A recent report by the Government Accountability Office (GAO) has determined that property and casualty insurance coverage for terrorist attacks involving nuclear, biological, chemical or radiological weapons (NBCR) is generally unavailable in the marketplace. As part of the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), the GAO was required to investigate and report on the availability of NBCR coverage, factors affecting the availability of NBCR coverage and options for expanding coverage for NBCR risks.
Most property and casualty insurers surveyed by the GAO indicated that they exclude or limit coverage for NBCR risks. Although stand-alone coverage for NBCR risks is sometimes available, the GAO's sources indicated that there is little demand for such policies because of their high price and coverage restrictions. Notably, the report indicated that insurers may attempt to limit their exposure to NBCR risks by relying on nuclear hazard and pollution exclusions. The extent to which a standard pollution exclusion would operate to bar coverage for an NBCR event is subject to some debate, particularly in light of the report's statement that an official from the New York Insurance Department represented that the department "did not interpret the definition of 'pollutants' in the standard pollution exclusion forms to apply to biological and chemical terrorist attacks." Ultimately, the applicability of any exclusions or limitations on property and casualty insurance coverage for NBCR events would be a matter for the courts.
Because of the uncertainties about the risk involved and the threat of catastrophic losses posed by an NBCR event, the GAO found that either insurers are unwilling to write coverage for NBCR terrorism or, when NBCR coverage is available, policyholders reject the coverage as too expensive. Insurers lack sufficient data to reliably estimate the frequency and severity of NBCR risks. This lack of information severely limits insurers' abilities to set sufficient premiums and forecast losses by focusing industry analysis on worst-case scenarios. Moreover, NBCR risks may affect a far greater magnitude of an insurer's portfolio than a conventional terrorism risk because of the potential area of effect of an NBCR event. Such wide exposure could result in catastrophic losses for an insurer and threaten the industry as a whole.
The report examined two proposals to increase coverage for NBCR risks: (1) an amendment to include NBCR coverage in the TRIA; and (2) the creation of a federal insurance program for NBCR risks where the federal government completely insures losses for NBCR events. The first proposal had been included in the House of Representatives' version of TRIPRA, but was rejected by the Senate. The amendment would have required insurers to make available NBCR coverage under TRIA under terms that were similar to coverage for other risks. H.R.2761, 110th Congress (September 2007). If a policyholder rejected an insurer's initial offer of NBCR coverage, then the insurer could exclude NBCR coverage or offer separate NBCR coverage under different terms. Because of the significant exposures to insurers from NBCR coverage, the amendment would have set insurers' deductibles for NBCR coverage at 3.5% of direct earned premiums, rather than the 20% deductible available under TRIA for conventional terrorist events. Depending on the amount of NBCR losses, insurers' co-payments would have ranged from 5 to 15%. Finally, the House proposal would have allowed insurers to reserve a portion of the conventional and NBCR terrorism coverage premiums in tax-free funds maintained by the Department of Treasury.
The report cited a study by the RAND Corporation that concluded that the House proposal would increase the availability of NBCR coverage and increase the number of policyholders that purchased such coverage. The RAND study also noted that inclusion of NBCR coverage in TRIA may lower the government's expected costs in the event of an NBCR incident. Nevertheless, the GAO also noted concern from sectors of the industry that inclusion of NBCR coverage in TRIA's make-available requirement could harm small insurers or cause insurers to withdraw from the commercial property and casualty market. Additionally, some parties expressed concern over the potential burden to taxpayers.
The second proposal examined by the GAO envisions the creation of a federal insurance program for NBCR risks similar to the NFIP. Under the proposal, the federal government would insure all NBCR risks while the insurance industry operated in an administrative capacity, collecting premiums, adjusting claims and distributing payments. The GAO stated that other federal insurance programs have proven to be costly and suffer from significant administrative challenges. Furthermore, the GAO observed that the NFIP and similar programs fail to collect sufficient premiums and require Congressional appropriations of funds to respond to disasters. Industry participants expressed concern that too much government involvement would inhibit the industry's ability and willingness to develop solutions for insuring catastrophic risks. Finally, objections were raised concerning insurers' ability to adequately perform administrative functions in the event of an NBCR event, such as difficulties presented by adjusting claims in radiation-contaminated areas.
The report seemed to support the conclusion that the House proposal to include NBCR coverage in TRIA would increase the availability and purchase of insurance coverage for NBCR risks. This is similar to the findings of the 2006 GAO study on NBCR insurance coverage, which may have prompted the House proposal in the 2007 TRIA reauthorization. Although one may expect renewed debate regarding the inclusion of NBCR coverage in TRIA during the new Congress—and perhaps even increased support—such action seems unlikely, at least in the short term, because of the current economic turmoil.