While the extent of regulation varies by  state and by line of insurance, state insurance regulators oversee the  provision of insurance; for example, states may approve the rates (prices)  insurers may charge and require insurers to cover certain events. Applying Common Principles for Assessing Insurability Presents Challenges in Measuring and Predicting NBCR Risks

Several commonly accepted principles underlie insurers’ ability to  determine whether to offer coverage for a particular risk and at what  price. However, measuring and predicting losses associated with NBCR risks can  be particularly challenging for a number of reasons, including lack of  experience with similar attacks, difficulty in predicting terrorists’  intentions, and the potentially catastrophic losses that could result. Insurers may still decide to offer insurance for risks that deviate  from the “ideal.” However, as one or more of the factors vary from the  ideal, the ability of the insurer to estimate future losses decreases, the risk  increases, and the insurer’s capital is more exposed to inadequate prices  for the coverage that the insurer offers. These principles are    The law of large numbers must apply. The loss must be definite and measurable. We interviewed representatives from three rating agencies, two of whom  said they generally viewed NBCR risks as not insurable because of their  potential for catastrophic losses. Insurers’ Exposure to NBCR Risks Varies Widely by Line of Insurance, and Insurers Offering Coverage Face Challenges in Pricing

Insurers’ exposure to NBCR risks varies widely by line of insurance, and  insurers offering coverage face challenges in pricing. In view of the  underlying difficulties in insuring NBCR risks, property/casualty insurers  generally have tried to exclude such events from their coverage. Representatives of property/casualty insurers said that these risks  continue to be unattractive to insure because of difficulties in predicting  the frequency and severity of these risks, the potential for large and  uncertain losses, and the limited amount of private reinsurance. Relatively Little NBCR Coverage Available in Property/Casualty Market Because Most Insurers Remain Unwilling to Cover Risks

Unlike workers’ compensation, life, and health insurers, insurers selling  property/casualty insurance largely have excluded NBCR risks from their  policies. Certified as a terrorist act. According  to representatives of two large homeowners’ insurers, the exclusions  limited their exposure to NBCR risks. Insurers in Workers’ Compensation, Life, and Health Generally Cover NBCR Risks, but Prices May Not Take Account of Potential Losses

Should an NBCR event occur, workers’ compensation, life, and health  insurers would be responsible for covering loss of life and medical  treatment for injuries because they generally provide coverage for these  events. According  to multiple sources, applicable state laws generally require workers’  compensation insurers to cover nearly all perils, including those from  NBCR risks. Appendix I: Objectives, Scope, and Methodology

Our objectives were to discuss (1) commonly accepted principles of  insurability and whether nuclear, biological, chemical, and radiological  (NBCR) risks are measurable and predictable and (2) whether private  insurers currently are exposed to NBCR risks and the challenges they face  in pricing such risks. Principles of Insurability and Assessing Whether NBCR Risks Are Measurable and Predictable

To identify commonly accepted principles of insurability and whether  NBCR risks are measurable and predictable, we reviewed standard  insurance references to identify principles that underlie insurers’  evaluations of the insurability of risks. Finally, to obtain a broad understanding of the characteristics of NBCR  weapons and the types of damage they could cause, we consulted several  sources of information. Assessing Exposure to NBCR Risks

To assess whether insurers are exposed to NBCR events, we identified  lines of insurance that could be affected in the event of an NBCR terrorist  attack: life, health, workers’ compensation, commercial property/casualty,  and homeowners insurance. The information from both the  surveys and the interviews about the availability of NBCR coverage is  limited to the specific brokerage clients and individual companies, and  cannot be generalized to all policyholders in the United States. Terrorism Insurance: Implementation of the Terrorism Risk Insurance  Act of 2002.
Why GAO Did This Study

Terrorists using unconventional weapons, also known as nuclear, biological, chemical, or radiological (NBCR) weapons, could cause devastating losses. The Terrorism Risk Insurance Act (TRIA) of 2002, as well as the extension passed in 2005, will cover losses from a certified act of terrorism, irrespective of the weapon used, if those types of losses are included in the coverage. Because of a lack of information about the willingness of insurers to cover NBCR risks and uncertainties about the extent to which these risks can be and are being insured by private insurers across various lines of insurance, GAO was asked to study these issues. This report discusses (1) commonly accepted principles of insurability and whether NBCR risks are measurable and predictable, and (2) whether private insurers currently are exposed to NBCR risks and the challenges they face in pricing such risks. GAO collected information from and met with some of the largest insurers in each line of insurance, associations representing a broader cross section of the industry and state insurance regulators. GAO makes no recommendations in this report.

What GAO Found

Insuring NBCR risks is distinctly different from insuring other risks because of the potential for catastrophic losses, a lack of understanding or knowledge about the long-term consequences, and a lack of historical experience with NBCR attacks in the United States. Measuring and predicting NBCR risks present distinct challenges to insurers because the characteristics of the risks largely diverge from commonly accepted principles used in determining insurability. According to these common principles, when assessing insurability, the risk generally must (1) have past occurrences sufficient in number and homogeneous enough (invoking the "law of large numbers") to enable insurers to accurately predict future losses, (2) be definite and measurable in terms of dollar value, (3) occur by chance, and (4) not result in catastrophic losses for the insurer. While the condition of insurability or uninsurability is not an absolute, NBCR risks generally fail to meet most or all of these principles of an insurable risk. Indeed, insurance experts GAO interviewed said that the potential severity of NBCR risks alone could diminish the willingness of some insurers to insure NBCR risks. Although NBCR risks may not fully satisfy the principles of insurability, there are enough variations in exposure across lines of insurance that some insurers or some lines of insurance may have no willingness to offer coverage for NBCR, while others may choose to offer coverage for some or all of the risks. For example, even with TRIA, property/casualty insurers generally have attempted to limit their exposure to NBCR risks by excluding nearly all NBCR events from coverage, both for commercial property/casualty and homeowners. According to industry representatives, property/casualty insurers believe they have excluded NBCR coverage by interpreting existing exclusions in their policies to apply to NBCR risks, but some of the exclusions could be challenged in courts. Unlike property/casualty insurers, however, workers' compensation, life, and health insurers are exposed to NBCR risks and generally have not excluded them from coverage for a variety of reasons. Specifically, workers' compensation insurers generally offer NBCR coverage because many states limit the exclusion of perils for workers' compensation. Conversely, while life and health insurers may not always be required to insure NBCR risks, they generally face other challenges in segregating and excluding NBCR risks. However, representatives of workers' compensation, life, and health insurers expressed concerns that the prices they currently charge may not cover their potential exposures to NBCR risks, sometimes because of regulatory limitations, and generally because of difficulties in measuring and pricing for NBCR losses. Given the challenges faced by insurers in providing coverage for, and pricing, NBCR risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future.