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Unconventional Weapons Is Difficult, but Some Industry Exposure Exists' 
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Report to the Chairman, Committee on Financial Services, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

September 2006: 

Terrorism Insurance: 

Measuring and Predicting Losses from Unconventional Weapons Is 
Difficult, but Some Industry Exposure Exists: 

Terrorism Insurance: 

GAO-06-1081: 

GAO Highlights: 

Highlights of GAO-06-1081, a report to 
the Chairman, Committee on Financial Services, House of Representatives 

Why GAO Did This Study: 

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. 

What GAO Found: 

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. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1081]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Orice M. Williams (202) 
512-5837 or williamso@gao.gov. 

[End of Section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Applying Common Principles for Assessing Insurability Presents 
Challenges in Measuring and Predicting NBCR Risks: 

Insurers' Exposure to NBCR Risks Varies Widely by Line of Insurance and 
Insurers Offering Coverage Face Challenges in Pricing: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Table: 

Table 1: Description of NBCR Weapons: 

United States Government Accountability Office: 
Washington, DC 20548: 

September 25, 2006: 

The Honorable Michael G. Oxley: 
Chairman: 
Committee on Financial Services: 
House of Representatives: 

Dear Mr. Chairman: 

When considering possible terrorist events, among the most potentially 
devastating would be those caused by terrorists using unconventional 
weapons, also known as nuclear, biological, chemical, or radiological 
(NBCR) weapons. Because of the potential for catastrophic losses from 
an NBCR attack, representatives of the insurance industry have voiced 
doubts about its ability to pay for such losses, and members of 
Congress have raised concerns about costs to the federal government and 
citizens from losses not covered by insurance. In response to the 
insurance industry's reluctance to cover terrorism risks generally, 
Congress enacted the Terrorism Risk Insurance Act (TRIA) of 2002 for 
the commercial property/casualty industry, which requires insurers to 
provide coverage for terrorism and provides a defined level of 
reimbursement for certain losses.[Footnote 1] However, limited 
information suggests that even with this federal financial backstop, 
the insurance industry continues to be reluctant to provide insurance 
to cover NBCR risks. 

In light of the continuing debate about TRIA, which is set to expire in 
2007, the lack of information about the willingness of insurers to 
cover NBCR risks, and uncertainties about the extent to which these 
risks can be and are being insured by private insurers across various 
lines of insurance, you asked that we study the extent to which NBCR 
risks are measurable and insurable. This report discusses (1) commonly 
accepted principles of insurability and whether NBCR risks are 
measurable and predictable and (2) whether private insurers currently 
are exposed to NBCR risks and the challenges they face in pricing such 
risks. 

To identify commonly accepted principles of insurability and whether 
NBCR risks are measurable and predictable, we reviewed standard 
insurance references to identify principles that insurers consider when 
evaluating the insurability of risks. We relied primarily on 
Fundamentals of Risk and Insurance.[Footnote 2] To determine the 
insurability of NBCR risks, we compared information we collected about 
the market for and nature of NBCR terrorism risk to the principles. 
Moreover, we obtained information from a limited number of insurance 
industry representatives, as well as firms that specialize in modeling 
terrorism and other catastrophic events for insurers (modeling firms), 
to identify the amount and types of data available to predict future 
losses from NBCR terrorist attacks.[Footnote 3] For comparison, we also 
obtained descriptions of data typically available to calculate losses 
for other catastrophic risks such as hurricanes. To assess whether 
private insurers were exposed to NBCR events and how they price for 
NBCR risks, we identified state requirements for coverage of NBCR 
events, lines of insurance where insurers cover NBCR damage of their 
own accord, and circumstances where coverage of NBCR events could be 
less clear. Specifically, we obtained documentation on state 
requirements from the National Association of Insurance Commissioners 
(NAIC) and visited two states and the District of Columbia, which 
contain localities that are considered to be at higher risk than others 
for a terrorist attack. To assess whether lines of insurance could be 
exposed to NBCR attacks, we reviewed government and industry studies to 
obtain broad estimates of the amount of NBCR coverage for commercial 
property/casualty insurance available on the market, but these studies 
had certain methodological limitations. We also interviewed at least 
two of the larger insurers in each of the major lines of insurance 
(commercial and personal property/casualty, workers' compensation, and 
individual and group life and health); commercial property/casualty and 
group life reinsurers (companies that provide insurance for insurers); 
and selected trade associations. Although we obtained information from 
a limited number of insurers, we selected the insurers based on their 
market share for each line of insurance nationwide and in states with 
localities considered to be at higher risk for terrorist attacks. The 
insurers we selected represented between 13 and 38 percent of the 
national market for each line of insurance. To determine circumstances 
under which coverage of NBCR events might be less clear, we interviewed 
insurers and identified examples of language relating to coverage in 
insurance contracts that 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. 

Results in Brief: 

Insuring NBCR risks is distinctly different from insuring other risks 
because of the potential for catastrophic losses, a lack of 
understanding or knowledge about the long-term consequences, and a lack 
of historical experience with NBCR attacks in the United States. 
Measuring and predicting NBCR risks present distinct challenges to 
insurers because the characteristics of the risks largely diverge from 
commonly accepted principles used in determining insurability. 
According to these common principles, when assessing insurability, the 
risk generally must (1) have past occurrences sufficient in number and 
homogeneous enough (invoking the "law of large numbers") to enable 
insurers to accurately predict future losses, (2) be definite and 
measurable in terms of dollar value, (3) occur by chance, and (4) not 
result in catastrophic losses for the insurer. Although these 
principles of insurability generally underlie insurers' decisions about 
what risks to insure and at what price, experience with NBCR and other 
more common risks illustrate that insurability occurs along a 
continuum. That is, at one end are risks that satisfy all the 
principles and are most likely to be insured and at the other end are 
risks that satisfy none of the principles and are least likely to be 
insured. In general, NBCR risks largely fail to meet most or all of the 
principles of an insurable risk. Indeed, insurance experts we 
interviewed said that the potential severity of NBCR risks alone could 
diminish the willingness of some insurers to insure NBCR risks. 

Although NBCR risks may not fully satisfy the principles of 
insurability, there are enough variations across lines of insurance 
that some insurers or some lines of insurance may have no willingness 
to offer coverage for NBCR, while others may choose to offer coverage 
for some or all of the risks. For example, even with TRIA, property/ 
casualty insurers generally have attempted to limit their exposure to 
NBCR risks by excluding nearly all NBCR events from coverage, both for 
commercial property/casualty and homeowners. According to industry 
representatives, property/casualty insurers believe they have excluded 
NBCR coverage by interpreting existing exclusions in their policies to 
apply to NBCR risks, but some of the exclusions could be challenged in 
courts. However, unlike property/casualty insurers, workers' 
compensation, life, and health insurers are exposed to NBCR risks and 
generally have not excluded them from coverage for a variety of 
reasons. Specifically, workers' compensation insurers generally offer 
NBCR coverage because many states limit the exclusion of any peril for 
workers' compensation. Conversely, while life and health insurers may 
not always be required to insure NBCR risks, they generally face other 
challenges in segregating and excluding NBCR risks. Another reason that 
life and health insurers may be more willing to insure NBCR risks is 
that while the loss of life and health effects from an NBCR event may 
be damaging to some companies, large life and health insurers might be 
able to diversify their risks geographically and spread their losses 
over time. However, representatives of workers' compensation, life, and 
health insurers expressed concerns that the prices they currently 
charge may not cover their potential exposures to NBCR risks, sometimes 
because of regulatory limitations, and generally because of 
difficulties in measuring and pricing for NBCR losses. Given the 
challenges faced by insurers in providing coverage for, and pricing, 
NBCR risks, any purely market-driven expansion of coverage is highly 
unlikely in the foreseeable future. 

Background: 

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.[Footnote 4] 
Personal lines of property/casualty insurance include policies for 
homeowners and automobile coverage. Homeowners insurance provides 
coverage for physical losses to the home, its contents, and additional 
living expenses for the owner while the home is uninhabitable. 

Life insurers sell either individual or group policies that provide 
benefits to designated survivors after the death of an insured. Health 
insurers cover medical expenses resulting from sickness and injury. 

State Regulation of Insurance Companies: 

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. 

NBCR Weapons Represent Many Methods of Attack: 

Terrorism attacks, particularly including those using NBCR weapons, 
could result in catastrophic losses. Each type of weapon--nuclear, 
biological, chemical, and radiological--represents different methods of 
attack. Further, many different agents can be used to carry out a 
biological, chemical, or radiological attack. See table 1 for general 
descriptions of each type of weapon and examples of available agents. 

Table 1: Description of NBCR Weapons: 

Nuclear; 
Weapon description: A nuclear explosion would have immediate blast 
effects that would destroy buildings. The explosion also would produce 
high-energy radiation and extreme heat, and form a cloud from which 
highly lethal radioactive material would fall. The overall effect of 
the weapon would depend on the size of the weapon and how high above 
the ground the detonation occurred; 
Examples of agents: The explosion of the weapon, a bomb or missile, 
would be generated through nuclear fission of uranium or plutonium 
atoms, or nuclear fusion of hydrogen isotopes. 

Biological; 
Weapon description: Biological attacks can involve two basic types of 
biological agents: contagious and noncontagious. With most biological 
agents, an attack may not be recognized immediately because the 
symptoms may be attributable to several causes or because the disease 
the agent causes has an incubation period; 
Examples of agents: Many different agents such as smallpox or anthrax, 
each with its own characteristics, could be used for biological 
attacks. 

Chemical; 
Weapon description: Chemical attacks entail the dispersal of chemical 
vapors, aerosols, liquids, or solids and affect individuals through 
inhalation or exposure to eyes and skin. Chemical weapons act very 
quickly to kill or harm humans, often within a few seconds; 
Examples of agents: Many different agents such as sarin and hydrogen 
cyanide, each with its own characteristics, could be used for chemical 
attacks. 

Radiological; 
Weapon description: A "dirty bomb" uses conventional explosives to 
disperse radioactive material across the immediate area, which could 
vary in size depending on the size of the explosive. The primary short-
term exposure hazard to humans would be inhalation of radioactive 
material suspended in the dust and smoke from the explosion; 
Examples of agents: Different radioactive agents, including americium, 
cesium, and plutonium, could be used to create a dirty bomb. 

Sources: RAND, GAO. 

Notes: For weapon descriptions, see Rand Public Safety and Justice, 
Individual Preparedness and Response to Chemical, Radiological, 
Nuclear, and Biological Terrorist Attacks (Santa Monica, California: 
2003). For examples of biological and chemical agents, see GAO, 
Combating Terrorism: Need for Comprehensive Threat and Risk Assessments 
of Chemical and Biological Attacks, GAO/NSIAD-99-163 (Washington, D.C.: 
Sept. 14, 1999). For examples of radiological agents that can be used 
in dirty bombs, see GAO, Nuclear Security: DOE Needs Better Information 
to Guide Its Expanded Recovery of Sealed Radiological Sources, GAO-05- 
967 (Washington, D.C.: Sept. 22, 2005). 

[End of table] 

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. 

The Terrorism Risk Insurance Act Program: 

After the events of September 11, when certain coverage for terrorism 
events disappeared, Congress passed TRIA.[Footnote 5] This law created 
a temporary program that effectively functions as reinsurance--for the 
commercial property/casualty and workers' compensation insurance 
industries only.[Footnote 6] Under TRIA, the federal government would 
reimburse insurers in these lines for 90 percent of their losses, up to 
a specified level, after the insurers paid a deductible. The program 
also would cover losses caused by NBCR attacks, if insurers had 
included this coverage in an insurance policy. However, coverage of 
NBCR attacks, as with other terrorist attacks, would have to meet the 
program's criteria to trigger reimbursements. 

TRIA requires certain insurers to "make available" coverage for 
terrorist events that the Secretary of the Treasury has certified as 
committed by individuals acting on behalf of a foreign person or 
interest.[Footnote 7] Commercial property/casualty insurers must offer 
terrorism coverage to their policyholders, although they could impose 
an additional charge. Policyholders have the option of not purchasing 
the coverage and adding a terrorism exclusion to their policies. If 
policyholders chose to purchase the terrorism coverage for their 
property/casualty policies, insurers then could not add any additional 
exclusions or conditional language to the policies. 

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.[Footnote 8] While deliberating the 
extension of TRIA, Congress considered whether to cover additional 
lines of coverage, such as group life insurance, and set a lower 
deductible that applied only to NBCR terrorist events. However, 
Congress did not enact these changes. The TRIA extension, which 
continues to apply only to the commercial property/casualty industry, 
is set to expire on December 31, 2007. 

Applying Common Principles for Assessing Insurability Presents 
Challenges in Measuring and Predicting NBCR Risks: 

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.[Footnote 9] However, measuring and 
predicting losses associated with NBCR risks can be particularly 
challenging for a number of reasons, including lack of experience with 
similar attacks, difficulty in predicting terrorists' intentions, and 
the potentially catastrophic losses that could result. Nevertheless, 
models have been developed that attempt to assist insurers in 
evaluating terrorist and NBCR risks. However, many insurers and other 
insurance experts continue to believe that there is an insufficient 
basis for estimating the probable frequency of terrorist attacks, 
including NBCR attacks. 

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.[Footnote 10] One of the reasons many insurers we 
interviewed had concerns about insuring NBCR risks was the small number 
of historical events that could be used as a basis for predicting the 
future frequency and severity of these risks. However, several of the 
academic experts we interviewed also noted that a limited number of 
historical events did not automatically make a risk 
uninsurable.[Footnote 11] For example, insurers have covered risks 
related to commercial satellites for which there has been a very 
limited record of losses; however, several of the experts noted that 
for commercial satellites the prospective loss is measurable and 
documentation is available to assess their safeguards. 

In addition to the inapplicability of the law of large numbers, 
insurers also told us that they are not able to fully measure the costs 
of NBCR terrorist risks (that is, the potential severity). Because 
certain types of NBCR attacks could have long-term or uncertain 
consequences, insurers may not be able to measure, or even clearly 
identify, their prospective losses. Almost all of the insurers we 
interviewed indicated uncertainties about the scope of potential losses 
as a factor contributing to difficulties in insuring NBCR risks. For 
example, according to America's Health Insurance Plans (AHIP), a 
national trade association for health insurers, some NBCR attacks could 
produce latent illnesses such as cancer.[Footnote 12] The costs to 
health insurers would not be immediate but would occur in the years to 
come. In addition, representatives of insurers and an insurance broker 
with knowledge of the property/casualty market told us that they 
believed the costs of some NBCR events would be uncertain because of 
difficulties in 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.[Footnote 13] In other words, even 
if an extensive history of NBCR terrorism experiences existed, without 
the element of randomness, it would not necessarily be indicative of 
the future frequency and severity of terrorist events. Likewise, 
according to the American Academy of Actuaries and the Insurance 
Information Institute, predicting terrorist risks is particularly 
difficult because the attacks are not random; they are intentional, and 
the attack characteristics are not likely to be constant, as terrorists 
adjust their strategies.[Footnote 14] 

Finally, insurance experts told us that NBCR risks could represent the 
potential for catastrophic (severe) losses because of the concentration 
of risks that could face either a particular insurer or the industry. 
Most of the academic experts we interviewed stressed that the potential 
for catastrophic losses, rather than the lack of reliable data on the 
frequency and severity of NBCR risks, made insurers reluctant to insure 
them. Several of these experts observed that in Florida, where the risk 
of hurricanes is both greater and more predictable than NBCR terrorism 
risks, insurers were leaving the state because of their exposure to 
catastrophic losses, perhaps more so than the unpredictability of the 
risk. An NBCR event, like a natural catastrophe, could result in 
catastrophic 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.[Footnote 15] In addition, as explained by representatives 
of the New York Department of Insurance, because NBCR risks have the 
ability to cut across many lines of insurance in a concentrated 
geographic area, large insurance companies that typically cover several 
lines of insurance could find it very difficult to diversify their risk 
portfolios. According to the American Academy of Actuaries, the 
prospect of catastrophic losses from an NBCR event could be far larger 
than insurers could sustain without impairing their ability to continue 
providing all other insurance coverages.[Footnote 16] 

The prospect of catastrophic risk poses additional problems because 
insurers, like most businesses, generally have two major objectives. 
First, they expect to make a profit for their owners. Second, they plan 
to survive so as to operate in the future. Several of the academic 
experts we interviewed questioned the incentive insurers would have to 
insure risks, such as catastrophic NBCR attacks, that might jeopardize 
their financial soundness and profitability. If an insurer were faced 
with the potential for a catastrophic loss--that is, one that 
threatened its solvency or its survival--the insurer would be less 
likely to be willing to provide insurance, or at a minimum, the insurer 
would limit its exposure to the extent that it could. The larger and 
more uncertain the estimates of projected losses, the less likely an 
insurer would be willing to voluntarily insure the risk. Moreover, 
insurers could have another disincentive to insuring catastrophic risks 
for which they might not be adequately capitalized--the prospect of 
receiving a low rating from a rating agency. We interviewed 
representatives from three rating agencies, two of whom said they 
generally viewed NBCR risks as not insurable because of their potential 
for catastrophic losses.[Footnote 17] For example, a representative 
from one credit rating agency said that if his company considered 
existing potential exposure to NBCR risks when analyzing commercial 
property/casualty insurers, they might have to downgrade ratings due to 
the magnitude of potential losses. 

Because the frequency and severity of NBCR risks are difficult to 
measure, insurers have turned to techniques and processes that they 
have applied to other catastrophic risks. As we previously reported, 
insurers have come to rely on computer models and modeling firms to 
assist them in estimating the frequency and severity of catastrophic 
events and the probable losses that they might face.[Footnote 18] 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.[Footnote 19] 

In view of the limited history of NBCR attacks in the United States, 
representatives of the modeling firms reported to us that they 
generally have relied on panels of terrorism experts to assess threats 
posed by terrorists. While these experts do not have access to current 
classified data, they use their judgment and expertise to assess the 
probability (that is, the future occurrence or frequency) of future 
terrorist attacks. For example, the experts assess the likelihood of 
terrorists targeting urban areas, based on population density and 
perceived importance, as well as 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.[Footnote 20] Representatives of 
insurers and insurance brokers also said that they generally had little 
confidence in the ability of models to estimate the frequency of future 
terrorist attacks, and the American Academy of Actuaries noted that 
while there has been some development of terrorism models since 
September 11, quantification of terrorism exposure still was extremely 
difficult.[Footnote 21] The Academy also noted that the probabilities 
associated with the occurrence of a terrorist attack have remained 
somewhat judgmental and a key source of uncertainty. 

Representatives of insurers told us that the models can be useful in 
simulating scenarios for particular NBCR attacks in specified 
locations, allowing them to estimate the potential severity of possible 
losses for specific events. Using available engineering, scientific, 
and demographic research, the models can estimate insured potential 
losses for the portfolios of individual insurers. Several insurers and 
brokers said that they found models, including those that they may have 
created themselves, useful in managing insurers' exposure to terrorism 
risks. 

Finally, insurance experts and representatives of insurers and 
reinsurers we interviewed agreed that difficulties in predicting NBCR 
events, as well as the prospect for catastrophic losses, make these 
risks difficult to insure.[Footnote 22] 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. 

Insurers' Exposure to NBCR Risks Varies Widely by Line of Insurance, 
and Insurers Offering Coverage Face Challenges in Pricing: 

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. 

Relatively Little NBCR Coverage Available in Property/Casualty Market 
Because Most Insurers Remain Unwilling to Cover Risks: 

Unlike workers' compensation, life, and health insurers, insurers 
selling property/casualty insurance largely have excluded NBCR risks 
from their policies. Since Congress passed TRIA, the supply of 
commercial property/casualty insurance for conventional terrorism 
appears to have increased, yet insurance policies covering NBCR risks 
have remained in short supply. In its most recent survey of terrorism 
insurance in the commercial property/casualty industry, Treasury found 
that the 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.[Footnote 23] In contrast, the percentage of insurers that 
reported covering NBCR risks in some of their policies remained about 
the same during that general period and was significantly smaller-- 
about 35 percent.[Footnote 24] Moreover, as explained by Treasury 
officials, the 35 percent represented insurers that offered any kind of 
coverage for NBCR risks, meaning that an insurer would be counted as 
offering NBCR coverage even if it offered only one policy for one type 
of NBCR risk. 

Representatives of insurance and insurance brokerage companies also 
told us there was a very limited supply of NBCR coverage in the 
commercial property/casualty marketplace. Representatives of the three 
largest brokerage firms that find property/casualty insurance coverage 
for large commercial businesses told us that insurers offering 
terrorism coverage exclude NBCR risks. According to representatives of 
insurers, exclusions for NBCR risks are contained in policies offered 
by commercial property/casualty insurers underwriting in regulated 
insurance markets and also are contained in stand-alone terrorism 
insurance policies offered by specialty insurers in the nonregulated 
market.[Footnote 25] A representative of one of the specialty insurers 
with whom we spoke said the company offered very limited amounts of 
NBCR coverage, typically for one or two of the risks. For example, this 
company would offer $10 million of biological and chemical coverage for 
certain commercial properties, but the insurer would not provide 
coverage above that threshold. 

Representatives of insurance and insurance brokerage companies we 
interviewed said that even though TRIA would cover NBCR losses 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.[Footnote 26] Under TRIA, the more business an 
insurer writes, the larger its deductible; and the more lines of 
insurance an insurer writes, the more it is exposed to losses from a 
catastrophic event.[Footnote 27] In addition, because of uncertainties 
surrounding the frequency and severity of NBCR events as well as the 
enormity of potential losses, representatives of insurers we 
interviewed said that they would have difficulty setting prices to 
cover such losses, even using information from the modeling firms. 
These representatives also expressed concerns about the potential 
insured losses of an NBCR event being largely undeterminable for many 
years after the event occurred. Such an event could have many long-term 
consequences--for example, the extent and duration of remediation for a 
contaminated building, the resulting business interruption to the 
policyholder, and any related litigation involved.[Footnote 28] 
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. 

Although Property/Casualty Insurers Remove Coverage for NBCR Events 
through Exclusions, They Could Be Challenged: 

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.[Footnote 29] 

According to these same insurance industry representatives, property/ 
casualty insurance contracts issued prior to September 11 did not 
specifically include references to losses from the terrorist release of 
biological and chemical agents.[Footnote 30] Rather, Insurance Services 
Office (ISO) officials told us that the standard contracts they 
provided for industry use contained language that excluded coverage for 
losses caused by pollution and contamination. For instance, the 
pollution exclusion was developed to exclude coverage for the release 
of many different types of substances--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.[Footnote 31] A national security 
expert told us that in the case of a nuclear bomb detonation, once the 
property was destroyed, insurers could dispute the extent to which fire 
(covered in fire following states) or the blast (excluded by the 
nuclear exclusion) caused the damage. In other contexts, disputes over 
the cause of loss often have been litigated. For example, many 
homeowners who suffered losses in Hurricane Katrina have filed lawsuits 
challenging property/casualty insurers' determinations about the cause 
of their losses.[Footnote 32] 

* Certified as a terrorist act. The Congressional Budget Office (CBO) 
has suggested that some NBCR events might not be readily identified as 
terrorist acts, as defined by TRIA, and therefore coverage--both for 
insurers and for their policyholders--would be unclear.[Footnote 33] 
For example, the persons or person who in 2001 mailed letters 
contaminated with anthrax that killed several people and sickened many 
more remain(s) unknown.[Footnote 34] However, should TRIA not be 
renewed in 2007, this particular determination would not apply. 

In addition, homeowners' insurers, part of the personal property/ 
casualty market, have long-standing exclusions in their policies, 
similar to the exclusions contained in commercial property/casualty 
policies. According to representatives of two large homeowners' 
insurers, the exclusions limited their exposure to NBCR risks. While 
these representatives also told us they have not excluded conventional 
terrorist events from their policies, they said their companies 
generally manage their exposure to any terrorism risks by diversifying 
their portfolios. 

Demand for NBCR Coverage in Property/Casualty Market Is Difficult to 
Determine: 

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.[Footnote 35] Further, although purchase rates for NBCR 
insurance do not necessarily reflect overall demand, a major reason for 
not purchasing NBCR insurance given by the survey respondents was that 
they did not believe they were at risk for an NBCR event. While the 
Treasury study did not break down purchase rates for NBCR insurance by 
industry sector, another study of the market for terrorism insurance 
conducted by insurance brokers found that companies in the real estate, 
financial, and health care sectors had the highest rates for purchasing 
terrorism insurance.[Footnote 36] Although the brokerage firm study 
does not specifically address the demand for NBCR insurance, we 
consider demand for terrorism insurance generally to be a reasonable 
approximation of where demand for NBCR insurance might exist. For 
instance, demand for terrorism insurance may be strong in the real 
estate sector because terrorism coverage typically is required as part 
of a commercial business loan transaction, according to the Mortgage 
Bankers Association. However, representatives of the Mortgage Bankers 
Association also said lenders generally do not require NBCR coverage, 
because little or no coverage is available. In addition, a few of the 
academic experts we interviewed suggested that some individuals and 
businesses might not purchase NBCR coverage under the assumption that 
the federal government would cover losses from an NBCR attack, as the 
government agreed to do for some personal and commercial property 
losses resulting from Hurricane Katrina. 

However, several risk managers we interviewed from the hospitality and 
transportation industries, as well as commercial property owners, all 
reported a willingness to buy NBCR coverage in the private market. 
These managers expressed frustration at not being able to purchase 
insurance for NBCR risks, which they said they could do little to 
prevent or mitigate, particularly because an NBCR attack would be an 
intentional act. One of the risk managers that we interviewed noted 
that his company could not find enough NBCR coverage for even one 
building, so the company used a captive to self-insure against NBCR 
risks.[Footnote 37] 

Insurers in Workers' Compensation, Life, and Health Generally Cover 
NBCR Risks, but Prices May Not Take Account of Potential Losses: 

Should an NBCR event occur, workers' compensation, life, and health 
insurers would be responsible for covering loss of life and medical 
treatment for injuries because they generally provide coverage for 
these events. Following September 11, NAIC issued guidance stating its 
member state regulators believed terrorism exclusions were "not 
necessary" or were "inappropriate" for workers' compensation, life, and 
health insurance policies, with exceptions limited to cases where 
insurers could demonstrate they would become insolvent from offering 
the coverage.[Footnote 38] According to an NAIC representative, 
regulators did not perceive exclusions as necessary because they 
presumed these insurers were diversifying their risks in these lines by 
insuring individuals across the country. 

Workers' Compensation Insurance Generally Covers All Perils, Including 
NBCR Risks, but Pricing Challenges Exist: 

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.[Footnote 39] In addition, according to 
representatives of the National Council on Compensation Insurance 
(NCCI), an organization that prepares insurance rate (price) 
recommendations for workers' compensation, under state workers' 
compensation laws, employers are responsible for covering unlimited 
medical costs and a portion of lost earnings for injuries or illnesses 
that occur during the course of employment, regardless of the 
cause.[Footnote 40] 

While workers' compensation insurers generally are not permitted to 
exclude any perils from coverage, insurer representatives advised us 
that any surcharges they may be permitted to charge for NBCR exposure 
likely would not cover potential losses. According to NCCI 
representatives, 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.[Footnote 41] NCCI 
developed this statewide surcharge based on the results of a model, as 
a way for insurers that underwrite in states that belong to NCCI to 
cover potential losses from terrorism, including those from NBCR 
weapons. While representatives of NCCI were reasonably satisfied that 
the surcharges were actuarially sound, in the District of Columbia-- 
where insurers may file the NCCI-developed terrorism surcharge-- 
regulators did not believe that the surcharge was actuarially sound 
because of assumptions made in the model about localities designated to 
be at higher risk for terrorist events. Moreover, the willingness of 
state regulators that do not participate in NCCI to approve terrorism 
surcharges in workers' compensation may vary. For example, we obtained 
information from two large states that do not participate in NCCI and 
have geographic areas considered at higher risk for terrorism--New York 
and California. In New York, regulators have allowed workers' 
compensation insurers to file an additional surcharge for terrorism. 
However, representatives of the New York Compensation Insurance Rating 
Board (Rating Board) told us that the terrorism surcharge the Rating 
Board developed does not distinguish between conventional and NBCR 
risks.[Footnote 42] They did not believe that the Rating Board could 
justify a higher surcharge to cover NBCR risks because of the limited 
historical data on NBCR attacks and further, if the Rating Board did, 
the cost would be so high that businesses would probably find it 
unaffordable. In contrast, California regulators have not permitted 
insurers to file rates with additional surcharges specifically for 
terrorism, including NBCR risks. California regulatory officials told 
us that they would reject any terrorist or NBCR risk surcharges because 
they thought such rate justifications were not based on recognized 
actuarial methods.[Footnote 43] 

Representatives of workers' compensation insurers we interviewed said 
that factors unique to workers' compensation also made it difficult for 
them to cover NBCR risks. First, as they explained, unlike some other 
lines of insurance, workers' compensation insurance covers losses 
beyond the expiration date of the policy. The representatives told us 
their most expensive claims typically came from workers who were 
disabled from illness or injury because they were entitled to lost 
wages as well as medical expenses. For NBCR events, quantifying medical 
expenses could be especially challenging because some illnesses or 
disabilities might not manifest until much later or could be difficult 
to trace to a workplace occurrence.[Footnote 44] For example, 
representatives of workers' compensation insurers told us that in the 
case of smallpox, it might be difficult to determine whether the worker 
contracted the illness at work or elsewhere.[Footnote 45] In addition, 
these representatives told us that they may be further constrained in 
their ability to adjust their price for specific geographic risks. 
Representatives of NCCI told us that terrorism surcharges must be 
applied equally throughout a state, thus the terrorism surcharge did 
not reflect that employers in certain areas, such as urban areas where 
employees might be more concentrated, had a greater exposure to 
terrorist events.[Footnote 46] 

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.[Footnote 47] Therefore, they explained that they 
largely would rely on TRIA to cover NBCR risks. As representatives of 
the private insurers explained, many of their private-market 
reinsurance policies specifically excluded NBCR risks, or to the extent 
coverage was available, reinsurers offered it at prices they could not 
afford. Representatives of the New York State Insurance Fund told us 
that they had not purchased reinsurance because they viewed the high 
costs of reinsurance for their market as unaffordable. As a result, 
should a large NBCR attack occur, these representatives said that their 
fund might have to turn to the state to help pay claims. In contrast, 
representatives of the California State Compensation Insurance Fund 
said that they were willing to pay higher prices based on available 
capacity for reinsurance for NBCR risks. 

According to Life Insurers, They Generally Cannot Exclude Terrorism 
Coverage Including NBCR Risks: 

The American Council of Life Insurers officials, as well as 
representatives of life insurers we interviewed, told us they believed 
that most states do not allow for terrorism or NBCR exclusions in life 
insurance policies.[Footnote 48] In two of the states specifically 
included in our review--New York and California--state insurance law 
and implementing regulatory policy prohibited both individual and group 
life insurance policies from excluding NBCR or other terrorism 
events.[Footnote 49] On the other hand, regulatory officials from the 
third jurisdiction we included in our review, the District of Columbia, 
told us that they did not have any legal requirements that life 
insurers cover NBCR events and that several group life insurers 
recently filed policies with exclusions for NBCR risks. 

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.[Footnote 50] Furthermore, these representatives told us that they 
have difficulty determining whether a particular employer or group 
would be more or less at risk for death from an NBCR event because they 
traditionally have not tracked the geographic locations of individuals 
covered by their policies. 

However, whether losses from a large NBCR attack would be catastrophic 
for life insurers was unclear and could depend on the extent to which 
their portfolios were diversified. Representatives of national life 
insurers told us that they have a broad portfolio of exposure 
nationwide, which helps them diversify their risks. In the event of a 
large NBCR attack in which up to one million insured people died, 
representatives of the American Council of Life Insurers told us that 
most large life insurers probably would be able to pay the death 
claims. However, these representatives also said that small or medium- 
size group life insurers that received a significantly high number of 
death claims following an NBCR attack might be unable to pay claims and 
become insolvent, and that state guarantee funds would have to levy an 
assessment on the remaining insurers in the states to pay the 
claims.[Footnote 51] Notwithstanding their belief that they could 
survive an NBCR attack, representatives of the two national insurers we 
interviewed were concerned about the companies' exposure to 
catastrophic NBCR losses. These representatives particularly were 
concerned because their companies generally insure all the employees of 
a given company. These 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.[Footnote 52] 

In addition, life insurers do not have access to TRIA. Representatives 
of two group life insurers we interviewed said that their companies 
either had not found reinsurance for NBCR risks or the costs were very 
high relative to the amount of insurance that could be purchased. We 
also spoke with representatives of a large group life reinsurer who 
said their company provided some coverage for NBCR events, although the 
company limited this exposure to $100 million per event. 

According to Health Insurers, They Face Unique Challenges in 
Determining Exposure to NBCR Risks: 

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.[Footnote 53] In contrast, regulatory 
officials in the District of Columbia told us that they did not have 
any requirements that health insurers cover NBCR events. 

Representatives of two national group health insurers we interviewed 
described the difficulties they would have in attempting to set 
actuarially sound prices for health risks from NBCR terrorist events. 
First, representatives of health insurers said that they typically 
price health coverage based on experience with their insured 
populations and without knowing the likely impact of NBCR risks, they 
could not develop actuarially sound prices for such a risk. Further, 
the representatives explained they tend to limit policy coverage by 
procedure or by individual, 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.[Footnote 54] According to representatives of one insurer, this 
also would make direct attribution of an expense to an NBCR attack 
difficult.[Footnote 55] Further, these representatives said that the 
ultimate costs of medical treatment would be unknown, as some factors 
such as whether hospitals would remain open and sufficient vaccines 
would be available, were controlled by local public health 
responders.[Footnote 56] Finally, similar to life insurance, 
representatives of one health insurer told us they often lack 
information about the specific geographic locations of their insured 
populations, further limiting their ability to conduct risk-based 
pricing for events such as NBCR attacks. 

Representatives of the health insurance industry told us private 
reinsurance for their coverage of catastrophic events generally was 
very limited. AHIP representatives told us that catastrophic 
reinsurance for health insurers was in short supply, expensive, and 
generally focused on covering large costs incurred by individuals, 
rather than large costs incurred by groups of individuals potentially 
exposed to the same risks. Representatives from health insurers also 
said that reinsurance was costly, but they had not specifically sought 
out coverage for NBCR risks. As is the case for life insurers, health 
insurers do not have access to TRIA. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution until 30 days 
from the report date. At that time, we will send copies to the Ranking 
Minority Member of the House Financial Services Committee, other 
interested members of Congress, and NAIC. We also will make copies 
available to others upon request. In addition, this report will be 
available at no charge on GAO's Web site at [Hyperlink, 
http://www.gao.gov]. 

If you or your staff have any questions on this report, please contact 
me at 202-512-8678 or williamso@gao.gov. Contact points for our Offices 
of Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO staff who made major contributions to this 
report are listed in appendix II. 

Sincerely yours, 

Signed by: 

Orice M. Williams: 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I" Objectives, Scope, and Methodology: 

Our objectives were to discuss (1) commonly accepted principles of 
insurability and whether nuclear, biological, chemical, and 
radiological (NBCR) risks are measurable and predictable and (2) 
whether private insurers currently are exposed to NBCR risks and the 
challenges they face in pricing such risks. As part of our review, we 
conducted interviews in California, New Jersey, New York, 
Massachusetts, and Washington, D.C. We conducted our review from 
February 2006 through September 2006 in accordance with generally 
accepted government auditing standards. 

Principles of Insurability and Assessing Whether NBCR Risks Are 
Measurable and Predictable: 

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.[Footnote 57] 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).[Footnote 58] 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.[Footnote 59] 

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. 

Assessing Exposure to NBCR Risks: 

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.[Footnote 60] 

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.[Footnote 61] 

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.[Footnote 62] 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. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

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. 

[End of section] 

Related GAO Products: 

Insurance Sector Preparedness: Insurers Appear Prepared to Recover 
Critical Operations Following Potential Terrorist Attacks, but Some 
Issues Warrant Further Review. GAO-06-85. Washington, D.C.: November 
18, 2005. 

Catastrophe Risk: U.S. and European Approaches to Insure Natural 
Catastrophe and Terrorism Risks. GAO-05-199. Washington, D.C.: February 
28, 2005. 

Terrorism Insurance: Effects of the Terrorism Risk Insurance Act of 
2002. GAO-04-806T. Washington, D.C.: May 18, 2004. 

Terrorism Insurance: Effects of the Terrorism Risk Insurance Act of 
2002. GAO-04-720T. Washington, D.C.: April 28, 2004. 

Terrorism Insurance: Implementation of the Terrorism Risk Insurance Act 
of 2002. GAO-04-307. Washington, D.C.: April 23, 2004. 

Catastrophe Insurance Risks: Status of Efforts to Securitize Natural 
Catastrophe and Terrorism Risk. GAO-03-1033. Washington, D.C.: 
September 24, 2003. 

Catastrophe Insurance Risks: The Role of Risk-Linked Securities and 
Factors Affecting Their Use. GAO-02-941. Washington, D.C.: September 
24, 2002. 

Terrorism Insurance: Rising Uninsured Exposure to Attacks Heightens 
Potential Economic Vulnerabilities. GAO-02-472T. Washington, D.C.: 
February 27, 2002. 

Terrorism Insurance: Alternative Programs for Protecting Insurance 
Consumers. GAO-02-199T. Washington, D.C.: October 24, 2001. 

Terrorism Insurance: Alternative Programs for Protecting Insurance 
Consumers. GAO-02-175T. Washington, D.C.: October 24, 2001. 

FOOTNOTES 

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

[2] Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and 
Insurance, 9th ed. (Hoboken, N. J.: John Wiley & Sons: 2003). 

[3] From an insurance company perspective, a catastrophe is one that 
has the potential to cause severe losses to an insurance company 
relative to its available financial resources. 

[4] Employers may cover employees for work-related injuries, illness, 
and death by purchasing an insurance policy from a company licensed by 
the state, or employers may self-insure. 

[5] For more information on TRIA, see GAO, Terrorism Insurance: 
Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-307 
(Washington, D.C.: Apr. 23, 2004). 

[6] For purposes of TRIA, "property and casualty insurance" includes 
commercial lines of property/casualty insurance, including workers' 
compensation and directors and officers' liability insurance. It does 
not include other types of insurance such as federal crop insurance, 
medical malpractice insurance, health or life insurance, commercial 
automobile insurance, burglary and theft insurance, professional 
liability insurance or farm owners multiple peril insurance. 15 U.S.C. 
§ 6701 note (Pub. L. No. 107-297, § 102(12)). 

[7] TRIA defines "make available" to mean that insurers subject to TRIA 
must offer coverage for insured losses arising from certified terrorist 
events and that the coverage not differ materially from the terms, 
amounts, and limitations applicable to other types of coverage. 

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

[9] For our description of the elements of an insurable risk, we 
primarily relied on Fundamentals of Risk and Insurance. In addition, we 
consulted other insurance references. 

[10] As described in GAO, U.S. Postal Service: Better Guidance Is 
Needed to Ensure an Appropriate Response to Anthrax Contamination, GAO-
04-239 (Washington, D.C.: Sept. 9, 2004), the first cases of 
bioterrorism anthrax in the United States occurred in September and 
October 2001, when at least four letters containing anthrax spores were 
mailed to news media personnel and two U.S. Senators. In addition, as 
indicated in Combating Terrorism: Need for Comprehensive Threat and 
Risk Assessments of Chemical and Biological Attacks, GAO/NSIAD-99-163 
(Washington, D.C.: Sept. 14, 1999), a limited number of incidents 
involving biological agents, including the contamination of salad bars 
in local restaurants with salmonella poisoning by the Rajneeshee 
religious cult, have occurred in the United States. 

[11] We contacted insurance experts from academia, including the 
University of California (Berkeley), Drake University, University of 
Pennsylvania, Santa Clara University, Georgia State University, as well 
as the American Academy of Actuaries, and RAND (with expertise in both 
insurance and national security). 

[12] AHIP, July 3, 2003, letter to Office of Microeconomic Analysis, 
U.S. Department of the Treasury (Treasury). 

[13] GAO, Risk Management: Further Refinements Needed to Assess Risks 
and Prioritize Protective Measures at Ports and Other Critical 
Infrastructure GAO-06-91 (Washington, D.C.: Dec. 15, 2005). 

[14] American Academy of Actuaries, April 21, 2006, letter to the 
President's Working Group on Financial Markets; public comment record, 
U.S. Department of the Treasury; and Insurance Information Institute, 
Terrorism Insurance and the United States Government (New York, New 
York: September 2004). In addition, the Congressional Budget Office 
(CBO) also noted that terrorism models are hampered not only by a lack 
of data but also by the absence of an established "theory" of terrorist 
attacks. CBO, Federal Terrorism Reinsurance: An Update (Washington, 
D.C.: January 2005). 

[15] Congressional Research Service, Terrorism: The New Occupational 
Hazard, Order Code RL31387 (Washington, D.C.: Jul. 23, 2002). As noted 
in this report, most of the direct victims of terrorism in the United 
States in recent years have been people at work, whether those in the 
World Trade Center or the Pentagon, or victims of anthrax transmitted 
through the mail. 

[16] Statement by American Academy of Actuaries' TRIA Subgroup on 
Extending or Replacing the Terrorism Risk Insurance Act of 2002, 
December 1, 2005. The Academy presented this conclusion--that the 
insurance industry would be impaired by an NBCR attack--based on the 
assumption that TRIA would be allowed to expire. 

[17] While rating agency representatives reported that their agencies 
have considered the exposure of commercial property/casualty insurers 
to terrorism generally, none reported that their agencies specifically 
analyzed exposure to NBCR risks. 

[18] See GAO, Catastrophic Risks: U.S. and European Approaches to 
Insure Natural Catastrophe and Terrorism Risks, GAO-05-199 (Washington, 
D.C.: Feb. 28, 2005) for a description of how insurers use modeling 
firms to estimate the financial consequences of various natural 
catastrophe scenarios. 

[19] Insurance Information Institute, Terrorism Insurance and the 
United States Government (New York, N.Y.: September 2004). 

[20] See GAO-06-91. We concluded that the assessments of selected 
federal agencies were limited in terms of including information on the 
relative probability of various threat scenarios. The assessments were 
limited in their reliability and completeness in part because 
coordination was needed with the intelligence community. 

[21] American Academy of Actuaries, August 2, 2005, letter to the 
Honorable Richard Baker, Chairman, Subcommittee on Capital Markets, 
Insurance and Government Sponsored Enterprises, Committee on Financial 
Services, U.S. House of Representatives. 

[22] See appendix I for a description of the insurance experts, 
insurers, and reinsurers we selected to interview. 

[23] From U.S. Department of the Treasury, "Report to Congress: 
Assessment: The Terrorism Risk Insurance Act of 2002," (Washington, 
D.C.: Jun. 30, 2005). Treasury reported on the market for terrorism 
insurance in 2005, using data collected in 2003 and 2004. 

[24] According to Treasury, the overall amount of coverage for any of 
the NBCR events was the same for 2003 and 2004, with an increase in the 
number of large insurers reporting coverage for NBCR events. The 
nonresponse rate for this part of the study was 16 percent in 2003 and 
9 percent in 2004. Percentages given do not include workers' 
compensation coverage. 

[25] Specialty insurers, also called surplus lines insurers, are not 
licensed or admitted to generally conduct business in a state but 
nevertheless are allowed to write insurance in a state under certain 
circumstances, such as providing insurance for special risks or with 
terms and conditions having special flexibility. 

[26] According to the American Academy of Actuaries, losses for a large 
NBCR event in both commercial property/casualty and workers' 
compensation could be substantial. Loss estimates obtained by the 
Academy indicate that a large NBCR event in a densely populated area 
could cause total insured losses of $158.3 billion for commercial 
property, $14.4 billion for general liability, and $483.7 billion for 
workers' compensation. American Academy of Actuaries, April 21, 2006, 
letter to the President's Working Group on Financial Markets; public 
comment record, U.S. Department of the Treasury. 

[27] Representatives of the insurers we interviewed said that although 
TRIA would cover a portion of their losses, the percentage mandated by 
law for insurer payments represented a sizeable portion of their 
capital. Under TRIA, insurers affected by a certified terrorist event 
would currently pay a deductible of 17.5 percent of earned premium in 
addition to paying 10 percent of the insured losses exceeding the 
deductible. This is an increase from the deductible amounts in previous 
years (7 percent in 2003, 10 percent in 2004, and 15 percent in 2005), 
and less than the 20 percent deductible that they would be responsible 
for paying in 2007. Treasury also noted the impact of company-specific 
deductibles in its 2005 report, stating that the deductible may confer 
an advantage to smaller insurers and insurers writing in single TRIA- 
eligible lines. Moreover, insurers will be responsible for covering 15 
percent of the insured losses exceeding the deductible in 2007. See 15 
U.S.C. § 6701 note (Pub. L. No. 107-297, §§ 102(7) and 103(e)(1)(A)). 
As a business strategy, insurers we interviewed had decided to limit 
their exposure by limiting the amount of business they wrote for NBCR 
risks. 

[28] Litigation remains a concern to representatives of a property/ 
casualty insurer and reinsurer we interviewed because of what has 
occurred with other terrorist acts. To illustrate, property/casualty 
insurers were involved in lawsuits related to the 1993 bombing of the 
World Trade Center as late as November 2005. 

[29] Standard Insurance Services Office (ISO) policy contracts state 
that insurers will not pay for any loss or damage from "nuclear 
reaction or radiation, or radioactive contamination, however caused." 
ISO is a national rating organization for the property/casualty 
insurance industry that develops standardized policy language designed 
to be in compliance with regulatory requirements. According to an NAIC 
representative, regulators have allowed commercial property/casualty 
insurers to exclude nuclear risks because insurance coverage for 
nuclear events falls under the Price-Anderson Act, Pub. L. No. 85-256, 
71 Stat. 576 (Sept. 2, 1957), codified at 42 U.S.C. §§ 2039, 2210. 

[30] After September 11 and prior to the passage of TRIA, ISO created 
terrorism exclusions with specific references to the dispersal of 
nuclear or radioactive material and the release of biological or 
chemical materials. Under TRIA, commercial property/casualty insurers 
are required to "make available" the same coverage as they did prior to 
September 11. Because of this, insurance industry representatives told 
us that insurers have relied on other long-standing exclusions written 
into standard contracts to limit their exposure to NBCR events. 

[31] As of June 28, 2006, according to NAIC, these states were 
California, Georgia, Hawaii, Illinois, Iowa, Maine, Massachusetts, 
Missouri, New Jersey, New York, North Carolina, Oregon, Pennsylvania, 
Washington, West Virginia, and Wisconsin. According to NAIC, since 
September 11, insurers have tried to limit fire following exposure by 
lobbying state legislatures to amend standard fire laws so that 
insurers would not be responsible for fire losses resulting from 
terrorism. Based upon the information NAIC provided, the number of 
states that have made such amendments has increased from the last time 
we reported on terrorism insurance, from seven states in 2004 to 12 in 
2006. (See GAO-04-307.) The remaining 22 states and the District of 
Columbia, according to NAIC, did not have standard fire policies. 

[32] GAO has ongoing work in this area. 

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

[34] As described in GAO, Capital Hill Anthrax Incident: EPA's Cleanup 
Was Successful: Opportunities Exist to Enhance Contract Oversight, GAO-
03-686 (Washington, D.C.: Jun. 4, 2003), letters containing a powdered 
form of anthrax were mailed to members of the news media and 
congressional leaders, resulting in five deaths and a costly 
decontamination process. 

[35] Treasury reports that 20 percent or fewer policyholders responded 
to its survey. In addition, Treasury only surveyed policyholders about 
purchasing NBCR coverage for commercial property/casualty lines. 

[36] The information on demand for terrorism coverage comes from the 
2006 Marsh MarketWatch report, published by a large commercial 
insurance broker using data from more than 2,000 companies, 
representing two-thirds of their clients. 

[37] Captives are special-purpose insurance companies set up by 
commercial businesses to self-insure risks arising from the owners' 
business activities. Captives may be insurers under TRIA and therefore 
may be eligible for payments for losses related to certified NBCR 
events. 

[38] The guidance NAIC issued, termed a "model bulletin," also stated 
they did not believe terrorism exclusions were needed in personal 
property/casualty insurance (including homeowners' insurance policies). 
See NAIC Model Bulletin (Dec. 21, 2001) addressing exclusions related 
to acts of terrorism, personal lines property/ casualty coverage, life 
insurance, health insurance, and workers' compensation. 

[39] American Academy of Actuaries, Public Policy Monograph, P/C 
Terrorism Insurance Coverage: Where Do We Go Post-Terrorism Risk 
Insurance Act? (Washington, D.C.: May 2004). In addition, Pennsylvania 
is an exception to this general rule because that state allows insurers 
to exclude losses from disability or death resulting from military 
activities or enemy sabotage. See 77 P.S. § 1209 and 77 P.S. § 431. 

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

[41] NCCI developed the terrorism surcharge using information from a 
modeling firm on potential losses to workers' compensation lines. The 
surcharge is applicable to 36 states--2 more than the number of states 
where NCCI files loss costs or rates. However, this surcharge was not 
developed for non-NCCI states, a group which includes some states with 
localities considered to be at higher risk for terrorism attacks-- 
including California, New York, and Texas. 

[42] The Rating Board determines workers' compensation rates in New 
York. 

[43] As we previously noted, insurers use historical information from a 
large number of occurrences to determine potential future losses. In 
addition, workers' compensation insurers that underwrite in California 
told us that even if they could charge higher prices to specifically 
cover NBCR risks, they could not use these funds to establish separate 
reserves to cover potential losses until after an event had occurred. 

[44] In addition, GAO has reported on difficulties in identifying 
whether chemical agents were the source of long-term illness. See GAO, 
Gulf War Illnesses: DOD's Conclusions about U.S. Troops' Exposure 
Cannot Be Adequately Supported, GAO-04-159 (Washington, D.C.: Jun. 1, 
2004). 

[45] Workers' compensation insurance only would cover injury or illness 
that occurred or was contracted on the job or when the employee was 
acting within the scope of employment. 

[46] In other words, workers' compensation insurers charge different 
rates, depending on the risk of death or injury by occupation, but they 
must charge the same statewide rate for occupation regardless of 
geographic location. For example, workers' compensation insurers charge 
higher rates for roofers than for clerical staff. However, according to 
NCCI representatives, employers pay the same rate for a roofer in an 
area considered at greater risk for a terrorism attack as they pay for 
a roofer in an area considered less at risk. 

[47] The New York State Insurance Fund and the State Compensation 
Insurance Fund of California are both insurers of last resort for 
employers that otherwise cannot find workers' compensation insurance in 
their respective states. See appendix I for information about their 
market share nationwide. 

[48] Although neither NAIC nor the American Council of Life Insurers 
could tell us about requirements across all states related to 
exclusions for terrorism and NBCR risks, NAIC told us that many states 
allow life insurers to exclude losses from an act of war. California 
state regulatory officials told us that they did not include terrorism 
within the definition of an act of war. 

[49] California regulatory officials told us that not all life products 
are subject to regulatory review, and therefore some forms sold by life 
insurers in California could exclude NBCR risks. 

[50] For example, according to one insurer, a group life insurer might 
anticipate three or four deaths per 1,000 people through ordinary 
causes of death, but an incident that caused more than four deaths per 
1,000 would require additional funds beyond what the insurer 
anticipated. 

[51] In general, when insurers become insolvent and cannot pay their 
claims, state insolvency guarantee funds compensate members of the 
public who suffer losses, although the policyholders may bear part of 
the losses themselves. 

[52] According to a model developed for the American Academy of 
Actuaries, a large NBCR event could cause widespread casualties 
resulting in insured losses to life insurers of $82 billion. See 
footnote 26. 

[53] NAIC also does not track state requirements regarding the coverage 
of NBCR events in health insurance policies across the states. 
California regulatory officials told us that some health insurance 
forms could exclude NBCR coverage if such a form were not disapproved 
by the state within 30 days of filing. 

[54] American Academy of Actuaries, December 2002, Public Policy 
Monograph, Group and Health Coverage in the Wake of September 11. The 
Academy specifically noted that a biological, chemical, or radiological 
attack could spread illness for extended periods. In addition, we have 
noted that the symptoms from some biological agents easily could be 
confused with other, more common illnesses. See GAO/NSIAD-99-163. 

[55] Unlike workers' compensation insurance, health insurers with whom 
we spoke told us that their policies covered medical treatments for 
current illnesses or injuries, regardless of when the person got sick 
or hurt. 

[56] The capabilities and availability of public health personnel and 
medicines or vaccines could affect the scope of damage and casualties, 
as we have previously noted in reports on the preparedness of public 
health agencies and health care organizations for biological attacks. 
See GAO, Infectious Disease Outbreaks: Bioterrorism Preparedness 
Efforts Have Improved Public Health Response Capacity, but Gaps Remain, 
GAO-03-654T, (Washington, D.C.: Apr. 9, 2003) and GAO, Bioterrorism: 
Preparedness Varied across State and Local Jurisdictions, GAO-03-373 
(Washington, D.C.: Apr. 7, 2003). 

[57] Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and 
Insurance, 9th ed. (Hoboken, N.J.: John Wiley & Sons, 2003). 

[58] From an insurance perspective, a catastrophe is one that has the 
potential to cause severe losses to an insurance company relative to 
its available financial resources. 

[59] Cat Modeling 2006: Shifting Paradigms, presented by the 
Reinsurance Association of America, Tampa, Fla.: February 2006. 

[60] The Insurance Information Institute provides information and 
analysis of insurance topics and collects data on insurance premiums 
and market shares for individual states as well as for the entire 
United States. Moody's Investors Services, as part of its Special 
Comment on insurers' exposure to terrorist risks, published information 
about workers' compensation insurers' premiums and market share. 

[61] All of the information about market share data came from the 
Insurance Information Institute, with the exception of workers' 
compensation insurance, which came from Moody's Special Comment on 
Terrorism Insurance in 2005. While the state funds only underwrite 
workers' compensation in their respective states, Moody's calculated 
their marketshare based on a percentage of total premiums written 
nationwide. 

[62] These studies were the Marsh MarketWatch Report: 2006 and Moody's 
Special Comment Letter on Terrorism Insurance: 2005. 

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