Terrorism Insurance: Measuring and Predicting Losses from Unconventional Weapons Is Difficult, but Some Industry Exposure Exists
Published: 2006-09-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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  insurance references to identify principles that insurers consider when  evaluating the insurability of risks. We relied primarily on Fundamentals  of Risk and Insurance. 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. 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  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.
subsections: section_title: Background
paragraphs: 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.
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  cover employer liability for workers who are killed, injured, or disabled on  the job from any cause. 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.
subsections: section_title: State Regulation of Insurance Companies
paragraphs: 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.
section_title: NBCR Weapons Represent Many Methods of Attack
paragraphs: 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.
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  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.
section_title: The Terrorism Risk Insurance Act Program
paragraphs: After the events of September 11, when certain coverage for terrorism  events disappeared, Congress passed TRIA. This law created a temporary  program that effectively functions as reinsurance—for the commercial  property/casualty and workers’ compensation insurance industries only.  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. 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.
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. 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.
section_title: Applying Common Principles for Assessing Insurability Presents Challenges in Measuring and Predicting NBCR Risks
paragraphs: 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.  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.
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  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  to measure and predict the frequency and severity of future losses. 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. 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. 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  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. 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.
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  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. 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.
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  potential for catastrophic losses. 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. Since Hurricane Andrew in 1992, insurers have  recognized the challenges associated with insuring low-frequency, high- cost 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.
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  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. 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. 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. However, as noted by several of the experts from academia, even  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.
section_title: Insurers’ Exposure to NBCR Risks Varies Widely by Line of Insurance, and Insurers Offering Coverage Face Challenges in Pricing
paragraphs: 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.
subsections: section_title: Relatively Little NBCR Coverage Available in Property/Casualty Market Because Most Insurers Remain Unwilling to Cover Risks
paragraphs: 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  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. 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. 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. 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  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. 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. 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  building, the resulting business interruption to the policyholder, and any  related litigation involved. Finally, as confirmed by representatives of the  Reinsurance Association of America, private reinsurance—the risk- spreading mechanism that insurers typically use to reduce their potential  losses—provided very limited amounts of coverage for NBCR risks in the  property/casualty market.
subsections: section_title: Although Property/Casualty Insurers Remove Coverage for NBCR Events through Exclusions, They Could Be Challenged
paragraphs: 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.
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. 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— 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. 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  about the cause of their losses.
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. 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.  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.
section_title: Demand for NBCR Coverage in Property/Casualty Market Is Difficult to Determine
paragraphs: 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. 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  highest rates for purchasing terrorism insurance. 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.
section_title: Insurers in Workers’ Compensation, Life, and Health Generally Cover NBCR Risks, but Prices May Not Take Account of Potential Losses
paragraphs: 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.  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.
subsections: section_title: Workers’ Compensation Insurance Generally Covers All Perils, Including NBCR Risks, but Pricing Challenges Exist
paragraphs: 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. 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.
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,  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. 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. 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  or NBCR risk surcharges because they thought such rate justifications  were not based on recognized actuarial methods.
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. 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. 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.
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. 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.
section_title: According to Life Insurers, They Generally Cannot Exclude Terrorism Coverage Including NBCR Risks
paragraphs: 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. 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. 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.
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. 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. 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  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.
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.
section_title: According to Health Insurers, They Face Unique Challenges in Determining Exposure to NBCR Risks
paragraphs: 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. 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,  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. According to representatives of one insurer, this also would make  direct attribution of an expense to an NBCR attack difficult. 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. 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  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.
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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.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: 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.
subsections: section_title: Principles of Insurability and Assessing Whether NBCR Risks Are Measurable and Predictable
paragraphs: 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. 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). 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  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.
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.
section_title: Assessing Exposure to NBCR Risks
paragraphs: 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.
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.
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.
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  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.
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.  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.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: 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.
section_title: Related GAO Products
paragraphs: 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.