Terrorism Insurance: Status of Coverage Availability for Attacks Involving Nuclear, Biological, Chemical, or Radiological Weapons
Published: 2008-12-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Terrorism Risk Insurance Act of 2002 (TRIA) is credited with stabilizing insurance markets after the September 11, 2001, attacks by requiring insurers to offer terrorism coverage to commercial property owners (property/casualty insurance), and specifying that the federal government is liable for a large share of related losses. While TRIA covers attacks involving conventional weapons, insurers may use exceptions that may exclude coverage for attacks with nuclear, biological, chemical, or radiological (NBCR) weapons, which has raised concerns about the potential economic consequences of such attacks. TRIA's 2007 reauthorization directed GAO to review (1) the extent to which insurers offer NBCR coverage, (2) factors that contribute to the willingness of insurers to provide NBCR coverage, and (3) policy options for expanding coverage for NBCR risks. To do this work, GAO reviewed studies and reports and interviewed more than 100 industry participants about the availability of NBCR coverage in the market. GAO provided a draft of this report to the Department of the Treasury and the National Association of Insurance Commissioners (NAIC). Treasury and NAIC said that they found the report informative and useful. NAIC did express what it said was a philosophical difference of opinion with GAO's characterization of risk-based premiums for workers' compensation insurers.
section_title: What GAO Found
paragraphs: Consistent with the findings of a September 2006 GAO report on the market for NBCR terrorism insurance, property/casualty insurers still generally seek to exclude such coverage from their commercial policies. In doing so, insurers rely on long-standing standard exclusions for nuclear and pollution risks, although such exclusions may be subject to challenges in court because they were not specifically drafted to address terrorist attacks. Commercial property/casualty policyholders, including companies that own high-value properties in large cities, generally reported that they could not obtain NBCR coverage. Unlike commercial property/casualty insurers, insurers in workers' compensation, group life, and health lines reported generally providing NBCR coverage because states generally do not allow them to exclude these risks. Commercial property/casualty insurers generally remain unwilling to offer NBCR coverage because of uncertainties about the risk and the potential for catastrophic losses, according to industry participants. Insurers face challenges in reliably estimating the severity and frequency of NBCR attacks for several reasons, including accounting for the multitude of weapons and locations that could be involved (ranging from an anthrax attack on a single building to a nuclear explosion in a populated area) and the difficulty or perhaps impossibility of predicting terrorists' intentions. Without the capacity to reliably estimate the severity and frequency of NBCR attacks, which would be necessary to set appropriate premiums, insurers focus on determining worst-case scenarios (which with NBCR weapons can result in losses that would render insurers insolvent). For example, a nuclear detonation could destroy many insured properties throughout an entire metropolitan area. Workers' compensation, group life, and health insurers that generally cannot exclude NBCR coverage from their policies also face challenges in managing these risks. For example, workers' compensation insurers said they face challenges in setting premiums that they believe would cover the potential losses associated with an attack involving NBCR weapons. GAO reviewed two proposals that have been made to address the lack of NBCR coverage in the commercial property/casualty market. The first proposal, part of an early version of the bill to reauthorize TRIA in 2007, would have required insurers to offer NBCR coverage, with the federal government assuming a greater share of potential losses than it would for conventional attacks. Some industry participants supported this proposal because insurers otherwise would not offer NBCR coverage and because a substantial federal backstop was necessary to mitigate the associated risks. However, others said that some insurers might withdraw from the market if mandated to offer NBCR coverage, even with a substantial federal backstop. In a second proposal by some industry participants, the federal government would assume all potential NBCR risks through a separate insurance program and charge premiums for doing so. However, critics said the government might face substantial losses on such an NBCR insurance program because it might not be able to determine or charge appropriate premiums.

section_title: Letter
paragraphs: While the September 11, 2001, terrorist attacks killed nearly 3,000 people  and resulted in an estimated $32.5 billion in insured losses as of 2006,  analysts estimate that casualties and property damage involving  unconventional weapons, such as nuclear, biological, chemical, or  radiological (NBCR) materials, could be substantially worse under some  scenarios. For example, under a RAND Corporation simulation of a  terrorist-detonated nuclear explosion in the Port of Long Beach,  California, 60,000 people could die instantly, another 150,000 people could  require emergency medical treatment, and losses could reach $1 trillion.
Although the Terrorism Risk Insurance Act of 2002 (TRIA) requires  companies that offer commercial property/casualty insurance (i.e.,  coverage for building damage and related legal costs for injuries to third  parties) to provide coverage for terrorist attacks and specifies that the  federal government assume a significant share of the associated financial  responsibility, insurers’ standard exemptions may exclude coverage for  terrorist attacks involving NBCR materials. While TRIA has been credited  with stabilizing markets for terrorism insurance for conventional weapons,  such as explosives, Members of Congress, academics, and policyholders  have expressed concerns about a potential lack of coverage for terrorist  attacks involving NBCR materials. In particular, they have stated that a  substantial amount of uninsured losses could prolong economic recovery  associated with an NBCR attack.
In a September 2006 report, we analyzed issues related to insurers’  coverage for terrorist attacks involving NBCR weapons in commercial  property/casualty policies as well as in other insurance lines, including  workers’ compensation, group life, and health. We found that many  commercial property/casualty insurers and reinsurers (companies that  offer insurance to insurers) sought to exclude NBCR coverage from their  policies or place significant restrictions on such coverage, largely because  of potentially catastrophic losses associated with an NBCR attack.  Although insurers reported that they would rely on standard policy  exclusions for nuclear and pollution risks to generally limit exposure to  NBCR risks, we noted that such exclusions may be challenged in courts.  We found that although insurers in other lines also were concerned about  attacks involving NBCR materials, state regulators generally did not permit  these insurers to exclude such risks from their policies. State workers’  compensation laws generally require workers’ compensation insurers to  cover all risks, including claims from terrorist acts involving NBCR  materials, and some state regulators do not allow life and health insurers  to exclude such risks from their policies. Unlike commercial  property/casualty and workers’ compensation insurers, life and health  insurers would not be eligible for federal reimbursement for terrorism  losses under TRIA.
In December 2007, Congress passed and the President signed the  Terrorism Risk Insurance Program Reauthorization Act of 2007, which  extended the federal TRIA program until 2014. The 2007 Reauthorization  Act directed us to update our analysis of issues related to NBCR coverage.  Specifically, the act required us to review (1) the extent to which insurers  and reinsurers offer coverage for NBCR attacks; (2) the factors that  contribute to the willingness of insurers and reinsurers to provide  coverage for NBCR attacks and their ability to manage these risks; and   (3) any public policy options for expanding coverage for these risks, given  current insurance market conditions.
To address our objectives, we reviewed reports and studies on terrorism  insurance for NBCR risks and interviewed more than 100 insurance  industry participants about the availability of NBCR coverage in the  market, factors contributing to the availability of NBCR coverage, and  their views on options to expand the market for NBCR coverage. For  coverage in commercial property/casualty and workers’ compensation  markets, we interviewed officials and representatives from state  regulators, rating agencies, risk modeling firms, insurer and policyholder  trade associations, national and regional insurance and reinsurance  brokers, insurance and reinsurance companies, and policyholders in a  variety of industries, in six geographic markets (Atlanta; Boston; Chicago;  New York; San Francisco; and Washington, D.C.) that received different  rankings for terrorism risk by an industry analyst. We interviewed some  participants in specialized insurance markets, including a nuclear pool,  Bermuda reinsurers, and a national broker with expertise in  environmental insurance. Furthermore, we interviewed private insurers  that provide workers’ compensation insurance and a judgmental sample of  nine state workers’ compensation funds that generally provide insurance  for employers that cannot obtain it in the private market. Our analysis of  NBCR coverage and capacity in the life and health insurance industries  was more limited. We reviewed our September 2006 report and  interviewed state insurance regulatory officials in California; Georgia;  Illinois; Massachusetts; New York; and Washington, D.C., about NBCR  coverage. We also interviewed representatives from several group life and  health insurers with a large market share nationwide and in these same  states. Although we selected industry participants to broadly represent  national and specific market conditions, our sample may not represent the  universe of insurers, insurance brokers, policyholders, and regulators. As a  result, we could not generalize the results of our analysis to the entire  national market for terrorism insurance for NBCR attacks in the  commercial property/casualty, workers’ compensation, life, and health  insurance markets. To obtain views on the advantages and disadvantages  of some public policy options for expanding coverage for NBCR risks, we  reviewed options proposed in legislation, suggested by industry  participants, or discussed in our prior reports or in other reports. See  appendix I for more detailed information on our scope and methodology.
We conducted this performance audit from January 2008 to December  2008, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Congress enacted and the President signed TRIA in 2002 to help restore  confidence and stability in commercial property insurance markets after  private insurers withdrew terrorism coverage in the wake of the  September 11 attacks. TRIA requires that commercial property/casualty  insurers, including (among others) workers’ compensation insurers, “make  available” coverage for certified terrorist events under the same terms and  conditions as other, nonterrorism coverage. Following a terrorist attack,  the federal government would reimburse insurers for 85 percent of their  losses after insurers pay a deductible of 20 percent of the value of each  company’s prior year’s direct earned premiums. Federal reimbursement  is activated when aggregated industry losses exceed $100 million and is  capped at an annual amount of $100 billion. TRIA also would cover losses  caused by NBCR terrorist attacks if the insurer had included this coverage  in the insurance policy.
Originally enacted as a 3-year program, TRIA was reauthorized in 2005; in  2007, Congress extended the program until 2014. In the deliberations over  the 2005 and 2007 Reauthorization Acts, Congress considered mandating  that commercial property/casualty insurers offer coverage for NBCR risks,  with significantly lower deductibles and copayments. Congress also  considered adding group life insurance to the TRIA program, so that group  life insurers could receive reimbursements for the majority of their claims  from terrorist events, including NBCR attacks. Members of Congress  supporting this provision argued that group life insurers were vulnerable  to the same extraordinary losses from a terrorist attack as other insurance  lines and could become insolvent after a catastrophic event. However,  Treasury testified that the Administration did not want to expand TRIA to  cover group life insurers, citing some reports that the group life insurance  market has remained competitive after September 11. The NBCR  requirement and the group life provisions were not included in the final  TRIA reauthorizing legislation.
subsections: section_title: Variation in Potential Weapons Involving NBCR Materials and Examples of Prior Attacks
paragraphs: Government and other experts have stated that terrorist attacks involving  NBCR weapons could affect people and property in a variety of ways,  depending on the weapon used as well as the location of the attack. Table  1 provides examples of attacks using NBCR weapons as well as some of  their potential effects.
Previous attacks involving NBCR materials in United States and Japan also  illustrate a range of consequences. In September and October 2001,  contaminated letters laced with anthrax were sent through the mail to two  U.S. senators and members of the media. As a result, 22 individuals  contracted anthrax disease, and 5 of these individuals died. In 1984, the  Rajneeshee religious cult in Oregon contaminated salad bars in local  restaurants with salmonella bacteria to prevent people from voting in a  local election. Although no one died, 751 people were diagnosed with the  food-borne illness. In 1995, 12 people were killed and many more were  injured after Aum Shinrikyo, a State Department-designated terrorist  organization, released the chemical nerve agent Sarin in the Tokyo  subway.
section_title: Overview of State Regulation of Insurance and Workers’ Compensation Insurance Providers
paragraphs: States have the primary responsibility for regulating the insurance industry  in the United States, and the degree of oversight varies by insurance line  and state. In some lines of insurance, state regulators guide the extent of  coverage by approving the wording of policies, including the explicit  exclusion of some perils. Regulators coordinate their activities, in part,  through NAIC. According to an NAIC representative, while practices vary  by state, state regulators generally review prices for personal lines of  insurance and workers’ compensation policies but not for commercial  property/casualty policies. In most cases, state insurance regulators  perform neither rate nor form review for large commercial  property/casualty insurance contracts because it is presumed that  businesses have a better understanding of insurance contracts and pricing  than the average personal-lines consumer. Reinsurers generally are not  required to obtain state regulatory approval for the terms of coverage or  the prices they charge.
Because state laws generally require employers to carry workers’  compensation insurance, which covers employees for death or injuries as  a result of a workplace incident, employers generally obtain coverage  either from a private insurance company or from a fund established by the  state. Twenty-six states have established separate funds, either run by the  state or as a separate company, according to the American Association of  State Compensation Insurance Funds (AASCIF), and most of these states  provide workers’ compensation coverage for all employers seeking it. An  NAIC official told us that when state governments began requiring  employers to purchase workers’ compensation coverage, many states  established separate funds to provide a mechanism to ensure coverage for  those employers that could not obtain it in the private market. The  majority of state funds are competitive, meaning that the state fund  competes for business with other private insurers. However, in four states,  the state fund is the sole insurer for workers’ compensation, unless an  employer is permitted to self-insure. The National Academy of Social  Insurance reported that in 2006, just over half of workers’ compensation  benefits (50.38 percent) were paid by private insurers, with just under half  coming from state funds (19.66 percent), federal programs (5.98 percent),  and self-insured employers (23.98 percent).
section_title: Most Commercial Property/Casualty Insurers and Reinsurers We Contacted Exclude or Limit Coverage for NBCR Risks, While Workers’ Compensation, Life, and Health Insurers Generally Are Required to Offer Such Coverage
paragraphs: Commercial property/casualty insurers and reinsurers generally seek to  exclude coverage for NBCR risks or place significant restrictions on such  coverage. According to industry participants, insurers interpret the  language of longstanding exclusions developed for nuclear and pollution  risks as excluding terrorist attacks involving NBCR weapons, but the use  of such exclusions may be challenged in court. Representatives from  policyholders from a variety of industries, including real estate, financial  services, and hospitality, also told us that they do not have NBCR coverage  either because a very limited amount of NBCR insurance is available or  they do not view the rates for available coverage as reasonable. A few  policyholders also reported self-insuring these risks through captive  insurers. Representatives from workers’ compensation, life, and health  insurers we contacted generally reported that they cover losses from  terrorist attacks, including those involving NBCR materials, because they  said state regulators generally do not allow these insurers to exclude such  risks.
subsections: section_title: NBCR Coverage Generally Is Unavailable in Commercial Property/Casualty Insurance and Reinsurance Policies, but the Exclusions Used to Limit Coverage Could Be Challenged in Court
paragraphs: While few market surveys that we identified specifically have addressed  the availability of property/casualty insurance for terrorist attacks  involving NBCR materials, our interviews with a range of industry  participants suggests that such coverage continues to be limited.  Representatives from the majority of the insurers and reinsurers we  interviewed said that their companies generally do not offer NBCR  coverage or offer a limited amount of such coverage. Representatives of  large insurance and reinsurance trade associations, as well as national  insurance brokers, also reported a general lack of coverage for NBCR  risks. According to a representative from a large national insurance  broker, he was not aware of any primary insurers that offered NBCR  coverage as part of their standard property/casualty policies. The  representative said that some insurers that offer “stand-alone” terrorism  insurance policies offer NBCR coverage, but demand for this product is  minimal due to its relatively high price and restrictions. Although  representatives of several reinsurers based in Bermuda told us that their  companies offer some NBCR coverage, the reported restrictions on these  policies help illustrate some of the limitations of the available coverage.  For example, the policy language of one reinsurance contract we reviewed  limited NBCR coverage only to losses resulting from the initial “force or  violence” of the NBCR terrorist attack and did not cover long-term effects,  such as resulting illnesses or business interruption.
Insurance companies seek to limit their coverage for NBCR risks by  relying on long-standing exclusions for nuclear and pollution risks, which  already have been approved by state regulators. As we stated in our  September 2006 report, insurers have written exclusions related to nuclear  hazard risks into their standard policies for decades, generally to protect  themselves from losses related to nuclear power accidents. Furthermore,  representatives from the Insurance Services Office (ISO), a national  organization for the property/casualty insurance industry that develops  standardized policy language designed to comply with regulatory  requirements, said that insurers also typically exclude coverage for losses  caused by pollution and contamination. ISO representatives told us that  the pollution exclusion was developed to exclude coverage for the release  of many different substances—such as asbestos or pesticides—that could  cause harm to people and the environment. Some insurance  representatives said that the pollution exclusion could be applied to  biological and chemical agents released in a terrorist attack.
Because these exclusions were developed for other purposes, some  regulators and insurance industry participants said that their use by  insurers in the event of an attack involving NBCR materials could be  challenged. Representatives from one large insurer told us that language in  the nuclear hazard exclusion may not be clear enough to apply to a  nuclear terrorist attack. Similarly, representatives from a large insurance  company said the pollution exclusion would not apply unless the terrorist  attack itself was deemed to be a polluting event. An official from the New  York Insurance Department also said that the Department did not interpret  the definition of “pollutants” in the standard pollution exclusion forms to  apply to biological and chemical terrorist attacks. 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 jurisdiction. As we stated in our September 2006  report, given the potential for litigation and court interpretation, insurers  and other industry experts have raised some concerns as to how  effectively the pollution exclusion would protect insurers against losses  resulting from an NBCR terrorist attack.
Property/casualty insurers also may face potential exposure to losses from  NBCR attacks as the result of state requirements, but it is difficult to  assess the extent of this exposure. According to industry officials,   16 states—including California, Illinois, and New York—require  property/casualty insurers to cover losses from fire following an event,  regardless of the cause of fire. As we reported in 2006, 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. However,  given the potential devastation resulting from a nuclear terrorist attack— including potentially widespread destruction and protracted  evacuations—it may be difficult for insurers, policyholders, regulators,  and courts to resolve any issues related to the cause of loss.
section_title: Property/Casualty Policyholders Report That NBCR Coverage Generally Is Unavailable or Available at Prices They View as Unaffordable
paragraphs: Information we obtained from commercial policyholders in a range of  industries across the country also indicate that property/casualty coverage  for NBCR risks is very limited. For example, we interviewed  representatives from real estate companies that own large, high-value  commercial properties (such as office buildings or hotels) in cities— including Chicago, New York, and San Francisco—that generally are  viewed as being at high risk of terrorist attack. While representatives from  these companies said that they generally were able to obtain coverage for  terrorist attacks that involve conventional weapons, such as truck bombs,  they generally did not have NBCR coverage. In addition, results from a  recent survey of risk managers conducted by the Risk and Insurance  Management Society, Inc. (RIMS), show that commercial policyholders  generally have not been offered NBCR coverage in their insurance  policies. Although the RIMS survey has several limitations, it found that  less than 15 percent of the respondents had coverage for NBCR attacks.  Furthermore, representatives we contacted from industries such as  transportation, hospitality, entertainment and utilities also reported that  they did not have NBCR coverage, or had limited coverage, such as for  only chemical risks.
Policyholders we contacted said that they generally lacked NBCR  coverage because (1) their insurers did not offer it; (2) the prices quoted  on the coverage that was available were viewed as too expensive to  purchase; or (3) they did not seek coverage. For example, a representative  of a shopping center development company with retail locations in various  cities throughout the United States said that the company is concerned  about the risks of NBCR attack and has sought insurance coverage.  However, the representative said that the company has not been able to  identify any insurers that would offer the company NBCR coverage or  provide pricing information. In addition, representatives of a commercial  real estate developer in Washington, D.C., said that quoted insurance  premiums for NBCR coverage were five times higher than their total  property insurance costs. Insurance brokers we contacted told us that  although some of their commercial policyholder clients have inquired  about NBCR coverage, the demand for such coverage is less than that for  conventional terrorism coverage. As we stated in 2006, demand for  conventional terrorism coverage is high in the commercial real estate  sector because mortgage lenders generally require companies to purchase  coverage. However, according to brokers and a lender that we  interviewed, lenders do not require companies to secure coverage for  NBCR terrorist attacks because such coverage is largely unavailable.
Due to concerns about the potential for NBCR attacks and the general lack  of coverage offered by insurers, some policyholders said that they had  established captive insurers to self-insure the risk and obtain federal  reinsurance under TRIA. Captive insurers are generally established by  major corporations, such as large real estate companies, to self-insure a  variety of risks. Corporations may create captives for several reasons,  including to obtain coverage for certain risks that may no longer be  provided by the private market (such as medical malpractice insurance),  access additional coverage directly from a reinsurer, or reduce tax  payments. According to a representative from an insurance broker that  helps companies in establishing and managing captives, companies either  may add NBCR coverage to an existing captive insurer or may create one  to cover NBCR risks. For example, a representative from a national real  estate company told us that he had difficulty finding terrorism insurance at  prices viewed as reasonable and without restrictions, so the company  established a captive that covered NBCR risks. Although captives may  help some companies limit their potential exposure from NBCR attacks,  available information suggests that captives are not widely used for this  purpose, perhaps because companies may lack the financial resources  necessary to do so. To illustrate, representatives from 18 percent of the  39 policyholders we contacted and 6 percent of the 377 respondents to the  RIMS survey that we have previously discussed reported using captives to  insure NBCR risks.
section_title: Workers’ Compensation, Life, and Health Insurers Generally Cover NBCR Risks Due to State Requirements
paragraphs: Unlike property/casualty insurers, workers’ compensation insurers we  contacted said that they offer NBCR coverage because they generally are  not permitted to exclude it under state laws and regulations. As we found  in 2006, applicable state laws generally require workers’ compensation  insurers to cover all perils, including those from NBCR risks. 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, according to NAIC.
Similarly, we were told that group life insurers generally do not exclude  NBCR coverage from their policies, according to regulators and industry  participants. Officials from five of the six state insurance regulators that  we interviewed reported that they do not allow terrorism or NBCR attacks  to be excluded from life insurance policies. However, officials from these  regulatory agencies also said that their states had not enacted laws that  explicitly require insurers to offer such coverage. Given the lack of  statutory requirements, officials from Washington, D.C., told us that group  life insurers in the District could exclude NBCR risks from their coverage.  However, representatives from the American Council of Life Insurers, a  national trade association for life insurers, reported that they were not  aware of the use of NBCR exclusions and believed that group life insurers  generally cover NBCR risks; officials from several large life insurance  companies confirmed that they provided coverage.
Finally, health insurers also generally cover NBCR risks, according to state  regulators, representatives from America’s Health Insurance Plans, and  health insurers we contacted. According to industry participants, health  insurers generally are required to pay claims, regardless of the cause that  led to the claim. Insurance regulatory officials from several states with  locations viewed as high risk—California, Georgia, Illinois, Massachusetts,  and New York—told us that they do not permit health insurers to exclude  NBCR coverage from their policies. However, regulatory officials in  Washington, D.C., said that health insurers were not mandated to cover  NBCR risks in the District and insurers had filed policies with NBCR  exclusions. In addition, a representative from one large health insurer said  that the insurer would invoke the force majeure clause—a general  contract provision used to relieve parties from their responsibilities due to  circumstances beyond their control, such as acts of God—to exclude  NBCR risks. However, representatives from two state regulators we  interviewed told us they were not familiar with the force majeure clause,  and an official from the Georgia Department of Insurance told us he did  not think the clause would apply to terrorist acts involving NBCR  materials.
section_title: Potential Financial Consequences of NBCR Attacks Limit Property/Casualty Insurers’ Willingness to Offer Coverage; Insurers for Other Lines of Insurance Report Limited Capacity to Manage Associated Risks
paragraphs: Commercial property/casualty insurers and reinsurers generally are not  willing to provide coverage for NBCR attacks or place significant  restrictions on the coverage they offer because of the uncertainties  surrounding such attacks and their potential for generating catastrophic  losses. Although private workers’ compensation insurers generally have  greater flexibility than state funds to limit their exposure to losses from  NBCR attacks by not offering coverage to certain employers, both private  insurers and state funds may face other challenges in managing the risks  associated with terrorist attacks involving NBCR weapons, such as limits  on their ability to price such risks and obtain private reinsurance. Life and  health insurers may also face challenges in managing NBCR risks, such as  competitive market pressures and challenges in establishing appropriate  premiums for their potential exposures.
subsections: section_title: Commercial Property/Casualty Insurers and Reinsurers Are Concerned about the Uncertainty and Potential Enormity of Losses from NBCR Attacks
paragraphs: As we stated in our September 2006 report, many insurers view terrorist  attacks, particularly attacks involving NBCR materials, as an uninsurable  risk because of uncertainties about the severity and frequency of such  attacks. Insurance companies typically manage and assess risk on the  basis of their expected losses, using historical information about the range  of damages (severity) and the number of incidents in a given period of  time (frequency). For some risks, such as those related to driving  automobiles, insurers have access to a substantial amount of statistical  and historical data on accidents, from which they can predict expected  losses and then calculate premiums that are adequate to cover these  losses. Large claims from automobile accidents also generally do not  occur to a large number of policyholders at the same time, which serves to  limit insurers’ exposures. In contrast, catastrophes, including natural  disasters such as hurricanes as well as terrorist attacks, present unique  challenges to insurers because they may result in substantial losses and  are relatively infrequent. To address these challenges, insurers may use  computer models developed internally and by outside firms to help  estimate the financial consequences of various disaster scenarios, and in  some cases, to develop appropriate premiums. However, as we have  previously noted, due to data limitations, estimating the potential  consequences of terrorist attacks is fundamentally different and  substantially more difficult than forecasting natural catastrophes. For  example, substantial data are available on the frequency and severity of  hurricanes, but the United States has experienced relatively few terrorist  attacks, particularly those involving NBCR materials.
Estimates of the potential severity of attacks involving NBCR materials  may be particularly difficult to produce for several reasons, according to  insurance industry participants and representatives from firms that have  developed computer models for catastrophe risks. For example, as we  previously have discussed, a wide range of potential weapons are  associated with NBCR attacks, which could result in varying amounts of  property damage as well as injuries and deaths (see fig. 1). While estimates  for the damage resulting from nuclear blast in an urban area exceed the  loss estimates for a chemical attack on a single building or facility, loss  estimates also may vary for different types of attacks using the same  agent. For example, one modeling firm has produced a scenario in which a  moving truck releases anthrax in a highly populated urban area creating  total insured losses of $144 million, 20 times higher than if the anthrax  were released through a sprayer inside the ground floor of a large  building. Representatives of insurers and reinsurers we interviewed  expressed concerns about models’ ability to account for all of the potential  losses associated with an NBCR attack, such as business interruption and  litigation costs, which may be difficult to quantify. In addition, a recent  report by one modeling firm stated that decisions about the extent of  cleanup required for nuclear and radiological contamination likely will be  made after the attack, creating further uncertainties about the cost of  rebuilding or remediation.
Insurers also face challenges with developing frequency estimates for  NBCR attack scenarios. Representatives of risk modeling firms told us  they use worldwide incidents of NBCR attacks and researchers’ opinions  on terrorists’ capabilities and potential targets to develop estimates for  NBCR event frequency. However, some insurance industry participants  described frequency estimates of NBCR attacks as too subjective to be  used as a basis for pricing coverage, because views on the frequency of  attacks vary. For example, while one modeling firm stated in a recent  report that its estimates for the frequency of terrorist attacks are   0.6 events per year, or 2.0 events every 3 years, the representative of a  large commercial property/casualty insurer said that his firm viewed the  risk as occurring once every 8 years. Furthermore, insurance experts said  that terrorists continue to adjust their strategies, thereby making past  attacks a poor predictor of future events.
Because insurers and reinsurers face challenges in reliably estimating the  severity and frequency of terrorist attacks involving NBCR materials and  setting appropriate premiums, industry representatives reported that their  companies focus on the most catastrophic attacks under scenarios with  widespread financial losses. For example, some representatives of  property/casualty insurers told us that the scale of a nuclear blast could  have a devastating impact on an insurer that chose to offer NBCR  coverage, because such an attack could destroy or render uninhabitable  many or all buildings within a large metropolitan area. In contrast, we  have previously reported that since TRIA was enacted, insurers have some  ability to limit their potential losses from terrorist attacks involving  conventional weapons such as truck bombs, because the damage resulting  from such attacks might be confined to a smaller geographic area, such as  a radius of several blocks from the attack. Representatives of insurers we  contacted told us their companies may limit their property/casualty  coverage in locations viewed as at high risk for a terrorist attack, such as  New York City; however, they reported that the potential losses from an  NBCR attack could far exceed what their company would be able to cover.  As we reported in 2006, academic experts and industry participants have  pointed out that insurers have little incentive to insure catastrophic events  that might jeopardize their financial soundness and solvency, so insurers  remain unwilling to offer coverage for NBCR attacks.
section_title: Private Workers’ Compensation Insurers Have Somewhat Greater Flexibility to Manage NBCR Risks by Choosing Which Employers to Offer Coverage, but Private Insurers and State Funds Face Other Risk Management Challenges
paragraphs: Although private and state workers’ compensation insurers generally must  cover losses resulting from NBCR attacks, private companies generally  have greater flexibility in managing their exposures to losses from NBCR  attacks under the TRIA program. Specifically, private insurers may choose  to which employers they will offer coverage. Accordingly, representatives  of private insurers reported that their companies have monitored or  limited coverage offerings to employers with employees concentrated in  locations considered to be at higher risk for an NBCR attack. For example,  representatives of smaller, more regionally based insurers said their  companies decided not to offer coverage for certain employers that have  employees concentrated in densely populated locations, or limited their  overall coverage offerings for workers’ compensation in urban areas.
In contrast to private insurers, state workers’ compensation funds  generally are unable to limit their NBCR risks on the basis of employers’  perceived risk levels. State laws and regulations generally require state  funds to provide coverage to all employers—regardless of their location or  risk level—and serve either as the state’s sole insurer or as the insurer of  last resort. While officials from some state funds we contacted said that  they were concerned about exposure to losses from an NBCR attack, they  also said the nature of their funds’ operations might limit that exposure to  some degree. For example, representatives from some funds said that  because they offered coverage to a significantly large group of employers  of varying sizes across the state, their exposure to losses from NBCR  attacks was somewhat diversified.
Finally, representatives of private workers’ compensation insurers and  state funds told us that they faced some challenges in managing NBCR  exposures, such as pricing the risk and obtaining adequate amounts of  private reinsurance. Recognizing workers’ compensation insurers’  exposure to terrorism risks, state regulators in at least 37 states, including  the District of Columbia, have permitted insurers to apply a statewide  surcharge, or additional premium, (which is on average about 1 cent per  $100 payroll) to cover the potential losses from terrorist attacks, including  those involving NBCR materials. The National Council on Compensation  Insurance, Inc. (NCCI), developed statewide surcharges 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  using NBCR materials. NCCI officials told us that their surcharges  generally are uniform across a state and insurers using this surcharge  generally cannot levy higher surcharges for employers they perceive to be  at higher risk of terrorist attack. Furthermore, NCCI’s surcharges were  developed to cover potential losses from terrorist attacks involving  conventional as well as NBCR weapons. Officials from the New York  Compensation Rating Board, which develops workers’ compensation rate  proposals for the state of New York (which does not belong to NCCI), also  told us the state’s surcharges were developed to cover potential losses  from both conventional and NBCR terrorist attacks. However, as we stated  in our 2006 report, state regulators and insurance representatives advised  us that any surcharges that insurers may be permitted to charge for NBCR  exposure likely would not cover potential losses. Similarly,  representatives of private workers’ compensation insurers we contacted  for this report that underwrite coverage in locations considered at high  risk for terrorist attacks said that their surcharges for terrorism may not  cover all of their potential exposure. In addition, representatives of many  of the private insurers and some of the state funds we interviewed said  that they had little to no private reinsurance for NBCR risks, and that they  would rely on TRIA in the event of a catastrophic NBCR attack.
section_title: Group Life and Health Insurers May Face Challenges in Managing NBCR Risks
paragraphs: In contrast to workers’ compensation insurers, life and health insurers  may have somewhat more flexibility to manage the risks associated with  terrorist attacks involving NBCR materials. For example, unlike workers’  compensation insurers, the prices charged by group life insurers generally  are not subject to state regulatory approval. Group health insurers  generally are able to negotiate the terms of health care coverage with  employers and employees, unlike workers’ compensation benefits that are  state-mandated.
However, based on the limited amount of work we conducted, we found  that for terrorist attacks involving NBCR materials, group life and health  insurers face the following risk-management challenges:    Group life insurers may not actively seek to limit the amount of coverage  that they offer in geographic markets perceived to be at high risk of attack,  according to representatives from the American Council on Life Insurance  (ACLI) and several large companies we contacted. According to these  officials, the group life insurance market is highly competitive, with  insurers competing to cover employers, even in densely populated urban  areas at risk for terrorist attacks. Furthermore, life insurers’ use of models  to manage the risks associated with providing coverage in densely  populated areas may be limited. We spoke with representatives from two  group life insurers that reported that while they have started to use models  to review the impact of catastrophic scenarios, they lack specific data on  the location of employees from some employers to monitor their  concentration of insured individuals. An ACLI representative said that  group life insurers with exposures across the country may be better able  to manage risks from an NBCR attack than smaller, more regional insurers  with portfolio concentrations near target locations.
We also previously reported on the difficulties group life insurers face in  charging higher premium rates to employers perceived to be at higher risk  of terrorist attacks, including attacks involving NBCR materials. Life  insurers price their products on the basis of mortality tables derived from  experience with prior insurance contracts and calibrated to the effects of  individual characteristics, such as smoking, or group characteristics, such  as occupation type. According to ACLI, group life insurance policies  currently are not designed or priced to account for catastrophic financial  losses and mass casualties from an unpredictable terrorist attack with an  NBCR weapon.
Similarly, health insurers may face difficulties in setting premium rates to  address the risks of terrorist attacks, including those involving NBCR  materials. For example, health insurers said that they generally price  coverage on the basis of previous experience with insured populations,  and that without knowing the frequency and severity of NBCR risks, they  could not develop actuarially sound prices for such a risk. Furthermore,  because illnesses or symptoms of illnesses resulting from NBCR attacks  could take years to develop, it might be very difficult for insurers to  establish appropriate premiums for such long-term risks.
section_title: Proposals to Increase Coverage for NBCR Attacks in the Property/Casualty Market Have Advantages and Disadvantages
paragraphs: Because the current commercial property/casualty market generally lacks  coverage for terrorist attacks involving NBCR materials, the two proposals  we reviewed to increase the availability of such coverage focus on that  market. The proposals involve the federal government assuming most or  all of the associated financial liabilities of such attacks. For example, an  early version of the bill to reauthorize TRIA in 2007 would have required  insurers to make NBCR coverage available and would have lowered their  exposure to potential losses. While such a proposal may increase the  availability of NBCR insurance, some industry participants believe it  would disrupt insurance markets. Alternatively, some industry participants  have suggested that the federal government should fully insure losses from  terrorist attacks involving NBCR materials, similar to other federal  disaster insurance programs. This program could help ensure the  availability of NBCR insurance, according to some industry participants,  but others said the program could result in substantial losses to the federal  government.
subsections: section_title: Proposal 1: Amend TRIA to Require Insurers to Make NBCR Coverage Available with the Federal Government Assuming Greater Financial Responsibility for Potential Losses
paragraphs: The House of Representatives initially passed an early version of the 2007  reauthorization of TRIA that would have amended the act to (1) require  insurers to make NBCR coverage available to policyholders, and   (2) require the federal government to assume a relatively high proportion  of the associated financial risk. With certain exceptions, the proposal  would have required insurers to offer coverage for NBCR attacks under  terms, amounts, and other coverage limitations that did not differ  materially from their coverage for other types of risks. The proposal would  have allowed an insurer to exclude NBCR coverage altogether (except for  workers’ compensation or other state coverage requirements) or offer a  separate NBCR terrorism policy at different terms, amounts, and other  coverage limitations than other types of coverage, if a policyholder  rejected an insurer’s initial offer for coverage. To compensate insurers for  the risks associated with providing NBCR coverage, the proposal initially  would have set insurers’ TRIA deductibles for such attacks at 3.5 percent  of direct earned premiums, substantially lower than the 20.0 percent  deductible insurers would pay under the current program for terrorist  attacks in general. In addition, under this proposal, insurers’ copayment,  or additional share of losses, for an NBCR attack would have varied  depending on the size of the losses associated with the attack. In the case  of a smaller NBCR attack, an insurer would have paid 15 percent of its  losses after paying its deductible, and for very large NBCR attacks,   5 percent. Additionally, the proposal would have permitted insurers to  voluntarily reserve some of their conventional and NBCR terrorism  premiums, tax-free, in a fund maintained by Treasury to cover the TRIA  deductibles or copayments associated with losses from future terrorist  attacks.
Given insurers’ general reluctance to provide NBCR coverage, some  industry participants we contacted stated that this proposal was  reasonable. For example, a representative from one insurer said that  unless mandated to do so, insurers would not offer coverage for NBCR  risks. Representatives from other insurers and industry participants,  including regulators, told us that limiting insurer losses for NBCR events  would help insurers better manage risks associated with NBCR attacks.  With their financial exposures limited, insurers could more easily develop  terms and conditions for NBCR coverage to policyholders and offer the  coverage at lower rates. In addition, some industry participants said that  the provision in the legislation allowing for separate pricing of NBCR  coverage would (1) allow insurers to tailor insurance coverage and prices  to the type of terrorist attack, and (2) provide policyholders with the  choice of purchasing NBCR and conventional terrorism coverage together  or separately.
A recent study by the RAND Corporation found that requiring insurers to  offer NBCR coverage, with the federal government assuming significant  financial liability for the associated losses from large attacks could be  beneficial. For example, the RAND study stated that under such a  program the number of policyholders purchasing coverage would increase  substantially from current levels. Furthermore, the study concluded that  the federal government’s expected outlays for compensation and  assistance following attacks involving NBCR materials actually might  decrease. Given that property/casualty coverage for NBCR attacks is  largely unavailable, in the event of such an attack, the study noted that the  federal government might decide to provide a large amount of disaster  assistance or other compensation following an attack, as it has done for  the victims of natural catastrophes and terrorist attacks. If insurers were  required to provide some coverage for NBCR attacks, the study concluded  that the federal government’s expected costs could be somewhat lower  under certain conditions than otherwise would be the case.
Some industry participants also suggested that insurers could use different  strategies in addition to TRIA to further manage the risks associated with  providing NBCR coverage, as would be mandated under this proposal. In  particular, some participants said they favored insurers forming risk pools  or changing tax laws to permit insurers to set aside tax-deductible  reserves to offset some of the losses associated with terrorist (including  NBCR) attacks, similar to provisions in the legislative proposal. We have  reported that establishing a group of insurance companies to pool their  assets could allow insurers to provide a greater amount of coverage for the  entire market than could be provided by each individual company.  Furthermore, as we discussed in our prior reports, allowing either a pool  or individual insurers to maintain tax-deductible reserves could provide  the industry with incentives to expand capacity to cover catastrophic  risks, such as attacks with NBCR materials. Table 2 provides information  on existing or proposed pooling arrangements in the United Kingdom and  the United States that are designed to help insurers manage the risks  associated with terrorist attacks involving NBCR materials or accidents  involving nuclear materials.
However, other industry participants cautioned that requiring insurers to  provide NBCR coverage, even with the federal government assuming a  relatively high percentage of the associated financial exposure, could have  adverse consequences for insurance markets. For example, a variety of  industry participants said that under such a mandate, insurers may be less  willing to offer property/casualty coverage and may withdraw from the  market or not offer coverage in areas viewed as at high risk of attack.  Some industry participants expressed particular concern about the impact  that such a proposal would have on smaller insurers. While this proposal  substantially would have lowered the deductible for attacks involving  NBCR materials, a few industry participants said that the proposed  copayments for such attacks still could be substantial for smaller insurers.  The officials said that smaller insurers may lack the financial capacity to  cover such potential costs.
In addition, some industry participants and policyholders said that this  proposal could be prohibitively costly to policyholders and taxpayers. As  we have previously discussed, industry participants said that estimates of  the severity and frequency of terrorist attacks involve many uncertainties,  making pricing difficult. Consequently, some industry participants said  that insurers, faced with a mandate of providing NBCR coverage, might set  premiums at rates they consider necessary to compensate for the risks of a  catastrophic attack, which could deter many commercial entities from  purchasing such coverage. For example, two researchers we contacted  said that when Pool Re expanded its coverage to include NBCR risks after  the September 11 attacks, prices for terrorism coverage doubled. In  addition, some industry participants said that if the federal government  were liable for a greater portion of insured losses resulting from an NBCR  attack, then the overall costs to the taxpayer from that attack could be  significant. Furthermore, although the RAND study concluded that costs  to the federal government could be reduced by requiring insurers to offer  NBCR coverage, the study noted that in the case of extremely large NBCR  attacks, the federal government’s financial liability could be larger than if  it did not participate in the market for terrorism insurance and require  insurers to offer NBCR coverage. We also note that the federal  government’s total costs could be higher under this option than the  current situation where NBCR coverage is generally unavailable, and  Congress later decided to provide additional funding to pay for uninsured  losses from such an attack.
Finally, information from our previous work, as well as interviews with  some industry participants, raises questions about whether establishing  pools or permitting insurers to maintain tax-deductible reserves materially  would enhance available coverage for terrorist attacks, including those  involving NBCR materials. According to industry participants and a study  by a global consulting firm on a proposed pool for workers’ compensation  coverage for terrorism risk, a reinsurance pool might not create new  industry capacity or bring in additional capital to support writing more  business. The study noted that if the overall industry does not have  enough capital to manage the risk of an NBCR attack, then neither would  an industry pool that simply combines existing industry capital in a new  structure. Furthermore, we have reported that overall insurance capacity  might not increase if a pool or individual insurers were allowed to  establish tax-deductible reserves. Because reinsurance premiums already  are tax-deductible, insurers would receive similar tax benefits from  traditional reinsurance, pool reinsurance, or individual reserves.
Therefore, insurers might substitute the pool reinsurance or individual  reserves for their current reinsurance program, if that program includes  coverage for NBCR attacks.
section_title: Proposal 2: Federal Government Completely Insures Losses for Terrorist Attacks Involving NBCR Materials, with Insurers Administering the Program
paragraphs: Given concerns about the potential financial and other consequences of  requiring insurers to provide NBCR coverage, some industry participants  we contacted suggested that the federal government should develop a  separate program to insure against such attacks. Under this proposal, the  federal government would serve as insurer, covering all losses for NBCR  attacks and charging premiums for providing these services. The insurance  industry’s role largely would be administrative, as some industry  representatives reported that the industry would have the staff, processes,  and experience in place to manage such tasks. For example, insurance  companies could be responsible for collecting premiums, adjusting claims,  and disbursing claims payments from the government to policyholders.  This proposal could be similar to other federal insurance programs shown  in table 3, where the government assumes most, if not all, of the risk.  These other programs generally were created because of gaps in coverage  in the private market or the perception that the risks were uninsurable.
While some industry analysts said that this proposal was the only way to  ensure that NBCR coverage would be widely available, others expressed  concerns about the potential costs of such a program to the federal  government and its effects on the private market. With the government  responsible for most, if not all, of the losses in the event of a terrorist  attack involving NBCR materials, several industry participants expressed  concerns about the potentially large post-disaster costs for the federal  government and, ultimately, taxpayers. We note that other government  disaster insurance programs have proven to be costly and have  administrative challenges. For example, we have reported that while NFIP  and the Federal Crop Insurance Program were created to provide  affordable insurance coverage, they do not collect enough in premiums to  fund potential losses from catastrophic disasters. Therefore, Congress has  had to appropriate funds after disasters, such as floods, to pay  catastrophic claims. Given the difficulties associated with reliably  estimating the potential severity and frequency of terrorist attacks  involving NBCR materials as discussed in this report, the federal  government may face substantial challenges in establishing premiums  sufficient to offset the risks involved in providing insurance coverage for  such attacks.
In addition to the large potential costs to taxpayers, industry participants  expressed other concerns about the federal government assuming  complete financial responsibility for potential NBCR property/casualty  losses. For example, some industry participants, including regulators, did  not think that the government should be responsible for all of the potential  losses from an NBCR attack and that insurers could assume some of the  risk. Furthermore, we have previously reported that some industry  participants believe that too much federal government involvement in  disaster relief crowds out private insurance and reduces the private  market’s ability and willingness to provide insurance-based solutions to  covering catastrophe risk. Finally, while insurers would play a largely  administrative role under this proposal, some insurers expressed  reservations about this potential responsibility because they have no  experience training, equipping, and sending claims adjusters and other  personnel into areas where NBCR materials have been released.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Department of the Treasury and  NAIC for their review and comment. In their oral comments, Treasury  officials said that they found the report informative and useful. They also  provided technical comments that were incorporated where appropriate.
NAIC provided written comments on a draft of this report, which have  been reprinted in appendix II. In their comments, NAIC stated that the  report was materially accurate and they agreed with our discussion on  proposed policy proposals for expanding NBCR coverage in the  commercial property/casualty market. However, NAIC reported a  philosophical difference of opinion with comments in the draft report  about the ability of workers’ compensation insurers to charge risk-based  premiums for attacks involving NBCR weapons. NAIC stated that our draft  report contained references that implied that state insurance regulators,  due to voter and legislative pressure, keep premium rates artificially low  for workers’ compensation insurers rather than relying on actuarial  science. NAIC disputed what it characterized as our implied contention  and suggested that the recent profitability of the insurance industry  indicates that premiums have not been suppressed by regulatory actions.
We made clarifications in the draft to address certain NAIC comments,  such as more fully describing the surcharges that workers’ compensation  insurers may levy for covering losses from terrorist attacks, including  those involving NBCR weapons. However, the draft report in no way  meant to imply that state insurance regulators succumb to voter and  legislative pressures in approving rates, and simply reported that workers’  compensation insurers and some regulators we contacted for both our  September 2006 report and this report said that they did not believe the  permissible surcharges would be sufficient to cover the potential losses  associated with an NBCR attack. Given that NBCR risks may not fully  satisfy the principles of insurability, as we said in our September 2006  report, statements by representatives of workers’ compensation insurers  that question whether the permitted surcharges are sufficient to cover  potential losses do not appear inherently unreasonable. As discussed in  the final report, the permitted surcharge in many states is the same for  conventional terrorist attacks and for those involving NBCR weapons and  insurers generally are not permitted to levy higher surcharges for  employers they perceive to be at higher risk of attack. Furthermore, we  note that while NAIC reports that workers’ compensation insurers have  been profitable over the past several years, this does not mean that any  premiums collected from this surcharge would be sufficient to cover the  losses associated with a future NBCR attack.
NAIC also commented on statements in the draft report regarding the  ability of group life insurers to manage exposures to NBCR risks.  Specifically, NAIC said that the competitive nature of group life insurance  markets has more of an impact on group life insurers’ decisions to provide  NBCR coverage in their policies than any regulatory constraints. NAIC  stated that if one group life insurer were to exclude coverage for NBCR  risks, and other group life insurers did not exclude such coverage, the  insurer excluding NBCR risks would be at a competitive disadvantage.  NAIC concluded that employers may choose not to purchase coverage  from the group life insurer that excluded NBCR risks, unless the price  difference was substantial. We generally agree with NAIC that competitive  market pressures may affect group life insurers’ willingness to limit NBCR  coverage, and note that the argument was included in the draft provided to  NAIC for its review and comment. Nevertheless, we made some  adjustments to the text to ensure that this analysis was better  communicated throughout the final report. NAIC also provided additional  technical comments and observations that were incorporated as  appropriate.
We also sent excerpts of our draft report to the six state regulators  discussed in this report (California, Georgia, Illinois, Massachusetts, New  York, and Washington, D.C.) for their review. Three state regulators  responded that they did not have any changes to our characterization of  NBCR requirements in their states, and one regulator provided a technical  comment that we made. We also provided excerpts of the draft report to  five other organizations referenced in this report, and all five responded,  some with technical comments that were incorporated where appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Department of the Treasury, NAIC, and other interested  parties. The report is also available at no charge on our Web site at  http://www.gao.gov.
If you or your staffs have any questions about 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 III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to review (1) the extent to which insurers and  reinsurers offer coverage for nuclear, biological, chemical, and  radiological (NBCR) attacks; (2) the factors that contribute to the  willingness of insurers and reinsurers to provide coverage for NBCR  attacks and their ability to manage these risks; and (3) any public policy  options for expanding coverage for these risks, given current insurance  market conditions.
To address the first objective, we reviewed relevant studies and  interviewed representatives of more then 100 organizations, including  insurer and policyholder trade associations; individual policyholders;  national insurance and reinsurance brokers; and insurance and  reinsurance companies with knowledge of the commercial  property/casualty, workers’ compensation, group life, and health  insurance markets nationwide and with expertise in specific geographic  markets. We also interviewed local brokers, insurance companies, and  local property owners in cities and regions with locations considered to be  at high, moderate, and low risk of exposure to terrorist attacks. These  locations included Atlanta; Boston; Chicago; New York; San Francisco;  and Washington, D.C. We selected these markets on the basis of rankings  of locations by risk of terrorism exposure from the Insurance Services  Office (ISO), an insurance industry analytics firm. Insurers may use these  rankings, which account for cities’ risk of terrorist attacks and the  potential for associated losses, as a basis for charging additional premiums  for terrorism exposure, according to ISO and several regulators we  contacted. We interviewed some participants in specialized insurance  markets, including a nuclear pool, Bermuda reinsurers, and a national  broker with expertise in environmental insurance. We spoke with  representatives of policyholders that own hundreds of properties and  other entities nationwide. These entities included large office towers in  major U.S. cities, properties in proximity to high-profile federal buildings,  hotels, industrial buildings, hospitals, sports stadiums, a chemical  company, a railroad company, and residential properties in locations  throughout the United States. In addition to one-on-one interviews, we  also conducted group discussions with representatives of 14 policyholders  at the annual Risk and Insurance Management Society, Inc. (RIMS),  conference in San Diego, California, in April 2008. Although we selected  industry participants to provide broad representation of market conditions  geographically and by industry, their responses may not be representative  of the universe of insurers, insurance brokers, policyholders, and  regulators. As a result, we could not generalize the results of our analysis  to the entire national market for commercial property/casualty, workers’  compensation, group life, and health insurance. We determined that the  selection of these sites and participants was appropriate for our  objectives, and that this selection would allow coverage of locations  considered to be at high, moderate, and low risk of exposure to terrorist  attacks, and would obtain information related to NBCR coverage for major  insurers, policyholders, and other organizations to generate valid and  reliable evidence to support our work.
We also reviewed the Department of the Treasury’s 2005 Report to  Congress, Assessment: The Terrorism Risk Insurance Act of 2002 and its  results from a survey of commercial property/casualty insurers on the  coverage they offered for NBCR risks. We were limited in our ability to use  this information because it was unclear from the survey question whether  an insurer offered NBCR coverage in one commercial property/casualty  policy or in all policies. We also reviewed results from a survey of risk  managers conducted by RIMS of their membership. However, we also  were limited in our ability to use results from this survey on purchase  rates of NBCR insurance as a signal for approximating overall demand  because of the low response rate (approximately 10 percent) to the survey.
To address the second objective, we selected large, national insurance  companies to interview on the basis of their market share in the states we  studied—California, Georgia, Illinois, Massachusetts, and New York as  well as Washington, D.C. In the commercial property/casualty and  workers’ compensation market, these national insurance companies held  from 37 to 52 percent of the market share in the states we studied,  according to information provided by the Insurance Information Institute.  In addition, we interviewed representatives of regional insurance  companies in our selected markets. We also spoke with representatives of  seven reinsurance companies, including two of the largest worldwide  reinsurance companies as well as risk modeling firms, state regulators,  and two credit rating agencies.
To select state workers’ compensation funds, we compiled and analyzed  available data on workers’ compensation state funds based on information  from the American Association of State Compensation Insurance Funds  and the National Council on Compensation Insurance, Inc. We selected  nine workers’ compensation state funds on the basis of the    presence of a metropolitan city in the state;    presence of cities considered at risk for terrorist attacks, developed using  estimates from ISO; and type of state fund—either monopolistic (fund is the sole insurer in the  state) or competitive (fund competes with private insurers to offer  workers’ compensation coverage)—and its size.
To learn more about the coverage in the group life and health insurance  markets and factors affecting that coverage, we interviewed state  regulators in California; Georgia; Illinois; Massachusetts; New York; and  Washington, D.C., as well as officials from the American Council of Life  Insurers and America’s Health Insurance Plans—two large national trade  associations. We also interviewed several group life and health insurers  with large shares of the market both nationally and in the selected states,  as well as one large group life reinsurance company and a representative  from a national brokerage firm with expertise in the reinsurance market  for group life carriers. Although we selected insurers from each of the  lines we studied to provide a broad representation of size and geographic  scope, we could not generalize the results of our analysis to the entire  population of private insurers or workers’ compensation state funds.
To address the third objective, we reviewed options proposed in  legislation, discussed in our prior reports or in other reports, or suggested  by industry participants. We also interviewed academics, representatives  from research organizations, and consumer interest groups. Although  these discussions did not produce a consensus about what measures  would increase the availability of NBCR coverage, for this report we  focused on two proposals deemed viable by a variety of industry  participants. We selected the proposal to amend Terrorism Risk Insurance  Act to require insurers to make NBCR coverage available and lower  insurers’ deductibles and co-payments from a recent legislative proposal.  We selected the option for the federal government to insure losses for  terrorist attacks involving NBCR materials from interviews conducted  with industry participants. We compiled and analyzed the views of the  industry participants listed above on these two proposals and reviewed  our prior reports to obtain information about other federal insurance  programs. We did not attempt to evaluate the prospective impact of these  proposals and, therefore, did not come to any conclusions about the  advisability of implementing them.
We conducted this audit in Atlanta; Boston; Chicago; New York; San  Diego; San Francisco; and Washington, D.C., from January 2008 to  December 2008, in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable   basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the National Association of Insurance Commissioners
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Wesley M. Phillips, Assistant  Director; Rudy Chatlos; Andrea Clark; Katherine Bittinger Eikel; Marc  Molino; Jill M. Naamane; Linda Rego; Barbara Roesmann; Kathryn  Supinski; and Shamiah Woods made key contributions to this report.
section_title: Related GAO Products
paragraphs: Terrorism Insurance: Status of Efforts by Policyholders to Obtain  Coverage. GAO-08-1057. Washington, D.C.: September 15, 2008.
Terrorism Insurance Availability: Initial Results on Availability of  Terrorism Insurance in Specific Geographic Markets. GAO-08-919R.  Washington, D.C.: July 11, 2008.
Homeland Security: First Responders’ Ability to Detect and Model  Hazardous Releases in Urban Areas Is Significantly Limited,  GAO-08-180. Washington, D.C.: June 27, 2008.
Natural Disasters: Public Policy Options for Changing the Federal Role  in Natural Catastrophe Insurance. GAO-08-7. Washington, D.C.:  November 26, 2007.
Terrorism Insurance: Measuring and Predicting Losses from  Unconventional Weapons is Difficult, But Some Industry Exposure  Exists. GAO-06-1081. Washington, D.C.: September 25, 2006.
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.