Insurance rates for these properties are soaring. Costs for both prized properties and ordinary buildings have escalated by as much as three or four times over what they were for the same, or less, insurance last year.
For high-profile properties, the reason for the steep price increase is obvious: The facilities are potentially attractive to terrorists. The rationale for the higher quotes for plain-Jane buildings follows a similar line. It stems from the concentration of many government facilities in one discrete area, which, from an insurance point of view, presents a higher terrorist risk than a stand-alone structure.
This new world of insurance has localities rethinking and repricing their coverage. Jacksonville, Florida, which owns the NFL Jaguars' Alltel Stadium, is monitoring the market but going without terrorism coverage for the time being, says Mary Arditti, the city's risk manager. Farther south, in Orange County, the government is responsible for insuring a large convention center, in addition to its general government buildings. Instead of insuring those properties through two insurers, as the county had in the past, it is looking at cobbling together coverage that involves 25 different insurance companies. "The question is," says Denise Estes, the county's assistant manager for risk management, "can we get enough of those small pieces to equal what we had before?"
While Estes' question echoes across the country, it also highlights that the insurance dilemma impacts government in two ways: State insurance commissioners are charged with keeping insurance rates fair for both the policy-buying public and the companies that take the risk of offering insurance. At the same time, as owners of property, states and localities are exposed to volatile rates and difficult-to-find coverage and, like their counterparts in the private sector, have to find ways to manage the risks associated with terrorist attacks.
Prior to 9-11, terrorism coverage was standard in most insurance policies, both for commercial and personal policyholders. Then came the attacks. The insurance industry's early estimate of the impact on its reserves was $30 billion; few now would be surprised to see that number closer to $70 billion. Worried about the possibility of future attacks--and the insolvency that could result--insurance companies have been pulling their terrorism coverage.
The retrenchment comes at an already-turbulent time in the insurance market. When the economy turned sour early in 2001, insurance companies had already decided to request rate hikes for 2002. It wasn't so much the recession as a combination of adverse factors-- years of underpricing policies and months of losing capital in the nose-diving stock market. The destruction of people and property on 9- 11 made it clear that 2002 was going to be a much more horrendous year for the insurance industry than anyone had predicted. "It has created a real cloud over the industry," says Terri Vaughan, Iowa's insurance commissioner and president of the National Association of Insurance Commissioners.
To understand why 9-11 is having such a profound effect, it helps to understand some basics about the insurance business: Policyholders pay for coverage from private insurance companies, which in turn cover their own risk by getting "reinsurance"--essentially, insurance for insurance. But officials estimate that the reinsurance market may have lost up to a third of its capital as a result of September 11 and the ensuing stock market plunge. Given those losses, reinsurance for companies offering terrorism coverage dried up quickly. "Coverage that was essentially given away before September 11 became uninsurable post-September 11," notes Gregory Serio, New York State's insurance superintendent.
The enormity of the insurance problem got Congress to consider a federal safety net for insurance companies last fall. There was widespread concern that the industry would become chaotic on January 1, when many policies were due for renewal. Fears grew that if companies couldn't obtain terrorism coverage as part of their property insurance, they wouldn't be able to get loans approved, continue or begin construction on new properties or be able to raise capital in general. The U.S. House of Representatives approved a bill in November to cover any losses related to a future terrorist attack beyond $1 billion, but the Senate adjourned in December without passing similar legislation. Although the issue languished during the winter, interest is picking back up again.
Meanwhile, NAIC members and industry leaders continue to push for a safety net. "We're in a situation where we're gambling," says Georgia Insurance Commissioner John Oxendine. "If there's not another terrorist attack, you're fine." But if there is, insurance companies "are going to have to ask the federal government for a bailout. It would be better to have a program to pay into rather than have to write a huge check at once."
No U.S. insurance companies claimed bankruptcy as a result of 9-11, but within a month of the attacks insurance companies began requesting permission to discontinue coverage for future terrorist acts. The Insurance Services Office, an information company for property and casualty insurers, drafted language for terrorism exclusions for both commercial and personal (auto, home) policy lines. The ISO suggested that exclusions apply if a terrorist event causes more than $25 million in damage nationwide or death or severe injury to 50 or more people.
While the decision to allow coverage exclusions rests with each state's insurance commissioner, the NAIC as an advisory group voted in favor of allowing limited exclusions for commercial policies, agreeing that those insurers are at greater risk for claims since the properties being insured are often clustered together. Moreover, if companies seeking the insurance encounter difficulties obtaining the same level of terrorism coverage as they had prior to September 11, they are likely to turn to the surplus insurance market for coverage-- a market that isn't regulated by state commissioners. In light of that, Vaughan says, NAIC commissioners thought, "Maybe we need exclusions. Once you go into the surplus market, you're going to deal with exclusions anyway."
When it came to personal property insurance, NAIC didn't go along with ISO's suggestions for exclusions in those policies. Compared with commercial coverage, NAIC officials felt that there weren't risks from concentration of property and that some limited reinsurance was still available. One continuing challenge in the personal line, though, is what would happen after a nuclear or bioterrorism attack; reinsurers have excluded coverage across the board for those types of events.
Many states have elected not to allow personal-line exclusions, but New York and Georgia are among the few states that haven't approved the ISO commercial-line exclusions. Most of the risks in New York exceed the threshold where the exclusion begins, says Serio. He and Georgia's Oxendine both view the ISO exclusion as too broad. Oxendine says that although his state is open to exclusions on a company-by- company basis, his primary complaint is the threshold: "I'm not crazy about it being industry wide," he says. "If it's $25,000,001, there's zero coverage. That's a concern."
In trying to purchase insurance for their own properties, states and localities see many connections between today's travails and previous disasters. Florida, for instance, had already weathered the nation's most significant insurance loss when Hurricane Andrew hit in 1992, leaving behind nearly $20 billion in claims. Many Florida insurance companies began excluding windstorm coverage. The state issued a moratorium on such exclusions and began an underwriting association to help people gain access to coverage. It also began a hurricane catastrophe fund that could issue tax-exempt bonds to allow for recapitalization of the insurance market and helped NAIC begin a catastrophe insurance working group.
While those factors didn't insulate Florida from the challenges after September 11, the state did know what to expect. But a positive difference between Hurricane Andrew and now, says Kevin McCarty, the state's deputy insurance commissioner, is that most catastrophic events are considered to be regional; terrorism, however, is viewed as a national threat. "That has gotten people to be thinking a lot less on jurisdictional lines, and more about risk sharing," he says.
But uncertainties remain, even for the governments that have experienced similar challenges. Following the 1994 Northridge earthquake, which caused about $14 billion in losses, California developed the California Earthquake Authority to provide earthquake coverage that insurers were no longer issuing. However, the deductibles are large, coverage isn't great, and without a major quake in the past few years, fewer homeowners are purchasing the policies. Two large earthquakes within a decade of each other could clean out the authority's reserves, says California Insurance Commissioner Harry W. Low. "We're thinking about how to finance it."
Since being hit on 9-11, New York has held four town hall meetings throughout the state to learn about challenges facing commercial and personal policyholders, both in Manhattan and in less urban areas. The transcripts of the meetings will be forwarded to Congress because they're indicative of difficulties being felt all over the country. "This problem is not isolated to New York City," says Serio, the state insurance superintendent. "It's a statewide phenomenon, and a national phenomenon."
