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What a lapse in terrorism insurance by Congress means for businesses

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    Since 9/11, American businesses have been able to buy insurance policies covering a terrorist attack through a public/private partnership known as the Terrorism Risk Insurance Act.

    But, for the first time, Congress left this week without funding it because of objections by one senator. It could have an effect on businesses coast to coast, as they wonder what happens in case of the worst.

    Joining us now is Leigh Ann Pusey. She's president and CEO of the American Insurance Association.

    And we welcome you to the program.

  • LEIGH ANN PUSEY, American Insurance Association:

    Thanks for having me.


    So, why is this terrorism risk insurance so important? Why do businesses need it?


    Well, terrorism is a very unique risk for insurance.

    It's very hard to conceive of the kinds of losses that can be associated with a terrorist attack. They're well beyond the capacity of the insurance market right now to provide that. So, what we learned after 9/11 was that insurance had been basically a natural part of coverage, but, after 9/11, the market retreated because, all of a sudden, it realized that this was a huge potential risk.

    And it took a TRIA-like partnership to really entice the private market back into providing this coverage, which is, in essence, an economic security matched up with the government's national security efforts, because it really helps us have an orderly recover after an innocent.


    So, what would trigger insurance like this? What would have to happen for this trigger — for this to happen, where the U.S. government would have to come in and, frankly, back up what the insurance companies are saying?


    Well, right now, the TRIA program anticipates a fairly substantial participation by the private market. So, you would have to see an event probably the size of 9/11 before the government would have to be tabbed to backstop insurers.

    Insurers are sitting on 20 percent deductibles of their premiums. What that really translates to is, for some companies, as much as $1 billion, $2 billion of insured losses they would pay before they tapped that backstop. And they're paying a percentage of that backstop even after they have met the deductible.

    They are going to pay 15, 20 percent as envisioned under the new law going up. There's a lot of skin in the game by the industry. It's grown over the years since 9/11. So, it would have to be a catastrophic-level event for the private — for the government to have to step in.


    Let me read you what one — one comment that Senator Tom Coburn, the senator from Oklahoma, the one who is responsible for holding this up, this week said.

    He said, "This program has made the insurance industry $40 billion in the last 12 years." He said, "American taxpayers take all the risk, except for 35 percent, and the insurance industry takes the money."


    Well, what the insurance industry is doing is stepping in and providing for an orderly economic recovery that otherwise the taxpayer would be on the hook for the first dollar of.

    So, have we charged a premium for that risk? Sure. That's a market force I would think Senator Coburn and other Republicans and pro-market voices would like to see happen. And the more we get can comfortable with this risk over time, the more we can learn about it, we can take on more of it. It will never be a risk that can be totally borne by the private market. And it shouldn't be.


    Why not? Why can't it be borne by the private…


    Well, because it associated — it's national security. Terrorism is a national security issue. It's the responsibility of the federal government, who has the data, the knowledge, the know-how.

    You just ran a piece about them confirming what they may or may not know about these threats related to Sony. Well, that — they have that knowledge. Nobody insuring Sony has that knowledge. They have that knowledge. We don't want that knowledge, by the way, but what it means is that insurers are limited in how much they can try to underwrite this and how much exposure they can take on.

    This current TRIA program covers — provides $100 billion. There's not $100 billion of private market capacity. If you want to provide economic stability and economic growth, then you need a partnership.


    What does it mean, Leigh Ann Pusey, that this insurance was not extended, that this doesn't exist right now?


    Well, it means that, after December 31, there is no TRIA backstop, and insurance companies and CEOs — I spoke to one as I was driving over here this evening — are employing their contingency events.

    They're having to put their contingency plans into place. They're going to look at their exposures. And I believe over the coming weeks we are going to see more and more market reaction to this. What that might mean is capacity will shrink over time, and the price of this might go up in certain markets. This isn't just about tall buildings in New York. It's about properties and businesses all around the country.


    You're saying they won't get built?


    They won't get — some projects could be delayed. Loans require this sort of financing to be backstopped by insurance coverage and protection on this.

    Think about the small business dry cleaner who is in the shadow of a trophy property in New York. They're going to have a hard time finding capacity just by sheer virtue of where they're located.


    Leigh Ann Pusey, who is the president and CEO of the American Insurance Association, we thank you.


    Thank you.

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