United States Government Accountability Office

GAO Report to the Chairman, Committee on 

Financial Services, House of 

Representatives 

TERRORISM 

INSURANCE 

Measuring and 

Predicting Losses 

from Unconventional 

Weapons Is Difficult, 

but Some Industry 

Exposure Exists 

September 2006 

 

GAO-06-1081 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

TERRORISM INSURANCE 

Measuring and Predicting Losses from 

Unconventional Weapons Is Difficult, but 

Some Industry Exposure Exists 

Highlights of GAO-06-1081, a report to 

the Chairman, Committee on Financial 

Services, House of Representatives 

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. 

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. www.gao.gov/cgi-bin/getrpt?GAO-06-1081.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Orice M. 

Williams (202) 512-5837 or

williamso@gao.gov.
Contents 

Letter 1

Results in Brief 3 

Background 4

Applying Common Principles for Assessing Insurability Presents 

Challenges in Measuring and Predicting NBCR Risks 8 

Insurers’ Exposure to NBCR Risks Varies Widely by Line of 

Insurance and Insurers Offering Coverage Face Challenges in

Pricing 15

Appendix I Objectives, Scope, and Methodology 30 

Appendix II GAO Contact and Staff Acknowledgments 36 

Related GAO Products 37 

Table 

Table 1: Description of NBCR Weapons 6 

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Page i GAO-06-1081 Terrorism Insurance
United States Government Accountability Office

Washington, DC 20548 

September 25, 2006 

The Honorable Michael G. Oxley 

Chairman 

Committee on Financial Services 

House of Representatives 

Dear Mr. Chairman: 

When considering possible terrorist events, among the most potentially 

devastating would be those caused by terrorists using unconventional 

weapons, also known as nuclear, biological, chemical, or radiological 

(NBCR) weapons. Because of the potential for catastrophic losses from an 

NBCR attack, representatives of the insurance industry have voiced 

doubts about its ability to pay for such losses, and members of Congress 

have raised concerns about costs to the federal government and citizens 

from losses not covered by insurance. In response to the insurance 

industry’s reluctance to cover terrorism risks generally, Congress enacted

the Terrorism Risk Insurance Act (TRIA) of 2002 for the commercial 

property/casualty industry, which requires insurers to provide coverage 

for terrorism and provides a defined level of reimbursement for certain 

losses.1

 However, limited information suggests that even with this federal 

financial backstop, the insurance industry continues to be reluctant to 

provide insurance to cover NBCR risks. 

In light of the continuing debate about TRIA, which is set to expire in 2007, 

the 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, you

asked that we study the extent to which NBCR risks are measurable and 

insurable. 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. 

To identify commonly accepted principles of insurability and whether 

NBCR risks are measurable and predictable, we reviewed standard 

 1

Pub. L. No. 107-297, 116 Stat. 2322 (Nov. 26, 2002), codified at 15 U.S.C. § 6701 note.

Page 1 GAO-06-1081 Terrorism Insurance
insurance references to identify principles that insurers consider when 

evaluating the insurability of risks. We relied primarily on Fundamentals 

of Risk and Insurance.

2

 To determine the insurability of NBCR risks, we 

compared information we collected about the market for and nature of 

NBCR terrorism risk to the principles. Moreover, we obtained information 

from a limited number of insurance industry representatives, as well as 

firms that specialize in modeling terrorism and other catastrophic events 

for insurers (modeling firms), to identify the amount and types of data 

available to predict future losses from NBCR terrorist attacks.3

 For 

comparison, we also obtained descriptions of data typically available to 

calculate losses for other catastrophic risks such as hurricanes. To assess 

whether private insurers were exposed to NBCR events and how they 

price for NBCR risks, we identified state requirements for coverage of 

NBCR events, lines of insurance where insurers cover NBCR damage of 

their own accord, and circumstances where coverage of NBCR events 

could be less clear. Specifically, we obtained documentation on state 

requirements from the National Association of Insurance Commissioners 

(NAIC) and visited two states and the District of Columbia, which contain

localities that are considered to be at higher risk than others for a terrorist 

attack. To assess whether lines of insurance could be exposed to NBCR 

attacks, we reviewed government and industry studies to obtain broad 

estimates of the amount of NBCR coverage for commercial 

property/casualty insurance available on the market, but these studies had 

certain methodological limitations. We also interviewed at least two of the 

larger insurers in each of the major lines of insurance (commercial and

personal property/casualty, workers’ compensation, and individual and 

group life and health); commercial property/casualty and group life 

reinsurers (companies that provide insurance for insurers); and selected 

trade associations. Although we obtained information from a limited 

number of insurers, we selected the insurers based on their market share 

for each line of insurance nationwide and in states with localities 

considered to be at higher risk for terrorist attacks. The insurers we 

selected represented between 13 and 38 percent of the national market for 

each line of insurance. To determine circumstances under which coverage 

of NBCR events might be less clear, we interviewed insurers and identified 

examples of language relating to coverage in insurance contracts that 

 2

Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and Insurance, 9th ed. 

(Hoboken, N. J.: John Wiley & Sons: 2003).

3

From an insurance company perspective, a catastrophe is one that has the potential to 

cause severe losses to an insurance company relative to its available financial resources. 

Page 2 GAO-06-1081 Terrorism Insurance
could be contested. Finally, to determine if and why insurers would be 

willing to offer more coverage for NBCR events in the future, we 

interviewed representatives of insurers, insurance trade groups, 

policyholders, and academic experts. 

We conducted our work in California, New Jersey, New York, 

Massachusetts, and Washington, D.C., from February 2006 through 

September 2006 in accordance with generally accepted government 

auditing standards. 

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. Although 

these principles of insurability generally underlie insurers’ decisions about 

what risks to insure and at what price, experience with NBCR and other 

more common risks illustrate that insurability occurs along a continuum. 

That is, at one end are risks that satisfy all the principles and are most 

likely to be insured and at the other end are risks that satisfy none of the 

principles and are least likely to be insured. In general, NBCR risks largely 

fail to meet most or all of the principles of an insurable risk. Indeed, 

insurance experts we interviewed said that the potential severity of NBCR

risks alone could diminish the willingness of some insurers to insure 

NBCR risks.

Results in Brief 

Although NBCR risks may not fully satisfy the principles of insurability, 

there are enough variations 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 

Page 3 GAO-06-1081 Terrorism Insurance
existing exclusions in their policies to apply to NBCR risks, but some of 

the exclusions could be challenged in courts. However, unlike 

property/casualty insurers, 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 any peril 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. Another reason that life and health insurers may be 

more willing to insure NBCR risks is that while the loss of life and health 

effects from an NBCR event may be damaging to some companies, large 

life and health insurers might be able to diversify their risks geographically 

and spread their losses over time. 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. 

The insurance industry offers many types of coverages intended to protect 

businesses as well as individuals. 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. In order 

to ensure the availability of terrorism coverage after September 11, 

Congress enacted TRIA to temporarily provide some property/casualty 

insurers some reimbursement for insured losses, including workers’ 

compensation losses, resulting from specific acts of terrorism. 

Background 

Insurance can be grouped into three main types: property/casualty, life, 

and health. Property/casualty insurance includes several types of 

insurance. Commercial property/casualty insurers cover physical losses to 

property, business interruptions or loss of use of buildings due to property 

damage, and also legal liability related to the maintenance of the property 

and business operations. Workers’ compensation insurance is considered 

a separate category of commercial property/casualty insurance, and the 

insurers provide employers protection against work-related disability and 

death. In addition, with certain exceptions, almost all employers are 

required to provide some form of workers’ compensation insurance to 

Page 4 GAO-06-1081 Terrorism Insurance
cover employer liability for workers who are killed, injured, or disabled on 

the job from any cause.4

 Personal lines of property/casualty insurance 

include policies for homeowners and automobile coverage. Homeowners 

insurance provides coverage for physical losses to the home, its contents, 

and additional living expenses for the owner while the home is 

uninhabitable. 

Life insurers sell either individual or group policies that provide benefits to

designated survivors after the death of an insured. Health insurers cover 

medical expenses resulting from sickness and injury. 

States have primary responsibility for regulating the insurance industry in 

the United States, and state insurance regulators coordinate their activities 

in part through NAIC. The degree of oversight of insurance varies by state 

and insurance type. In some lines of insurance, such as workers’ 

compensation, insurers may file insurance policy forms with state 

regulators, who help determine the extent of coverage provided by a 

policy by approving the wording of policies, including the explicit 

exclusions of some perils. According to an NAIC representative, while 

practices vary by state, state regulators generally regulate prices for 

personal lines of insurance and workers’ compensation policies but not for 

group life or commercial property/casualty policies. In most cases, state 

insurance regulators perform neither rate nor form review for commercial 

property/casualty insurance contracts because it is presumed that 

businesses have a better understanding of insurance contracts than the 

average personal lines consumer. However, reinsurers—companies that 

provide insurance to insurers—generally are not required to get state 

regulatory approval for the terms of coverage or the prices they charge. 

State Regulation of 

Insurance Companies 

NBCR Weapons Represent 

Many Methods of Attack 

Terrorism attacks, particularly including those using NBCR weapons, 

could result in catastrophic losses. Each type of weapon—nuclear, 

biological, chemical, and radiological—represents different methods of 

attack. Further, many different agents can be used to carry out a 

biological, chemical, or radiological attack. See table 1 for general 

descriptions of each type of weapon and examples of available agents. 

 4

Employers may cover employees for work-related injuries, illness, and death by 

purchasing an insurance policy from a company licensed by the state, or employers may 

self-insure. 

Page 5 GAO-06-1081 Terrorism Insurance
Table 1: Description of NBCR Weapons

Weapon description Examples of agents 

Nuclear A nuclear explosion would have immediate blast effects that would destroy 

buildings. The explosion also would produce high-energy radiation and 

extreme heat, and form a cloud from which highly lethal radioactive

material would fall. The overall effect of the weapon would depend on the 

size of the weapon and how high above the ground the detonation 

occurred. 

The explosion of the weapon, a bomb or 

missile, would be generated through 

nuclear fission of uranium or plutonium 

atoms, or nuclear fusion of hydrogen 

isotopes. 

Biological Biological attacks can involve two basic types of biological agents: 

contagious and noncontagious. With most biological agents, an attack may 

not be recognized immediately because the symptoms may be attributable

to several causes or because the disease the agent causes has an 

incubation period. 

Many different agents such as smallpox 

or anthrax, each with its own 

characteristics, could be used for 

biological attacks. 

Chemical Chemical attacks entail the dispersal of chemical vapors, aerosols, liquids, 

or solids and affect individuals through inhalation or exposure to eyes and 

skin. Chemical weapons act very quickly to kill or harm humans, often 

within a few seconds. 

Many different agents such as sarin and 

hydrogen cyanide, each with its own 

characteristics, could be used for 

chemical attacks. 

Radiological A “dirty bomb” uses conventional explosives to disperse radioactive 

material across the immediate area, which could vary in size depending on

the size of the explosive. The primary short-term exposure hazard to 

humans would be inhalation of radioactive material suspended in the dust 

and smoke from the explosion. 

Different radioactive agents, including 

americium, cesium, and plutonium, could 

be used to create a dirty bomb. 

Sources: RAND, GAO.

Notes: For weapon descriptions, see Rand Public Safety and Justice, Individual Preparedness and 

Response to Chemical, Radiological, Nuclear, and Biological Terrorist Attacks (Santa Monica, 

California: 2003). For examples of biological and chemical agents, see GAO, Combating Terrorism: 

Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks, 

GAO/NSIAD-99-163 (Washington, D.C.: Sept. 14, 1999). For examples of radiological agents that

can be used in dirty bombs, see GAO, Nuclear Security: DOE Needs Better Information to Guide Its 

Expanded Recovery of Sealed Radiological Sources, GAO-05-967 (Washington, D.C.: Sept. 22, 

2005). 

The agents used to undertake NBCR attacks have differing characteristics 

and properties and would affect people and property in myriad ways. Of 

the four types of NBCR attacks, a nuclear bomb would be the most likely 

to result in fires of any consequence. The intense heat produced by the 

nuclear explosion and subsequent reactions could produce extensive fires 

located throughout the area of detonation. While the detonation of a dirty 

bomb (conventional explosives used to disperse radioactive material) 

could result in blast damage, the resulting fire damage likely would be 

confined to the immediate area. However, the detonation of both nuclear 

and dirty bombs would release radioactive materials, resulting in the need

to decontaminate buildings and provide immediate healthcare. The 

distance these radioactive agents disperse from the original detonation 

site would depend on many factors, including the strength of the explosive 

and meteorological conditions. While the release of chemical and 

biological agents is significantly less likely to result in fires of any 

Page 6 GAO-06-1081 Terrorism Insurance
consequence, the agents also have the potential to contaminate buildings 

and make them unusable for long periods. These agents could be released

within buildings or outdoors, with chemical agents more likely than 

biological agents to result in immediate harm to humans. All NBCR 

attacks, depending on size of the explosion or the quantity of the agent, 

have the potential to result in fatalities, injuries, or illness. 

The Terrorism Risk 

Insurance Act Program 

After the events of September 11, when certain coverage for terrorism 

events disappeared, Congress passed TRIA.5

 This law created a temporary 

program that effectively functions as reinsurance—for the commercial 

property/casualty and workers’ compensation insurance industries only.6

Under TRIA, the federal government would reimburse insurers in these 

lines for 90 percent of their losses, up to a specified level, after the 

insurers paid a deductible. The program also would cover losses caused by 

NBCR attacks, if insurers had included this coverage in an insurance 

policy. However, coverage of NBCR attacks, as with other terrorist 

attacks, would have to meet the program’s criteria to trigger 

reimbursements. 

TRIA requires certain insurers to “make available” coverage for terrorist 

events that the Secretary of the Treasury has certified as committed by 

individuals acting on behalf of a foreign person or interest.7

 Commercial 

property/casualty insurers must offer terrorism coverage to their 

policyholders, although they could impose an additional charge. 

Policyholders have the option of not purchasing the coverage and adding a

terrorism exclusion to their policies. If policyholders chose to purchase 

the terrorism coverage for their property/casualty policies, insurers then 

could not add any additional exclusions or conditional language to the 

policies. 

 5

For more information on TRIA, see GAO, Terrorism Insurance: Implementation of the 

Terrorism Risk Insurance Act of 2002, GAO-04-307 (Washington, D.C.: Apr. 23, 2004). 

6

For purposes of TRIA, “property and casualty insurance” includes commercial lines of 

property/casualty insurance, including workers’ compensation and directors and officers’

liability insurance. It does not include other types of insurance such as federal crop

insurance, medical malpractice insurance, health or life insurance, commercial automobile

insurance, burglary and theft insurance, professional liability insurance or farm owners 

multiple peril insurance. 15 U.S.C. § 6701 note (Pub. L. No. 107-297, § 102(12)). 

7

TRIA defines “make available” to mean that insurers subject to TRIA must offer coverage 

for insured losses arising from certified terrorist events and that the coverage not differ 

materially from the terms, amounts, and limitations applicable to other types of coverage. 

Page 7 GAO-06-1081 Terrorism Insurance
In December 2005, Congress extended many of the same provisions of the 

original statute in the Terrorism Risk Insurance Extension Act of 2005, but

increased the required amount insurers would have to pay in the aftermath 

of a terrorist attack.8

 While deliberating the extension of TRIA, Congress 

considered whether to cover additional lines of coverage, such as group 

life insurance, and set a lower deductible that applied only to NBCR 

terrorist events. However, Congress did not enact these changes. The 

TRIA extension, which continues to apply only to the commercial 

property/casualty industry, is set to expire on December 31, 2007. 

Several commonly accepted principles underlie insurers’ ability to 

determine whether to offer coverage for a particular risk and at what 

price. Ultimately, the decision becomes a question of whether sufficient 

information exists for insurers to accurately estimate potential losses. 

According to standard insurance theory, four major principles contribute 

to the ability of insurers to estimate and cover future losses: the law of 

large numbers, measurability, fortuity, and the size of the potential losses.9

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. 

Nevertheless, models have been developed that attempt to assist insurers 

in evaluating terrorist and NBCR risks. However, many insurers and other 

insurance experts continue to believe that there is an insufficient basis for 

estimating the probable frequency of terrorist attacks, including NBCR 

attacks. 

Applying Common 

Principles for 

Assessing Insurability 

Presents Challenges 

in Measuring and 

Predicting NBCR

Risks 

Four principles generally underlie an insurance company’s willingness to 

provide insurance for a particular risk or type of risk. Each contributes to 

the insurer’s ability to measure and predict, with a reasonable degree of 

accuracy, the likely frequency of occurrence and the probable severity of 

losses that will result from each occurrence. In the ideal situation, when 

all these factors are satisfied, the insurer can add other expenses and 

profits to the expected losses and determine a price that is appropriate to 

the risk. Insurers may still decide to offer insurance for risks that deviate 

 8

Pub. L. No. 109-144, 119 Stat. 2660 (Dec. 22, 2005). 

9

For our description of the elements of an insurable risk, we primarily relied on

Fundamentals of Risk and Insurance. In addition, we consulted other insurance 

references. 

Page 8 GAO-06-1081 Terrorism Insurance
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. There must be a sufficiently large 

number of homogeneous units exposed to random losses, both historically 

and prospectively, to make the future losses reasonably predictable. This 

principle works best when there are large numbers of losses with similar 

characteristics spread across a large group. For example, an automobile 

insurer could analyze annual data on the frequency and severity (cost) of 

accidents and the characteristics of drivers (gender or age) involved in the 

accidents to predict expected losses for certain types of drivers, and thus 

set premiums adequate to cover these losses. The greater the experience

with losses, the better the insurer would be able to estimate both the 

frequency and the severity of future losses, based on what happened in the 

past. 

• The loss must be definite and measurable. The insurer must be capable of

determining whether a loss has taken place, and setting a dollar value on 

the amount of the loss. 

• The loss must be fortuitous or accidental. That is, the loss must result 

from chance and not be something that is certain to happen. To the extent 

that a future loss approaches certainty, an insurer would have to charge

the full value of the loss plus an additional amount for the expenses 

incurred. 

• The loss must not be catastrophic. That is, the losses should not affect a 

very large percentage of an insurance company’s policyholders at the same 

time, for example, in a limited geographic area. Alternatively, a 

catastrophic loss is one that is extraordinarily large relative to the amount 

of exposure in an insurance pool. 

When applied to NBCR terrorist risks, these principles can help explain 

why NBCR risks are so challenging for insurers. Most importantly, because 

so few NBCR attacks have occurred, the pool of experience in the United

States is very limited, and the law of large numbers does not help insurers 

Page 9 GAO-06-1081 Terrorism Insurance
to measure and predict the frequency and severity of future losses.10 One 

of the reasons many insurers we interviewed had concerns about insuring 

NBCR risks was the small number of historical events that could be used 

as a basis for predicting the future frequency and severity of these risks. 

However, several of the academic experts we interviewed also noted that a 

limited number of historical events did not automatically make a risk 

uninsurable.11 For example, insurers have covered risks related to 

commercial satellites for which there has been a very limited record of 

losses; however, several of the experts noted that for commercial satellites 

the prospective loss is measurable and documentation is available to 

assess their safeguards. 

In addition to the inapplicability of the law of large numbers, insurers also 

told us that they are not able to fully measure the costs of NBCR terrorist 

risks (that is, the potential severity). Because certain types of NBCR 

attacks could have long-term or uncertain consequences, insurers may not 

be able to measure, or even clearly identify, their prospective losses. 

Almost all of the insurers we interviewed indicated uncertainties about the 

scope of potential losses as a factor contributing to difficulties in insuring 

NBCR risks. For example, according to America’s Health Insurance Plans 

(AHIP), a national trade association for health insurers, some NBCR 

attacks could produce latent illnesses such as cancer.12 The costs to health 

insurers would not be immediate but would occur in the years to come. In 

addition, representatives of insurers and an insurance broker with 

knowledge of the property/casualty market told us that they believed the 

costs of some NBCR events would be uncertain because of difficulties in 

 10As described in GAO, U.S. Postal Service: Better Guidance Is Needed to Ensure an

Appropriate Response to Anthrax Contamination, GAO-04-239 (Washington, D.C.: Sept. 9, 

2004), the first cases of bioterrorism anthrax in the United States occurred in September 

and October 2001, when at least four letters containing anthrax spores were mailed to news

media personnel and two U.S. Senators. In addition, as indicated in Combating Terrorism:

Need for Comprehensive Threat and Risk Assessments of Chemical and Biological

Attacks, GAO/NSIAD-99-163 (Washington, D.C.: Sept. 14, 1999), a limited number of 

incidents involving biological agents, including the contamination of salad bars in local 

restaurants with salmonella poisoning by the Rajneeshee religious cult, have occurred in 

the United States. 

11We contacted insurance experts from academia, including the University of California 

(Berkeley), Drake University, University of Pennsylvania, Santa Clara University, Georgia 

State University, as well as the American Academy of Actuaries, and RAND (with expertise 

in both insurance and national security). 

12AHIP, July 3, 2003, letter to Office of Microeconomic Analysis, U.S. Department of the

Treasury (Treasury). 

Page 10 GAO-06-1081 Terrorism Insurance
estimating how much time would pass before buildings were successfully

decontaminated (for example, after an anthrax attack) or before anyone

would even be willing to enter contaminated locations (for example, after 

a nuclear attack) to assess the damage, making the areas unusable for a 

long time. 

Moreover, losses must be fortuitous or accidental. By definition terrorist 

events, including NBCR, are deliberate and do not occur by chance. As we 

previously reported, unlike storms and accidents, terrorism involves an

adversary with deliberate intent to destroy, and the probabilities and 

consequences of a terrorist act are poorly understood and difficult to 

predict.13 In other words, even if an extensive history of NBCR terrorism 

experiences existed, without the element of randomness, it would not 

necessarily be indicative of the future frequency and severity of terrorist 

events. Likewise, according to the American Academy of Actuaries and the 

Insurance Information Institute, predicting terrorist risks is particularly 

difficult because the attacks are not random; they are intentional, and the 

attack characteristics are not likely to be constant, as terrorists adjust 

their strategies.14

Finally, insurance experts told us that NBCR risks could represent the 

potential for catastrophic (severe) losses because of the concentration of

risks that could face either a particular insurer or the industry. Most of the 

academic experts we interviewed stressed that the potential for 

catastrophic losses, rather than the lack of reliable data on the frequency 

and severity of NBCR risks, made insurers reluctant to insure them. 

Several of these experts observed that in Florida, where the risk of 

hurricanes is both greater and more predictable than NBCR terrorism 

risks, insurers were leaving the state because of their exposure to 

catastrophic losses, perhaps more so than the unpredictability of the risk. 

An NBCR event, like a natural catastrophe, could result in catastrophic 

 13GAO, Risk Management: Further Refinements Needed to Assess Risks and Prioritize 

Protective Measures at Ports and Other Critical Infrastructure GAO-06-91 (Washington,

D.C.: Dec. 15, 2005). 

14American Academy of Actuaries, April 21, 2006, letter to the President’s Working Group 

on Financial Markets; public comment record, U.S. Department of the Treasury; and

Insurance Information Institute, Terrorism Insurance and the United States Government

(New York, New York: September 2004). In addition, the Congressional Budget Office 

(CBO) also noted that terrorism models are hampered not only by a lack of data but also by

the absence of an established “theory” of terrorist attacks. CBO, Federal Terrorism 

Reinsurance: An Update (Washington, D.C.: January 2005).

Page 11 GAO-06-1081 Terrorism Insurance
losses if it created significant losses to a high proportion of insureds in a 

particular geographic area. Should these events take place in urban areas 

that serve as major places of employment, they could result in tremendous 

exposure for lines of insurance providing coverage for workers, such as 

health or workers’ compensation.15 In addition, as explained by

representatives of the New York Department of Insurance, because NBCR 

risks have the ability to cut across many lines of insurance in a 

concentrated geographic area, large insurance companies that typically 

cover several lines of insurance could find it very difficult to diversify their 

risk portfolios. According to the American Academy of Actuaries, the 

prospect of catastrophic losses from an NBCR event could be far larger 

than insurers could sustain without impairing their ability to continue 

providing all other insurance coverages.16

The prospect of catastrophic risk poses additional problems because 

insurers, like most businesses, generally have two major objectives. First, 

they expect to make a profit for their owners. Second, they plan to survive 

so as to operate in the future. Several of the academic experts we 

interviewed questioned the incentive insurers would have to insure risks, 

such as catastrophic NBCR attacks, that might jeopardize their financial 

soundness and profitability. If an insurer were faced with the potential for 

a catastrophic loss—that is, one that threatened its solvency or its 

survival—the insurer would be less likely to be willing to provide 

insurance, or at a minimum, the insurer would limit its exposure to the 

extent that it could. The larger and more uncertain the estimates of 

projected losses, the less likely an insurer would be willing to voluntarily 

insure the risk. Moreover, insurers could have another disincentive to 

insuring catastrophic risks for which they might not be adequately 

capitalized—the prospect of receiving a low rating from a rating agency.

We interviewed representatives from three rating agencies, two of whom 

said they generally viewed NBCR risks as not insurable because of their 

 15Congressional Research Service, Terrorism: The New Occupational Hazard, Order Code

RL31387 (Washington, D.C.: Jul. 23, 2002). As noted in this report, most of the direct 

victims of terrorism in the United States in recent years have been people at work, whether 

those in the World Trade Center or the Pentagon, or victims of anthrax transmitted through 

the mail. 

16Statement by American Academy of Actuaries’ TRIA Subgroup on Extending or Replacing 

the Terrorism Risk Insurance Act of 2002, December 1, 2005. The Academy presented this 

conclusion—that the insurance industry would be impaired by an NBCR attack—based on

the assumption that TRIA would be allowed to expire. 

Page 12 GAO-06-1081 Terrorism Insurance
potential for catastrophic losses.17 For example, a representative from one 

credit rating agency said that if his company considered existing potential

exposure to NBCR risks when analyzing commercial property/casualty 

insurers, they might have to downgrade ratings due to the magnitude of 

potential losses. 

Because the frequency and severity of NBCR risks are difficult to measure, 

insurers have turned to techniques and processes that they have applied to

other catastrophic risks. As we previously reported, insurers have come to 

rely on computer models and modeling firms to assist them in estimating 

the frequency and severity of catastrophic events and the probable losses 

that they might face.

18 Since Hurricane Andrew in 1992, insurers have 

recognized the challenges associated with insuring low-frequency, highcost risks such as natural disasters and increasingly have turned to the use 

of computer models to better estimate the expected frequency and 

severity of the risks. After September 11, the owners of these models 

developed them to estimate the effects of man-made, or terrorist, events as 

well. However, as noted by the Insurance Information Institute and other 

insurance experts, estimating the incidence of terrorism is fundamentally 

different and vastly more difficult than forecasting natural catastrophes, 

where insurers can learn much about the frequency and severity of events 

through historical claim data, meteorological and geological records, and 

increases in scientific knowledge.19

In view of the limited history of NBCR attacks in the United States, 

representatives of the modeling firms reported to us that they generally 

have relied on panels of terrorism experts to assess threats posed by 

terrorists. While these experts do not have access to current classified 

data, they use their judgment and expertise to assess the probability (that 

is, the future occurrence or frequency) of future terrorist attacks. For 

example, the experts assess the likelihood of terrorists targeting urban 

areas, based on population density and perceived importance, as well as 

 17While rating agency representatives reported that their agencies have considered the 

exposure of commercial property/casualty insurers to terrorism generally, none reported

that their agencies specifically analyzed exposure to NBCR risks. 

18See GAO, Catastrophic Risks: U.S. and European Approaches to Insure Natural 

Catastrophe and Terrorism Risks, GAO-05-199 (Washington, D.C.: Feb. 28, 2005) for a

description of how insurers use modeling firms to estimate the financial consequences of

various natural catastrophe scenarios. 

19Insurance Information Institute, Terrorism Insurance and the United States Government

(New York, N.Y.: September 2004). 

Page 13 GAO-06-1081 Terrorism Insurance
well-known buildings within those areas. Moreover, the experts also 

consider the level of difficulty of using weapons of different sizes and 

capacities as a way of estimating the potential severity of terrorist attacks. 

The modeling firm representatives reported that they use a number of 

statistical techniques to convert the subjective opinions of their experts 

and the characteristics of NBCR weapons into quantified estimates of the 

frequency and severity of potential losses. While we did not assess the 

capabilities of these models, we have noted in a previous report that some 

federal agencies, even with access to classified data, have difficulty 

including in their risk assessments the relative probability of various 

terrorist threat scenarios.20 Representatives of insurers and insurance 

brokers also said that they generally had little confidence in the ability of 

models to estimate the frequency of future terrorist attacks, and the 

American Academy of Actuaries noted that while there has been some 

development of terrorism models since September 11, quantification of 

terrorism exposure still was extremely difficult.21 The Academy also noted 

that the probabilities associated with the occurrence of a terrorist attack 

have remained somewhat judgmental and a key source of uncertainty. 

Representatives of insurers told us that the models can be useful in 

simulating scenarios for particular NBCR attacks in specified locations, 

allowing them to estimate the potential severity of possible losses for 

specific events. Using available engineering, scientific, and demographic 

research, the models can estimate insured potential losses for the 

portfolios of individual insurers. Several insurers and brokers said that 

they found models, including those that they may have created themselves, 

useful in managing insurers’ exposure to terrorism risks. 

Finally, insurance experts and representatives of insurers and reinsurers 

we interviewed agreed that difficulties in predicting NBCR events, as well

as the prospect for catastrophic losses, make these risks difficult to 

insure.22 However, as noted by several of the experts from academia, even

 20See GAO-06-91. We concluded that the assessments of selected federal agencies were 

limited in terms of including information on the relative probability of various threat 

scenarios. The assessments were limited in their reliability and completeness in part 

because coordination was needed with the intelligence community. 

21American Academy of Actuaries, August 2, 2005, letter to the Honorable Richard Baker, 

Chairman, Subcommittee on Capital Markets, Insurance and Government Sponsored 

Enterprises, Committee on Financial Services, U.S. House of Representatives. 

22See appendix I for a description of the insurance experts, insurers, and reinsurers we

selected to interview. 

Page 14 GAO-06-1081 Terrorism Insurance
though a risk may not satisfy all the principles of insurability, insureds 

may be able to find some amount of coverage. Several experts noted that 

insurability is not simply an issue of extremes—that is, either insurable or 

uninsurable. Rather, as specifically noted by one, the insurability of events

should be viewed as a continuum, with some events such as NBCR being 

on the extreme end of the continuum. 

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. However, 

for reasons that vary somewhat by line of insurance, workers’ 

compensation, life, and health insurers generally offer coverage for NBCR 

events. Insurance industry representatives told us that most 

property/casualty insurers have used long-standing policy exclusions to 

limit coverage of NBCR events, although experience with these types of 

exclusions suggests that they could be challenged in court. 

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. Despite 

similar concerns and subsequent difficulties in setting prices due to lack of

reliable historical data, coverage for workers’ compensation, life, and

health insurance generally is available on the market. In large part, 

insurers provide this coverage, particularly workers’ compensation, 

because they are required to by states, or because the coverage (for 

example, life insurance) does not readily lend itself to excluding one type

of risk. Nevertheless, insurance and state regulatory officials expressed 

particular concerns about whether the prices set for workers’ 

compensation insurance would cover potential losses, should a major 

NBCR event occur. Representatives of life and health insurers told us that 

generally their prices did not reflect their potential exposure to NBCR 

risks. 

Unlike workers’ compensation, life, and health insurers, insurers selling 

property/casualty insurance largely have excluded NBCR risks from their 

policies. Since Congress passed TRIA, the supply of commercial 

property/casualty insurance for conventional terrorism appears to have 

increased, yet insurance policies covering NBCR risks have remained in 

short supply. In its most recent survey of terrorism insurance in the 

commercial property/casualty industry, Treasury found that the 

Insurers’ Exposure to 

NBCR Risks Varies 

Widely by Line of 

Insurance, and 

Insurers Offering 

Coverage Face 

Challenges in Pricing 

Relatively Little NBCR 

Coverage Available in 

Property/Casualty Market 

Because Most Insurers 

Remain Unwilling to Cover 

Risks 

Page 15 GAO-06-1081 Terrorism Insurance
percentage of insurers that reported that they wrote some coverage for 

terrorism using conventional weapons (that is, not NBCR) increased from 

73 percent in 2002 to 91 percent in 2003 and 2004.

23 In contrast, the 

percentage of insurers that reported covering NBCR risks in some of their 

policies remained about the same during that general period and was 

significantly smaller—about 35 percent.24 Moreover, as explained by 

Treasury officials, the 35 percent represented insurers that offered any 

kind of coverage for NBCR risks, meaning that an insurer would be 

counted as offering NBCR coverage even if it offered only one policy for 

one type of NBCR risk. 

Representatives of insurance and insurance brokerage companies also 

told us there was a very limited supply of NBCR coverage in the 

commercial property/casualty marketplace. Representatives of the three 

largest brokerage firms that find property/casualty insurance coverage for 

large commercial businesses told us that insurers offering terrorism

coverage exclude NBCR risks. According to representatives of insurers, 

exclusions for NBCR risks are contained in policies offered by commercial 

property/casualty insurers underwriting in regulated insurance markets 

and also are contained in stand-alone terrorism insurance policies offered 

by specialty insurers in the nonregulated market.25 A representative of one 

of the specialty insurers with whom we spoke said the company offered 

very limited amounts of NBCR coverage, typically for one or two of the 

risks. For example, this company would offer $10 million of biological and 

chemical coverage for certain commercial properties, but the insurer 

would not provide coverage above that threshold.

Representatives of insurance and insurance brokerage companies we 

interviewed said that even though TRIA would cover NBCR losses 

 23From U.S. Department of the Treasury, “Report to Congress: Assessment: The Terrorism 

Risk Insurance Act of 2002,” (Washington, D.C.: Jun. 30, 2005). Treasury reported on the 

market for terrorism insurance in 2005, using data collected in 2003 and 2004. 

24According to Treasury, the overall amount of coverage for any of the NBCR events was

the same for 2003 and 2004, with an increase in the number of large insurers reporting 

coverage for NBCR events. The nonresponse rate for this part of the study was 16 percent 

in 2003 and 9 percent in 2004. Percentages given do not include workers’ compensation 

coverage. 

25Specialty insurers, also called surplus lines insurers, are not licensed or admitted to 

generally conduct business in a state but nevertheless are allowed to write insurance in a 

state under certain circumstances, such as providing insurance for special risks or with

terms and conditions having special flexibility. 

Page 16 GAO-06-1081 Terrorism Insurance
incurred by an insurer the same as it would any other covered terrorist 

losses, little coverage for NBCR risks was available because commercial 

property/casualty carriers largely viewed NBCR risks as uninsurable. 

According to representatives of two large commercial property/casualty 

insurers, both of whom underwrote insurance in states with localities 

considered at higher risk for a terrorist attack, the current structure of 

TRIA offered little incentive to cover NBCR losses, even though TRIA 

would provide coverage for some insured NBCR events. For example, they 

said that because their companies offered workers’ compensation 

insurance in areas at higher risk for terrorism, the companies were less 

likely to increase their level of exposure to NBCR events by also offering 

NBCR coverage in their commercial property and general liability 

policies.26 Under TRIA, the more business an insurer writes, the larger its 

deductible; and the more lines of insurance an insurer writes, the more it 

is exposed to losses from a catastrophic event.27 In addition, because of 

uncertainties surrounding the frequency and severity of NBCR events as 

well as the enormity of potential losses, representatives of insurers we 

interviewed said that they would have difficulty setting prices to cover 

such losses, even using information from the modeling firms. These 

representatives also expressed concerns about the potential insured losses 

of an NBCR event being largely undeterminable for many years after the 

event occurred. Such an event could have many long-term consequences—

for example, the extent and duration of remediation for a contaminated 

 26According to the American Academy of Actuaries, losses for a large NBCR event in both 

commercial property/casualty and workers’ compensation could be substantial. Loss

estimates obtained by the Academy indicate that a large NBCR event in a densely 

populated area could cause total insured losses of $158.3 billion for commercial property, 

$14.4 billion for general liability, and $483.7 billion for workers’ compensation. American 

Academy of Actuaries, April 21, 2006, letter to the President’s Working Group on Financial 

Markets; public comment record, U.S. Department of the Treasury. 

27Representatives of the insurers we interviewed said that although TRIA would cover a 

portion of their losses, the percentage mandated by law for insurer payments represented a 

sizeable portion of their capital. Under TRIA, insurers affected by a certified terrorist event 

would currently pay a deductible of 17.5 percent of earned premium in addition to paying

10 percent of the insured losses exceeding the deductible. This is an increase from the 

deductible amounts in previous years (7 percent in 2003, 10 percent in 2004, and 15 percent 

in 2005), and less than the 20 percent deductible that they would be responsible for paying

in 2007. Treasury also noted the impact of company-specific deductibles in its 2005 report, 

stating that the deductible may confer an advantage to smaller insurers and insurers 

writing in single TRIA-eligible lines. Moreover, insurers will be responsible for covering 15 

percent of the insured losses exceeding the deductible in 2007. See 15 U.S.C. § 6701 note 

(Pub. L. No. 107-297, §§ 102(7) and 103(e)(1)(A)). As a business strategy, insurers we

interviewed had decided to limit their exposure by limiting the amount of business they 

wrote for NBCR risks.

Page 17 GAO-06-1081 Terrorism Insurance
building, the resulting business interruption to the policyholder, and any 

related litigation involved.28 Finally, as confirmed by representatives of the 

Reinsurance Association of America, private reinsurance—the riskspreading mechanism that insurers typically use to reduce their potential 

losses—provided very limited amounts of coverage for NBCR risks in the 

property/casualty market. 

Property/casualty insurers long have sought to limit their exposure to 

certain perils, such as flood, that they consider uninsurable. 

Property/casualty insurers have written exclusions related to nuclear 

hazard risk into their standard policies for decades, generally to protect 

themselves from losses related to nuclear power plant accidents. 

Representatives of insurance companies and brokerage firms agreed that 

existing nuclear hazard exclusions were broad enough to likely exclude 

any losses resulting from nuclear and radiological events, including a 

terrorist attack.29

According to these same insurance industry representatives, 

property/casualty insurance contracts issued prior to September 11 did not 

specifically include references to losses from the terrorist release of 

biological and chemical agents.30 Rather, Insurance Services Office (ISO) 

officials told us that the standard contracts they provided for industry use 

contained language that excluded coverage for losses caused by pollution 

and contamination. For instance, the pollution exclusion was developed to

exclude coverage for the release of many different types of substances—

Although Property/Casualty

Insurers Remove Coverage for 

NBCR Events through 

Exclusions, They Could Be 

Challenged 

 28Litigation remains a concern to representatives of a property/casualty insurer and 

reinsurer we interviewed because of what has occurred with other terrorist acts. To

illustrate, property/casualty insurers were involved in lawsuits related to the 1993 bombing 

of the World Trade Center as late as November 2005. 

29Standard Insurance Services Office (ISO) policy contracts state that insurers will not pay

for any loss or damage from “nuclear reaction or radiation, or radioactive contamination, 

however caused.” ISO is a national rating organization for the property/casualty insurance 

industry that develops standardized policy language designed to be in compliance with 

regulatory requirements. According to an NAIC representative, regulators have allowed 

commercial property/casualty insurers to exclude nuclear risks because insurance

coverage for nuclear events falls under the Price-Anderson Act, Pub. L. No. 85-256, 71 Stat. 

576 (Sept. 2, 1957), codified at 42 U.S.C. §§ 2039, 2210. 

30After September 11 and prior to the passage of TRIA, ISO created terrorism exclusions 

with specific references to the dispersal of nuclear or radioactive material and the release 

of biological or chemical materials. Under TRIA, commercial property/casualty insurers are

required to “make available” the same coverage as they did prior to September 11. Because 

of this, insurance industry representatives told us that insurers have relied on other longstanding exclusions written into standard contracts to limit their exposure to NBCR events. 

Page 18 GAO-06-1081 Terrorism Insurance
from asbestos to pesticides—that could cause harm to people and the 

environment. Representatives of some of the insurers we interviewed 

believed that their pollution and contamination exclusions also might 

allow property/casualty insurers to exclude losses caused by biological

and chemical agents released by a terrorist. However, representatives of 

one insurance broker we interviewed suggested that pollution and 

contamination exclusions could be challenged in the courts if a biological 

or chemical event were to occur. Courts determine whether a particular 

substance is or is not a pollutant based upon, among other things, the 

language in the policy, the facts and circumstances of the case, and the

law of the jurisdiction. As a result, the language of the standard pollution 

exclusion might be susceptible to broad interpretation by the courts. In 

other words, some uncertainty exists, even in the insurance industry, 

about how effectively the pollution and contamination exclusions would 

protect insurers against losses from a NBCR terrorist attack.

In addition to disputes over the exclusion of NBCR risks in policies, there 

are other situations where the extent of property/casualty insurers’ 

coverage of such events could depend on judicial or other determinations. 

• Cause of loss. According to standard nuclear exclusions, commercial 

policies would not cover damage caused by a nuclear blast. However, 

regardless of any exclusions, according to information provided by NAIC, 

approximately 16 states (including New York) require property/casualty

insurers to cover losses from a “fire following” an event, irrespective of the 

cause of fire.

31 A national security expert told us that in the case of a 

nuclear bomb detonation, once the property was destroyed, insurers could 

dispute the extent to which fire (covered in fire following states) or the 

blast (excluded by the nuclear exclusion) caused the damage. In other 

contexts, disputes over the cause of loss often have been litigated. For 

example, many homeowners who suffered losses in Hurricane Katrina 

have filed lawsuits challenging property/casualty insurers’ determinations 

 31As of June 28, 2006, according to NAIC, these states were California, Georgia, Hawaii, 

Illinois, Iowa, Maine, Massachusetts, Missouri, New Jersey, New York, North Carolina, 

Oregon, Pennsylvania, Washington, West Virginia, and Wisconsin. According to NAIC, since 

September 11, insurers have tried to limit fire following exposure by lobbying state 

legislatures to amend standard fire laws so that insurers would not be responsible for fire 

losses resulting from terrorism. Based upon the information NAIC provided, the number of 

states that have made such amendments has increased from the last time we reported on 

terrorism insurance, from seven states in 2004 to 12 in 2006. (See GAO-04-307.) The

remaining 22 states and the District of Columbia, according to NAIC, did not have standard

fire policies.

Page 19 GAO-06-1081 Terrorism Insurance
about the cause of their losses.32

• Certified as a terrorist act. The Congressional Budget Office (CBO) has 

suggested that some NBCR events might not be readily identified as 

terrorist acts, as defined by TRIA, and therefore coverage—both for 

insurers and for their policyholders—would be unclear.33 For example, the 

persons or person who in 2001 mailed letters contaminated with anthrax 

that killed several people and sickened many more remain(s) unknown.34

However, should TRIA not be renewed in 2007, this particular 

determination would not apply. 

In addition, homeowners’ insurers, part of the personal property/casualty 

market, have long-standing exclusions in their policies, similar to the 

exclusions contained in commercial property/casualty policies. According 

to representatives of two large homeowners’ insurers, the exclusions 

limited their exposure to NBCR risks. While these representatives also told

us they have not excluded conventional terrorist events from their 

policies, they said their companies generally manage their exposure to any 

terrorism risks by diversifying their portfolios. 

The 2005 Treasury study reported that less than 3 percent of policyholders

from a range of industries reported purchasing NBCR coverage in their 

commercial property/casualty insurance policies.35 Further, although 

purchase rates for NBCR insurance do not necessarily reflect overall 

demand, a major reason for not purchasing NBCR insurance given by the 

survey respondents was that they did not believe they were at risk for an 

NBCR event. While the Treasury study did not break down purchase rates 

for NBCR insurance by industry sector, another study of the market for 

terrorism insurance conducted by insurance brokers found that 

companies in the real estate, financial, and health care sectors had the 

Demand for NBCR Coverage in 

Property/Casualty Market Is 

Difficult to Determine

 32GAO has ongoing work in this area. 

33CBO, Federal Terrorism Reinsurance: An Update (Washington, D.C.: January 2005). 

34As described in GAO, Capital Hill Anthrax Incident: EPA’s Cleanup Was Successful: 

Opportunities Exist to Enhance Contract Oversight, GAO-03-686 (Washington, D.C.: Jun.

4, 2003), letters containing a powdered form of anthrax were mailed to members of the 

news media and congressional leaders, resulting in five deaths and a costly 

decontamination process.

35Treasury reports that 20 percent or fewer policyholders responded to its survey. In

addition, Treasury only surveyed policyholders about purchasing NBCR coverage for 

commercial property/casualty lines. 

Page 20 GAO-06-1081 Terrorism Insurance
highest rates for purchasing terrorism insurance.36 Although the brokerage 

firm study does not specifically address the demand for NBCR insurance, 

we consider demand for terrorism insurance generally to be a reasonable

approximation of where demand for NBCR insurance might exist. For 

instance, demand for terrorism insurance may be strong in the real estate

sector because terrorism coverage typically is required as part of a 

commercial business loan transaction, according to the Mortgage Bankers

Association. However, representatives of the Mortgage Bankers 

Association also said lenders generally do not require NBCR coverage, 

because little or no coverage is available. In addition, a few of the 

academic experts we interviewed suggested that some individuals and 

businesses might not purchase NBCR coverage under the assumption that 

the federal government would cover losses from an NBCR attack, as the 

government agreed to do for some personal and commercial property 

losses resulting from Hurricane Katrina. 

However, several risk managers we interviewed from the hospitality and

transportation industries, as well as commercial property owners, all 

reported a willingness to buy NBCR coverage in the private market. These 

managers expressed frustration at not being able to purchase insurance 

for NBCR risks, which they said they could do little to prevent or mitigate, 

particularly because an NBCR attack would be an intentional act. One of

the risk managers that we interviewed noted that his company could not 

find enough NBCR coverage for even one building, so the company used a 

captive to self-insure against NBCR risks.37

 36The information on demand for terrorism coverage comes from the 2006 Marsh 

MarketWatch report, published by a large commercial insurance broker using data from

more than 2,000 companies, representing two-thirds of their clients.

37Captives are special-purpose insurance companies set up by commercial businesses to 

self-insure risks arising from the owners’ business activities. Captives may be insurers

under TRIA and therefore may be eligible for payments for losses related to certified NBCR

events. 

Page 21 GAO-06-1081 Terrorism Insurance
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. Following September 11, NAIC issued guidance stating its member 

state regulators believed terrorism exclusions were “not necessary” or 

were “inappropriate” for workers’ compensation, life, and health insurance 

policies, with exceptions limited to cases where insurers could 

demonstrate they would become insolvent from offering the coverage.

38

According to an NAIC representative, regulators did not perceive 

exclusions as necessary because they presumed these insurers were 

diversifying their risks in these lines by insuring individuals across the 

country. 

Workers’ compensation insurers must cover losses from NBCR events that 

occur at the workplace, including related illnesses and injuries. According 

to multiple sources, applicable state laws generally require workers’ 

compensation insurers to cover nearly all perils, including those from 

NBCR risks.39 In addition, according to representatives of the National 

Council on Compensation Insurance (NCCI), an organization that prepares 

insurance rate (price) recommendations for workers’ compensation, 

under state workers’ compensation laws, employers are responsible for 

covering unlimited medical costs and a portion of lost earnings for injuries 

or illnesses that occur during the course of employment, regardless of the 

cause.40

While workers’ compensation insurers generally are not permitted to 

exclude any perils from coverage, insurer representatives advised us that 

any surcharges they may be permitted to charge for NBCR exposure likely 

would not cover potential losses. According to NCCI representatives, 

Workers’ Compensation

Insurance Generally Covers All 

Perils, Including NBCR Risks, 

but Pricing Challenges Exist 

 38The guidance NAIC issued, termed a “model bulletin,” also stated they did not believe 

terrorism exclusions were needed in personal property/casualty insurance (including 

homeowners’ insurance policies). See NAIC Model Bulletin (Dec. 21, 2001) addressing 

exclusions related to acts of terrorism, personal lines property/casualty coverage, life 

insurance, health insurance, and workers’ compensation. 

39American Academy of Actuaries, Public Policy Monograph, P/C Terrorism Insurance 

Coverage: Where Do We Go Post-Terrorism Risk Insurance Act? (Washington, D.C.: May

2004). In addition, Pennsylvania is an exception to this general rule because that state 

allows insurers to exclude losses from disability or death resulting from military activities 

or enemy sabotage. See 77 P.S. § 1209 and 77 P.S. § 431.

40NCCI helps insurers develop and file loss costs and rates in 33 states and the District of 

Columbia.

Page 22 GAO-06-1081 Terrorism Insurance
recognizing that workers’ compensation insurers have exposure to 

terrorism losses, at least 36 states, including the District of Columbia, have 

allowed workers’ compensation insurers to file rates that include an 

additional surcharge (an average of 2 cents per $100 of employee payroll)

for terrorism risk.41 NCCI developed this statewide surcharge based on the

results of a model, as a way for insurers that underwrite in states that 

belong to NCCI to cover potential losses from terrorism, including those 

from NBCR weapons. While representatives of NCCI were reasonably 

satisfied that the surcharges were actuarially sound, in the District of 

Columbia—where insurers may file the NCCI-developed terrorism 

surcharge—regulators did not believe that the surcharge was actuarially

sound because of assumptions made in the model about localities 

designated to be at higher risk for terrorist events. Moreover, the 

willingness of state regulators that do not participate in NCCI to approve 

terrorism surcharges in workers’ compensation may vary. For example, 

we obtained information from two large states that do not participate in 

NCCI and have geographic areas considered at higher risk for terrorism—

New York and California. In New York, regulators have allowed workers’ 

compensation insurers to file an additional surcharge for terrorism. 

However, representatives of the New York Compensation Insurance 

Rating Board (Rating Board) told us that the terrorism surcharge the 

Rating Board developed does not distinguish between conventional and 

NBCR risks.42 They did not believe that the Rating Board could justify a 

higher surcharge to cover NBCR risks because of the limited historical 

data on NBCR attacks and further, if the Rating Board did, the cost would 

be so high that businesses would probably find it unaffordable. In contrast, 

California regulators have not permitted insurers to file rates with 

additional surcharges specifically for terrorism, including NBCR risks. 

California regulatory officials told us that they would reject any terrorist 

 41NCCI developed the terrorism surcharge using information from a modeling firm on 

potential losses to workers’ compensation lines. The surcharge is applicable to 36 states—2 

more than the number of states where NCCI files loss costs or rates. However, this 

surcharge was not developed for non-NCCI states, a group which includes some states with 

localities considered to be at higher risk for terrorism attacks—including California, New

York, and Texas.

42The Rating Board determines workers’ compensation rates in New York. 

Page 23 GAO-06-1081 Terrorism Insurance
or NBCR risk surcharges because they thought such rate justifications 

were not based on recognized actuarial methods.43

Representatives of workers’ compensation insurers we interviewed said 

that factors unique to workers’ compensation also made it difficult for 

them to cover NBCR risks. First, as they explained, unlike some other 

lines of insurance, workers’ compensation insurance covers losses beyond 

the expiration date of the policy. The representatives told us their most 

expensive claims typically came from workers who were disabled from 

illness or injury because they were entitled to lost wages as well as 

medical expenses. For NBCR events, quantifying medical expenses could 

be especially challenging because some illnesses or disabilities might not 

manifest until much later or could be difficult to trace to a workplace 

occurrence.44 For example, representatives of workers’ compensation 

insurers told us that in the case of smallpox, it might be difficult to 

determine whether the worker contracted the illness at work or 

elsewhere.45 In addition, these representatives told us that they may be 

further constrained in their ability to adjust their price for specific 

geographic risks. Representatives of NCCI told us that terrorism 

surcharges must be applied equally throughout a state, thus the terrorism 

surcharge did not reflect that employers in certain areas, such as urban 

areas where employees might be more concentrated, had a greater 

exposure to terrorist events.46

 43As we previously noted, insurers use historical information from a large number of 

occurrences to determine potential future losses. In addition, workers’ compensation 

insurers that underwrite in California told us that even if they could charge higher prices to

specifically cover NBCR risks, they could not use these funds to establish separate reserves 

to cover potential losses until after an event had occurred. 

44In addition, GAO has reported on difficulties in identifying whether chemical agents were 

the source of long-term illness. See GAO, Gulf War Illnesses: DOD’s Conclusions about 

U.S. Troops’ Exposure Cannot Be Adequately Supported, GAO-04-159 (Washington, D.C.: 

Jun. 1, 2004). 

45Workers’ compensation insurance only would cover injury or illness that occurred or was 

contracted on the job or when the employee was acting within the scope of employment. 

46In other words, workers’ compensation insurers charge different rates, depending on the

risk of death or injury by occupation, but they must charge the same statewide rate for 

occupation regardless of geographic location. For example, workers’ compensation 

insurers charge higher rates for roofers than for clerical staff. However, according to NCCI

representatives, employers pay the same rate for a roofer in an area considered at greater

risk for a terrorism attack as they pay for a roofer in an area considered less at risk. 

Page 24 GAO-06-1081 Terrorism Insurance
Despite the exposure of workers’ compensation insurers to NBCR risks,

representatives of private market insurers and two public insurance funds 

told us that the availability of private reinsurance for these risks was 

limited.47 Therefore, they explained that they largely would rely on TRIA to 

cover NBCR risks. As representatives of the private insurers explained, 

many of their private-market reinsurance policies specifically excluded 

NBCR risks, or to the extent coverage was available, reinsurers offered it 

at prices they could not afford. Representatives of the New York State 

Insurance Fund told us that they had not purchased reinsurance because 

they viewed the high costs of reinsurance for their market as unaffordable. 

As a result, should a large NBCR attack occur, these representatives said 

that their fund might have to turn to the state to help pay claims. In 

contrast, representatives of the California State Compensation Insurance 

Fund said that they were willing to pay higher prices based on available 

capacity for reinsurance for NBCR risks. 

The American Council of Life Insurers officials, as well as representatives 

of life insurers we interviewed, told us they believed that most states do 

not allow for terrorism or NBCR exclusions in life insurance policies.48 In 

two of the states specifically included in our review—New York and 

California—state insurance law and implementing regulatory policy 

prohibited both individual and group life insurance policies from 

excluding NBCR or other terrorism events.49 On the other hand, regulatory 

officials from the third jurisdiction we included in our review, the District 

of Columbia, told us that they did not have any legal requirements that life

insurers cover NBCR events and that several group life insurers recently 

filed policies with exclusions for NBCR risks. 

According to Life Insurers, 

They Generally Cannot Exclude 

Terrorism Coverage Including 

NBCR Risks 

 47The New York State Insurance Fund and the State Compensation Insurance Fund of

California are both insurers of last resort for employers that otherwise cannot find

workers’ compensation insurance in their respective states. See appendix I for information

about their market share nationwide. 

48Although neither NAIC nor the American Council of Life Insurers could tell us about

requirements across all states related to exclusions for terrorism and NBCR risks, NAIC

told us that many states allow life insurers to exclude losses from an act of war. California

state regulatory officials told us that they did not include terrorism within the definition of

an act of war. 

49California regulatory officials told us that not all life products are subject to regulatory 

review, and therefore some forms sold by life insurers in California could exclude NBCR

risks.

Page 25 GAO-06-1081 Terrorism Insurance
While group life insurers have exposure to NBCR risks, representatives of 

group life insurers that provide coverage nationwide told us that charging

higher rates to insureds at potentially greater risk for an NBCR event 

would be difficult. This is because of the way the insurers typically price 

coverage and their inability to determine which employers would be at 

greater risk for an NBCR event. Life insurers price their products based on

mortality tables derived from experience with prior insurance contracts 

and calibrated for the effects of certain individual characteristics such as a 

smoking habit, or group characteristics such as occupation type. However, 

representatives of life insurers said that these tables do not take into 

account a greater number of deaths that could occur as a result of a 

terrorist or NBCR act.50 Furthermore, these representatives told us that 

they have difficulty determining whether a particular employer or group 

would be more or less at risk for death from an NBCR event because they 

traditionally have not tracked the geographic locations of individuals 

covered by their policies.

However, whether losses from a large NBCR attack would be catastrophic 

for life insurers was unclear and could depend on the extent to which their 

portfolios were diversified. Representatives of national life insurers told us 

that they have a broad portfolio of exposure nationwide, which helps them 

diversify their risks. In the event of a large NBCR attack in which up to 

one million insured people died, representatives of the American Council 

of Life Insurers told us that most large life insurers probably would be able 

to pay the death claims. However, these representatives also said that 

small or medium-size group life insurers that received a significantly high

number of death claims following an NBCR attack might be unable to pay 

claims and become insolvent, and that state guarantee funds would have 

to levy an assessment on the remaining insurers in the states to pay the 

claims.51 Notwithstanding their belief that they could survive an NBCR 

attack, representatives of the two national insurers we interviewed were 

concerned about the companies’ exposure to catastrophic NBCR losses. 

These representatives particularly were concerned because their 

companies generally insure all the employees of a given company. These

 50For example, according to one insurer, a group life insurer might anticipate three or four 

deaths per 1,000 people through ordinary causes of death, but an incident that caused more 

than four deaths per 1,000 would require additional funds beyond what the insurer 

anticipated. 

51In general, when insurers become insolvent and cannot pay their claims, state insolvency 

guarantee funds compensate members of the public who suffer losses, although the

policyholders may bear part of the losses themselves. 

Page 26 GAO-06-1081 Terrorism Insurance
employees could be concentrated in one geographic location, and the 

insurance companies could be liable for huge losses if an NBCR event led

to widespread casualties in one area.

52

In addition, life insurers do not have access to TRIA. Representatives of 

two group life insurers we interviewed said that their companies either 

had not found reinsurance for NBCR risks or the costs were very high 

relative to the amount of insurance that could be purchased. We also 

spoke with representatives of a large group life reinsurer who said their 

company provided some coverage for NBCR events, although the 

company limited this exposure to $100 million per event. 

Although many health insurers cover groups of individuals concentrated 

geographically, representatives of AHIP and two national group health 

insurers told us that determining overall exposure to NBCR risks was 

challenging. Further, they explained that state regulation of NBCR 

coverage was not the primary reason they covered terrorism risks, and 

AHIP could not provide us documentation of regulatory requirements for 

NBCR coverage. Nevertheless, insurance regulatory officials from two 

states with localities at higher exposure to terrorism risks—California and

New York—told us they have not allowed health insurance policies to 

exclude medical expenses related to illness or injury sustained from an 

NBCR event.53 In contrast, regulatory officials in the District of Columbia 

told us that they did not have any requirements that health insurers cover 

NBCR events. 

Representatives of two national group health insurers we interviewed 

described the difficulties they would have in attempting to set actuarially

sound prices for health risks from NBCR terrorist events. First, 

representatives of health insurers said that they typically price health 

coverage based on experience with their insured populations and without 

knowing the likely impact of NBCR risks, they could not develop 

actuarially sound prices for such a risk. Further, the representatives 

explained they tend to limit policy coverage by procedure or by individual, 

According to Health Insurers, 

They Face Unique Challenges 

in Determining Exposure to 

NBCR Risks 

 52According to a model developed for the American Academy of Actuaries, a large NBCR 

event could cause widespread casualties resulting in insured losses to life insurers of $82 

billion. See footnote 26.

53NAIC also does not track state requirements regarding the coverage of NBCR events in

health insurance policies across the states. California regulatory officials told us that some

health insurance forms could exclude NBCR coverage if such a form were not disapproved 

by the state within 30 days of filing. 

Page 27 GAO-06-1081 Terrorism Insurance
rather than by the source of the illness. For example, a representative of 

one health insurer told us that while the company did develop prices for 

other low-frequency, high-cost claims such as liver transplants, they could 

only do so because of prior experiences. Second, uncertainties over the 

long-term health effects of NBCR attacks, such as the need for 

psychological counseling or cancer treatment, make it difficult for insurers 

either to exclude NBCR attacks from their coverage or charge additional 

prices for their coverage. A report from the American Academy of 

Actuaries, as well as representatives from AHIP, noted that harm from

NBCR events could be widespread and persist for years, and in the years 

subsequent to the attack, it would be difficult to identify the source of the 

illness.54 According to representatives of one insurer, this also would make 

direct attribution of an expense to an NBCR attack difficult.55 Further, 

these representatives said that the ultimate costs of medical treatment 

would be unknown, as some factors such as whether hospitals would 

remain open and sufficient vaccines would be available, were controlled 

by local public health responders.56 Finally, similar to life insurance, 

representatives of one health insurer told us they often lack information 

about the specific geographic locations of their insured populations, 

further limiting their ability to conduct risk-based pricing for events such

as NBCR attacks. 

Representatives of the health insurance industry told us private 

reinsurance for their coverage of catastrophic events generally was very 

limited. AHIP representatives told us that catastrophic reinsurance for 

health insurers was in short supply, expensive, and generally focused on 

covering large costs incurred by individuals, rather than large costs 

 54American Academy of Actuaries, December 2002, Public Policy Monograph, Group and 

Health Coverage in the Wake of September 11. The Academy specifically noted that a

biological, chemical, or radiological attack could spread illness for extended periods. In 

addition, we have noted that the symptoms from some biological agents easily could be

confused with other, more common illnesses. See GAO/NSIAD-99-163. 

55Unlike workers’ compensation insurance, health insurers with whom we spoke told us

that their policies covered medical treatments for current illnesses or injuries, regardless of 

when the person got sick or hurt. 

56The capabilities and availability of public health personnel and medicines or vaccines 

could affect the scope of damage and casualties, as we have previously noted in reports on 

the preparedness of public health agencies and health care organizations for biological 

attacks. See GAO, Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have

Improved Public Health Response Capacity, but Gaps Remain, GAO-03-654T, 

(Washington, D.C.: Apr. 9, 2003) and GAO, Bioterrorism: Preparedness Varied across State

and Local Jurisdictions, GAO-03-373 (Washington, D.C.: Apr. 7, 2003). 

Page 28 GAO-06-1081 Terrorism Insurance
incurred by groups of individuals potentially exposed to the same risks. 

Representatives from health insurers also said that reinsurance was costly, 

but they had not specifically sought out coverage for NBCR risks. As is the 

case for life insurers, health insurers do not have access to TRIA. 

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to the Ranking Minority 

Member of the House Financial Services Committee, other interested 

members of Congress, and NAIC. We also will make copies available to 

others upon request. In addition, this report will be available at no charge 

on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions on this report, please contact me at 

202-512-8678 or williamso@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix II. 

Sincerely yours, 

Orice M. Williams 

Director, Financial Markets and Community Investment 

Page 29 GAO-06-1081 Terrorism Insurance
Appendix I: 

Methodology 

Objectives, Scope, and 

Page 30 GAO-06-1081

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. As part of our review, we conducted interviews in 

California, New Jersey, New York, Massachusetts, and Washington, D.C. 

We conducted our review from February 2006 through September 2006 in

accordance with generally accepted government auditing standards. 

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. We primarily relied upon 

Fundamentals of Risk and Insurance, but consulted additional references 

for consistency of explanation.1

 To determine the insurability of NBCR 

risks, we applied these principles based on information we collected about 

the market for, and nature of, NBCR terrorism risks. To enhance our 

understanding of the market for NBCR insurance, and factors that insurers 

might consider when deciding whether to offer this insurance, we 

consulted insurance experts, including the American Academy of 

Actuaries, the Insurance Information Institute, and insurance experts from 

academia, and a crosssection of insurers representing different lines of 

insurance. 

Moreover, we obtained information about how NBCR terrorist risks are 

measured and predicted from three firms that specialize in modeling 

terrorism and other catastrophic events for insurers (modeling firms).2

 We 

chose these three firms because they are among the best known in the 

insurance industry. Representatives of these firms provided us with and 

identified the types of information they incorporate into their computer 

models, the methods that they use to estimate the potential frequency and 

severity of terrorist attacks with NBCR weapons, and the reasons they 

believe their products are of assistance to the insurance industry. We did 

not evaluate the ability of the models to predict the frequency and severity 

of NBCR or other catastrophic risks. For additional perspective, we also 

Principles of Insurability 

and Assessing Whether 

NBCR Risks Are 

Measurable and 

Predictable 

 1

Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and Insurance, 9th ed. 

(Hoboken, N.J.: John Wiley & Sons, 2003).

2

From an insurance perspective, a catastrophe is one that has the potential to cause severe

losses to an insurance company relative to its available financial resources.

 Terrorism Insurance
Appendix I: Objectives, Scope, and 

Methodology 

obtained descriptions of the types of data available to model insured 

losses from natural disasters, such as hurricanes, from a modeling firm 

and presentations made at a catastrophe modeling conference.3

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. We interviewed representatives from RAND, a 

nonprofit research organization with a focus on national security issues, 

and reviewed RAND publications. In addition, we interviewed

representatives of the U.S. Department of Homeland Security and 

reviewed reports. In addition, to identify the characteristics of biological, 

chemical, and radiological weapons, we used information from our own 

reports. 

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. Our information about insurer exposure in

each of these lines came from multiple sources. 

For an overview of the market nationwide, we interviewed representatives 

of three of the largest commercial insurance brokers and national 

insurance trade organizations—the American Council of Life Insurers, 

representing life insurers; America’s Health Insurance Plans, representing

health insurers; the Property Casualty Insurance Association of America, 

representing property/casualty insurers; the Reinsurance Association of 

America, representing reinsurance companies; and the Association of 

Bermuda Insurers and Reinsurers, representing off-shore specialty 

insurers and reinsurers. In addition, we interviewed representatives from 

Independent Insurance Agents and Brokers of America, an association of 

independent insurance agents and insurance brokers nationwide. 

Information from these trade associations helped provide a broader 

context for information we obtained from individual insurers and 

reinsurers and gave us some perspective on exposure for small and 

medium-sized insurers, insurers that we did not interview. 

Assessing Exposure to 

NBCR Risks 

 3

Cat Modeling 2006: Shifting Paradigms, presented by the Reinsurance Association of 

America, Tampa, Fla.: February 2006. 

Page 31 GAO-06-1081 Terrorism Insurance
Appendix I: Objectives, Scope, and 

Methodology 

To obtain information on specific insurers’ exposure to NBCR risks, we 

interviewed knowledgeable representatives of a total of 12 insurers, 

writing either one or several lines of insurance addressed by our study. 

Although the time frames of our report only permitted us to obtain 

information from selected insurers, we believe that these insurers were 

knowledgeable based on their broad exposure for their respective lines of 

insurance nationwide and their knowledge of markets at higher risk for 

terrorism. To select insurers to interview, we obtained 2004 market share 

data based on direct written premiums from the Insurance Information 

Institute and Moody’s, the most recent available data at the time of our 

review.4

Seven of the insurers we interviewed that provide coverage in the 

property/casualty, workers’ compensation, life, and health insurance lines

held a significant portion of the insurance industry’s market share 

nationwide. In addition, we interviewed the state workers' compensation 

insurance funds for New York and California, which serve as insurers of 

last resort for employers that cannot find workers’ compensation coverage 

in the private market. Collectively, the private insurers and state funds 

held the following shares of the markets, by line of insurance:

• 16 percent of the commercial property/casualty insurance market, 

• 34 percent of the homeowners insurance market, 

• 38 percent of the workers’ compensation insurance market, 

• 18 percent of the life insurance market, and 

• 13 percent of the health insurance market.5

 4

The Insurance Information Institute provides information and analysis of insurance topics

and collects data on insurance premiums and market shares for individual states as well as 

for the entire United States. Moody’s Investors Services, as part of its Special Comment on

insurers’ exposure to terrorist risks, published information about workers’ compensation

insurers’ premiums and market share. 

5

All of the information about market share data came from the Insurance Information 

Institute, with the exception of workers’ compensation insurance, which came from

Moody’s Special Comment on Terrorism Insurance in 2005. While the state funds only 

underwrite workers' compensation in their respective states, Moody's calculated their

marketshare based on a percentage of total premiums written nationwide. 

Page 32 GAO-06-1081 Terrorism Insurance
Appendix I: Objectives, Scope, and 

Methodology 

In addition, market shares for the private market insurers were among the 

highest in six states with localities considered by the Insurance Services 

Office (ISO)—a national organization that prepares insurance rate (price) 

recommendations and related policies for property/casualty insurers—to

be at higher risk for terrorist events (including NBCR events). These 

insurers usually numbered among the top five insurance providers for 

their respective lines of insurance in these six states. Depending on the 

competitiveness of the state market for each insurance line, this market 

share generally represented anywhere from 2 to 30 percent of the local 

market. For commercial property/casualty insurance, we also interviewed

three specialty insurers, recommended to us by insurance brokers. 

Specialty insurers are not regulated by state insurance departments but 

provide stand-alone terrorism insurance coverage that may or may not 

include NBCR risks. 

Finally, to learn more about the availability of NBCR reinsurance 

coverage, we interviewed representatives of three reinsurers that provide 

insurance for insurers in the commercial property/casualty market and the 

group life market, including one reinsurer that focuses its coverage on

specific risks such as NBCR events. Two of the reinsurers, as measured by 

revenue, are among the top three reinsurers in the United States. 

To identify state requirements regarding NBCR coverage, we met with and 

received documentation from the National Association of Insurance 

Commissioners (NAIC) for a national regulatory perspective as well as 

insurance regulators in California, New York, and the District of Columbia 

for individual states’ regulations. We selected these states and the District 

of Columbia because they were among the jurisdictions that have 

localities considered at high risk for terrorist attacks. Representatives of 

NAIC were able to provide us with all of the states’ legal requirements for 

property/casualty insurers’ coverage of fire following events; however, 

NAIC did not collect information that would allow us to determine a 

state’s requirements for coverage of NBCR events in workers’ 

compensation, life, and health insurance. State regulators in California, 

New York, and the District of Columbia provided us with information 

about their requirements for NBCR coverage for life and health policies 

issued in their respective states. We gathered information on state 

workers’ compensation requirements for providing NBCR coverage and 

for pricing this coverage from the National Council on Compensation 

Insurance—representing 34 states including the District of Columbia—and 

from workers’ compensation rating boards and researchers in New York 

and California. In the time frames of our study, we could not review all of 

the state requirements for each of the lines of insurance included in our 

Page 33 GAO-06-1081 Terrorism Insurance
Appendix I: Objectives, Scope, and 

Methodology 

study. Therefore, for circumstances in which NAIC could not provide us 

specific state requirements, we relied on national trade associations or 

information provided by national insurance carriers, particularly for 

requirements for life and health insurance. 

To learn about permissible policy exclusions, we met with ISO and 

reviewed their standard policies (forms) for commercial property, general 

liability, and homeowners insurance, including terrorism endorsements. 

While individual insurer’s use of these forms may vary, ISO’s forms contain 

standard policy language. We identified language in these policies that 

could address issues related to NBCR events, including the nuclear hazard 

exclusion and the pollution exclusion. We also obtained information about 

factors that could affect the interpretation of ISO forms from insurers and 

insurance brokers. In addition, we identified examples of court cases 

involving disputes over language pertaining to the pollution exclusion in 

insurance contracts. 

Interviews with insurance experts and representatives of three major 

rating agencies provided additional perspective on insurer willingness to 

offer NBCR coverage. We selected insurance experts from academia based 

on their knowledge of insuring for catastrophes, including terrorist acts. 

We met with representatives of three rating agencies that provide ratings 

on insurers’ financial strength and abilities to meet ongoing obligations to

policyholders. 

To learn more about supply and demand for NBCR insurance in the 

commercial property/casualty industry, we reviewed the U.S. Department 

of the Treasury’s (Treasury) 2005 “Report to Congress, Assessment: The 

Terrorism Risk Insurance Act of 2002” and discussed the findings with 

Treasury staff responsible for its contents. In this report, Treasury reports 

on results from a series of surveys of commercial property/casualty 

insurers and policyholders. One survey asked insurers whether they wrote 

coverage for terrorism risks and whether they wrote any policies that 

included coverage for any one of the NCBR risks. Another survey asked

policyholders from a range of industries whether they purchased NBCR 

terrorism risk coverage and if not, asked them to identify the reasons. We 

were limited in our ability to use policyholders’ reported purchase rates 

for NBCR coverage as a signal for approximating overall demand because 

of the low response rates to these questions. Because a number of 

surveyed policyholders did not provide this information, there is a risk 

that those who did not respond differed from those who did, which could

lead to bias in the survey results. 

Page 34 GAO-06-1081 Terrorism Insurance
Appendix I: Objectives, Scope, and 

Methodology 

To supplement Treasury’s data on demand for NBCR coverage in the 

commercial property/casualty insurance market, we reviewed surveys of 

the terrorism insurance market conducted by Marsh—a large insurance 

broker—in 2005 and 2006 as well as by Moody’s, a rating agency, in 2005.6

We also interviewed three risk managers from large companies who 

purchase commercial property/casualty insurance policies in the real 

estate, hospitality, and transportation industries, and interviewed 

representatives of two national associations representing a range of 

consumers and commercial businesses. 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. 

Nonresponse rates and other sources of potential error also may limit the 

use of data from these two surveys. 

 6

These studies were the Marsh MarketWatch Report: 2006 and Moody’s Special Comment

Letter on Terrorism Insurance: 2005. 

Page 35 GAO-06-1081 Terrorism Insurance
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 36 GAO-06-1081

Appendix II: GAO Contact and Staff 

Acknowledgments 

GAO Contact Orice M. Williams, (202) 512-8678 or williamso@gao.gov 

Lawrence D. Cluff was the Assistant Director. In addition, Joseph A. 

Applebaum, Sonja J. Bensen, Katherine C. Bittinger, Carl Ramirez, Linda 

Rego, Barbara M. Roesmann, and Elizabeth Walat made key contributions 

to this report. 

Staff 

Acknowledgments 

 Terrorism Insurance
Related GAO Products Related GAO Products 

Insurance Sector Preparedness: Insurers Appear Prepared to Recover 

Critical Operations Following Potential Terrorist Attacks, but Some 

Issues Warrant Further Review. GAO-06-85. Washington, D.C.: November 

18, 2005. 

Catastrophe Risk: U.S. and European Approaches to Insure Natural 

Catastrophe and Terrorism Risks. GAO-05-199. Washington, D.C.: 

February 28, 2005. 

Terrorism Insurance: Effects of the Terrorism Risk Insurance Act of 

2002. GAO-04-806T. Washington, D.C.: May 18, 2004. 

Terrorism Insurance: Effects of the Terrorism Risk Insurance Act of 

2002. GAO-04-720T. Washington, D.C.: April 28, 2004. 

Terrorism Insurance: Implementation of the Terrorism Risk Insurance

Act of 2002. GAO-04-307. Washington, D.C.: April 23, 2004. 

Catastrophe Insurance Risks: Status of Efforts to Securitize Natural 

Catastrophe and Terrorism Risk. GAO-03-1033. Washington, D.C.: 

September 24, 2003. 

Catastrophe Insurance Risks: The Role of Risk-Linked Securities and 

Factors Affecting Their Use. GAO-02-941. Washington, D.C.: September 

24, 2002. 

Terrorism Insurance: Rising Uninsured Exposure to Attacks Heightens 

Potential Economic Vulnerabilities. GAO-02-472T. Washington, D.C.: 

February 27, 2002. 

Terrorism Insurance: Alternative Programs for Protecting Insurance 

Consumers. GAO-02-199T. Washington, D.C.: October 24, 2001. 

Terrorism Insurance: Alternative Programs for Protecting Insurance 

Consumers. GAO-02-175T. Washington, D.C.: October 24, 2001. 

(250283) Page 37 GAO-06-1081 Terrorism Insurance
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