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entitled 'Terrorism Insurance: Status of Coverage Availability for 
Attacks Involving Nuclear, Biological, Chemical, or Radiological 
Weapons' which was released on December 12, 2008.

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Report to Congressional Committees: 

United States Government Accountability Office: 
GAO: 

December 2008: 

Terrorism Insurance: 

Status of Coverage Availability for Attacks Involving Nuclear, 
Biological, Chemical, or Radiological Weapons: 

GAO-09-39: 

GAO Highlights: 

Highlights of GAO-09-39, a report to congressional committees. 

Why GAO Did This Study: 

The Terrorism Risk Insurance Act of 2002 (TRIA) is credited with 
stabilizing insurance markets after the September 11, 2001, attacks by 
requiring insurers to offer terrorism coverage to commercial property 
owners (property/casualty insurance), and specifying that the federal 
government is liable for a large share of related losses. While TRIA 
covers attacks involving conventional weapons, insurers may use 
exceptions that may exclude coverage for attacks with nuclear, 
biological, chemical, or radiological (NBCR) weapons, which has raised 
concerns about the potential economic consequences of such attacks. 
TRIA’s 2007 reauthorization directed GAO to review (1) the extent to 
which insurers offer NBCR coverage, (2) factors that contribute to the 
willingness of insurers to provide NBCR coverage, and (3) policy 
options for expanding coverage for NBCR risks. To do this work, GAO 
reviewed studies and reports and interviewed more than 100 industry 
participants about the availability of NBCR coverage in the market. 

GAO provided a draft of this report to the Department of the Treasury 
and the National Association of Insurance Commissioners (NAIC). 
Treasury and NAIC said that they found the report informative and 
useful. NAIC did express what it said was a philosophical difference of 
opinion with GAO’s characterization of risk-based premiums for workers’ 
compensation insurers. 

What GAO Found: 

Consistent with the findings of a September 2006 GAO report on the 
market for NBCR terrorism insurance, property/casualty insurers still 
generally seek to exclude such coverage from their commercial policies. 
In doing so, insurers rely on long-standing standard exclusions for 
nuclear and pollution risks, although such exclusions may be subject to 
challenges in court because they were not specifically drafted to 
address terrorist attacks. Commercial property/casualty policyholders, 
including companies that own high-value properties in large cities, 
generally reported that they could not obtain NBCR coverage. Unlike 
commercial property/casualty insurers, insurers in workers’ 
compensation, group life, and health lines reported generally providing 
NBCR coverage because states generally do not allow them to exclude 
these risks. 

Commercial property/casualty insurers generally remain unwilling to 
offer NBCR coverage because of uncertainties about the risk and the 
potential for catastrophic losses, according to industry participants. 
Insurers face challenges in reliably estimating the severity and 
frequency of NBCR attacks for several reasons, including accounting for 
the multitude of weapons and locations that could be involved (ranging 
from an anthrax attack on a single building to a nuclear explosion in a 
populated area) and the difficulty or perhaps impossibility of 
predicting terrorists’ intentions. Without the capacity to reliably 
estimate the severity and frequency of NBCR attacks, which would be 
necessary to set appropriate premiums, insurers focus on determining 
worst-case scenarios (which with NBCR weapons can result in losses that 
would render insurers insolvent). For example, a nuclear detonation 
could destroy many insured properties throughout an entire metropolitan 
area. Workers’ compensation, group life, and health insurers that 
generally cannot exclude NBCR coverage from their policies also face 
challenges in managing these risks. For example, workers’ compensation 
insurers said they face challenges in setting premiums that they 
believe would cover the potential losses associated with an attack 
involving NBCR weapons. 

GAO reviewed two proposals that have been made to address the lack of 
NBCR coverage in the commercial property/casualty market. The first 
proposal, part of an early version of the bill to reauthorize TRIA in 
2007, would have required insurers to offer NBCR coverage, with the 
federal government assuming a greater share of potential losses than it 
would for conventional attacks. Some industry participants supported 
this proposal because insurers otherwise would not offer NBCR coverage 
and because a substantial federal backstop was necessary to mitigate 
the associated risks. However, others said that some insurers might 
withdraw from the market if mandated to offer NBCR coverage, even with 
a substantial federal backstop. In a second proposal by some industry 
participants, the federal government would assume all potential NBCR 
risks through a separate insurance program and charge premiums for 
doing so. However, critics said the government might face substantial 
losses on such an NBCR insurance program because it might not be able 
to determine or charge appropriate premiums. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-39]. For more 
information, contact Orice Williams at (202) 512-8678 or 
williamso@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Most Commercial Property/Casualty Insurers and Reinsurers We Contacted 
Exclude or Limit Coverage for NBCR Risks, While Workers' Compensation, 
Life, and Health Insurers Generally Are Required to Offer Such 
Coverage: 

Potential Financial Consequences of NBCR Attacks Limit Property/ 
Casualty Insurers' Willingness to Offer Coverage; Insurers for Other 
Lines of Insurance Report Limited Capacity to Manage Associated Risks: 

Proposals to Increase Coverage for NBCR Attacks in the Property/ 
Casualty Market Have Advantages and Disadvantages: 

Agency Comments and Our Evaluation: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: Comments from the National Association of Insurance 
Commissioners: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Types of Potential NBCR Attacks and Their Effects: 

Table 2: Examples of Proposed or Existing Pooling Arrangements: 

Table 3: Examples of Current and Past Federal Insurance Programs: 

Figure: 

Figure 1: Examples of Potential Property/Casualty and Workers' 
Compensation Losses from Different NBCR Scenarios in New York City: 

Abbreviations: 

AASCIF: American Association of State Compensation Insurance Funds: 

ACLI: American Council of Life Insurers: 

ANI: American Nuclear Insurers: 

FEMA: Federal Emergency Management Agency: 

ISO: Insurance Services Office: 

NAIC: National Association of Insurance Commissioners: 

NBCR: nuclear, biological, chemical, and radiological: 

NCCI: National Council on Compensation Insurance, Inc. 

NFIP: National Flood Insurance Program: 

RIMS: Risk and Insurance Management Society, Inc. 

TRIA: Terrorism Risk Insurance Act: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

December 12, 2008: 

The Honorable Christopher J. Dodd: 
Chairman: 
The Honorable Richard C. Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Barney Frank: 
Chairman: 
The Honorable Spencer Bachus: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

While the September 11, 2001, terrorist attacks killed nearly 3,000 
people and resulted in an estimated $32.5 billion in insured losses as 
of 2006, analysts estimate that casualties and property damage 
involving unconventional weapons, such as nuclear, biological, 
chemical, or radiological (NBCR) materials, could be substantially 
worse under some scenarios.[Footnote 1] For example, under a RAND 
Corporation simulation of a terrorist-detonated nuclear explosion in 
the Port of Long Beach, California, 60,000 people could die instantly, 
another 150,000 people could require emergency medical treatment, and 
losses could reach $1 trillion.[Footnote 2] 

Although the Terrorism Risk Insurance Act of 2002 (TRIA) requires 
companies that offer commercial property/casualty insurance (i.e., 
coverage for building damage and related legal costs for injuries to 
third parties) to provide coverage for terrorist attacks and specifies 
that the federal government assume a significant share of the 
associated financial responsibility, insurers' standard exemptions may 
exclude coverage for terrorist attacks involving NBCR materials. 
[Footnote 3] While TRIA has been credited with stabilizing markets for 
terrorism insurance for conventional weapons, such as explosives, 
Members of Congress, academics, and policyholders have expressed 
concerns about a potential lack of coverage for terrorist attacks 
involving NBCR materials. In particular, they have stated that a 
substantial amount of uninsured losses could prolong economic recovery 
associated with an NBCR attack. 

In a September 2006 report, we analyzed issues related to insurers' 
coverage for terrorist attacks involving NBCR weapons in commercial 
property/casualty policies as well as in other insurance lines, 
including workers' compensation, group life, and health.[Footnote 4] We 
found that many commercial property/casualty insurers and reinsurers 
(companies that offer insurance to insurers) sought to exclude NBCR 
coverage from their policies or place significant restrictions on such 
coverage, largely because of potentially catastrophic losses associated 
with an NBCR attack. Although insurers reported that they would rely on 
standard policy exclusions for nuclear and pollution risks to generally 
limit exposure to NBCR risks, we noted that such exclusions may be 
challenged in courts.[Footnote 5] We found that although insurers in 
other lines also were concerned about attacks involving NBCR materials, 
state regulators generally did not permit these insurers to exclude 
such risks from their policies. State workers' compensation laws 
generally require workers' compensation insurers to cover all risks, 
including claims from terrorist acts involving NBCR materials, and some 
state regulators do not allow life and health insurers to exclude such 
risks from their policies. Unlike commercial property/casualty and 
workers' compensation insurers, life and health insurers would not be 
eligible for federal reimbursement for terrorism losses under TRIA. 
[Footnote 6] 

In December 2007, Congress passed and the President signed the 
Terrorism Risk Insurance Program Reauthorization Act of 2007, which 
extended the federal TRIA program until 2014.[Footnote 7] The 2007 
Reauthorization Act directed us to update our analysis of issues 
related to NBCR coverage. Specifically, the act required us to review 
(1) the extent to which insurers and reinsurers offer coverage for NBCR 
attacks; (2) the factors that contribute to the willingness of insurers 
and reinsurers to provide coverage for NBCR attacks and their ability 
to manage these risks; and (3) any public policy options for expanding 
coverage for these risks, given current insurance market conditions. 

To address our objectives, we reviewed reports and studies on terrorism 
insurance for NBCR risks and interviewed more than 100 insurance 
industry participants about the availability of NBCR coverage in the 
market, factors contributing to the availability of NBCR coverage, and 
their views on options to expand the market for NBCR coverage. For 
coverage in commercial property/casualty and workers' compensation 
markets, we interviewed officials and representatives from state 
regulators, rating agencies, risk modeling firms, insurer and 
policyholder trade associations, national and regional insurance and 
reinsurance brokers, insurance and reinsurance companies, and 
policyholders in a variety of industries, in six geographic markets 
(Atlanta; Boston; Chicago; New York; San Francisco; and Washington, 
D.C.) that received different rankings for terrorism risk by an 
industry analyst. We interviewed some participants in specialized 
insurance markets, including a nuclear pool, Bermuda reinsurers, and a 
national broker with expertise in environmental insurance.[Footnote 8] 
Furthermore, we interviewed private insurers that provide workers' 
compensation insurance and a judgmental sample of nine state workers' 
compensation funds that generally provide insurance for employers that 
cannot obtain it in the private market. Our analysis of NBCR coverage 
and capacity in the life and health insurance industries was more 
limited. We reviewed our September 2006 report and interviewed state 
insurance regulatory officials in California; Georgia; Illinois; 
Massachusetts; New York; and Washington, D.C., about NBCR coverage. We 
also interviewed representatives from several group life and health 
insurers with a large market share nationwide and in these same states. 
Although we selected industry participants to broadly represent 
national and specific market conditions, our sample may not represent 
the universe of insurers, insurance brokers, policyholders, and 
regulators. As a result, we could not generalize the results of our 
analysis to the entire national market for terrorism insurance for NBCR 
attacks in the commercial property/casualty, workers' compensation, 
life, and health insurance markets. To obtain views on the advantages 
and disadvantages of some public policy options for expanding coverage 
for NBCR risks, we reviewed options proposed in legislation, suggested 
by industry participants, or discussed in our prior reports or in other 
reports. See appendix I for more detailed information on our scope and 
methodology. 

We conducted this performance audit from January 2008 to December 2008, 
in accordance with generally accepted government auditing standards. 
Those standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

Consistent with findings in our 2006 report, representatives of most 
commercial property/casualty insurers we contacted said that they 
continue to exclude coverage for terrorist attacks involving NBCR 
materials, and representatives from several reinsurance companies that 
do offer such coverage reported placing significant restrictions on it. 
Insurance representatives reported that they continued to rely on long-
established exclusions, such as the nuclear and pollution exclusions, 
to exclude or limit coverage. However, some insurance industry 
participants said the applicability of these exclusions, particularly 
the pollution exclusion, could be challenged in court because the 
exclusions were not specifically developed to address terrorist 
attacks. In addition, representatives from policyholders, such as the 
owners of large properties in cities that are viewed as being at high 
risk of attack, including New York City and San Francisco, generally 
reported that they did not have coverage for attacks involving NBCR 
materials because (1) their insurers did not offer it; (2) they viewed 
available coverage as being too expensive to purchase (such as five 
times higher than their total property insurance costs); or (3) they 
had not sought coverage. Furthermore, due to the limited amount of NBCR 
coverage, some property owners said they had set up their own insurance 
companies, called captive insurers, specifically to cover the risks 
associated with such attacks.[Footnote 9] Unlike commercial property/ 
casualty insurance policies, workers' compensation, group life, and 
health insurance policies generally provide NBCR coverage because these 
insurers generally are not able to exclude such coverage. Workers' 
compensation insurers generally are required to cover losses resulting 
from injuries sustained at the workplace, and state regulators 
generally review the terms for offering such coverage, including price 
and policy limits. Representatives from life and health insurers also 
reported that state regulators generally have not permitted them to 
exclude NBCR risks from their policies, although representatives of an 
insurer and a state regulator we interviewed reported some exceptions 
that indicate some policies may exclude or limit coverage for NBCR 
risks. 

Commercial property/casualty insurers and reinsurers generally do not 
offer or strictly limit NBCR coverage because of the uncertainties 
about the risk and the potential for catastrophic losses, according to 
industry participants, and insurers that are required to provide such 
coverage--in workers' compensation, life, and health--reported some 
challenges in managing the associated risks. Property/casualty 
insurance industry participants we contacted told us that NBCR risks 
generally are uninsurable because insurers lack a reliable means to 
estimate the severity (because of the wide range of potential weapons 
and targets) and frequency (because of the impossibility of predicting 
terrorists' intentions) of such attacks.[Footnote 10] Without the 
ability to reliably estimate the severity and frequency of NBCR 
attacks, insurers lack a basis for setting premium rates to compensate 
for their potential losses. As a result, industry representatives 
reported that insurers and reinsurers focus on the most catastrophic 
NBCR attacks, under scenarios with widespread financial damage. For 
example, some representatives of property/casualty insurers told us 
that the scale of a nuclear blast could affect a far greater portion of 
an insurer's portfolio than a truck bomb of conventional explosives, 
potentially rendering insurers that chose to offer NBCR coverage 
insolvent. Although representatives of workers' compensation insurers 
in the private market told us they may not offer coverage to employers 
in geographic areas considered to be at higher risk of terrorist 
attack, representatives from state funds--state-established insurers 
generally designed to accept all employees--reported that they 
generally are required to cover all employers, regardless of location 
or risk level.[Footnote 11] Both private workers' compensation insurers 
and state funds we contacted also said that they face challenges in 
managing NBCR risks, such as setting premiums that they believe would 
cover the potential losses associated with a terrorist attack that 
involved NBCR weapons (workers' compensation insurers in many states 
are permitted to add a uniform surcharge of one penny per $100 of 
employee payroll to cover terrorism risks, including those involving 
NBCR materials). While group life and health insurers may have somewhat 
more regulatory flexibility than certain workers' compensation insurers 
to manage NBCR risks, they may face challenges in doing so. For 
example, group life insurers, due to competitive pressure within the 
industry, may be unwilling to restrict coverage in certain geographic 
markets perceived to be at higher risk of terrorist attack. 
Furthermore, partly due to their limited experience with the effects of 
attacks involving NBCR materials, representatives from group life and 
health insurers said it is difficult for them to develop risk-based 
premiums to cover potential losses from an NBCR attack. 

The two proposals that we identified and reviewed to increase the 
availability of insurance coverage for terrorist attacks involving NBCR 
materials focus on the commercial property/casualty market because such 
coverage is largely unavailable in that market and would involve the 
federal government assuming most or all of the associated financial 
risks.[Footnote 12] One recent legislative proposal would amend TRIA to 
mandate that insurers make NBCR coverage available and would provide 
greater federal financial support for attacks involving NBCR weapons 
compared with the current TRIA program for terrorism attacks in 
general.[Footnote 13] A variety of industry participants supported this 
proposal. For example, representatives of one insurer said that, given 
insurers' reluctance to cover terrorist attacks involving NBCR 
materials, the only way to make such coverage available would be to 
mandate that commercial property/casualty insurers offer NBCR coverage. 
To offset the potential costs to insurers in providing such coverage, 
the federal government would assume a greater share of the potential 
losses. A recent RAND study also concluded that requiring insurers to 
cover NBCR risks may reduce potential taxpayer costs in comparison to 
the current situation in which the federal government may be asked to 
cover a large share of uninsured losses from an NBCR attack, as it has 
done after natural catastrophes and terrorist attacks.[Footnote 14] 
However, other industry participants said that even with a reduced 
exposure to the costs of an NBCR attack, some insurers might withdraw 
entirely from the commercial property/casualty insurance market if they 
were required to offer coverage for attacks involving NBCR materials. 
Under a separate proposal suggested by some industry participants, the 
federal government would assume complete financial liability for 
policyholders that elect coverage and charge premiums for doing so. 
Insurers would be responsible for administering the program similar to 
other federal insurance programs such as the National Flood Insurance 
Program. While some industry participants said that the only way to 
help ensure the availability of NBCR coverage would be for the federal 
government to assume all of the potential costs, others disagreed for 
several reasons. For example, some expressed concerns about the 
potential costs of such a program. The federal government may face 
substantial challenges in establishing appropriate premiums for NBCR 
risks and, therefore, could face significant losses, which has been the 
case in other federal insurance programs. In addition, some said 
insurance companies may not have the experience needed to provide 
claims adjustors and other personnel for areas affected by attacks 
involving NBCR materials. 

We provided a draft of this report to the Department of the Treasury 
(Treasury) and the National Association of Insurance Commissioners 
(NAIC) for their review and comment.[Footnote 15] In oral comments, 
Treasury officials said that they found the report informative and 
useful. They also provided technical comments that we incorporated 
where appropriate. NAIC provided written comments that are reprinted in 
appendix II. In these comments, NAIC officials said they found our 
report useful and informative and agreed with its analysis of the 
various policy options, but also said that they had a philosophical 
difference of opinion with some statements in our draft report. In 
particular, NAIC commented on our discussion on the ability of workers' 
compensation insurers to charge risk-based premiums to employers 
perceived as being at higher risk for terrorist attacks. NAIC said that 
the draft report implied that state insurance regulators, due to voter 
and legislative pressure, keep premium rates artificially low for 
workers' compensation insurers rather than relying on actuarial 
science. NAIC disputed what they characterized as our implied 
contention and suggested that the recent profitability of the workers' 
compensation insurance industry indicates that premiums have not been 
suppressed by regulatory actions. We made clarifications to the draft 
to address certain NAIC comments. For example, we more fully described 
the surcharges that workers' compensation insurers may levy for 
covering losses from terrorist attacks, including those involving NBCR 
weapons. However, the draft report in no way meant to imply that state 
insurance regulators succumb to voter and legislative pressures in 
approving rates, and simply reported that workers' compensation 
insurers and some regulators we contacted for both our September 2006 
report and this report said that they did not believe the permissible 
surcharge would be sufficient to cover the potential losses associated 
with an NBCR attack.[Footnote 16] Given that NBCR risks may not fully 
satisfy the principles of insurability (as we said in our September 
2006 report), statements by representatives of workers' compensation 
insurers that question whether the permitted surcharge would be 
sufficient to cover potential losses do not appear to be inherently 
unreasonable. We also note that while NAIC reports that workers' 
compensation insurers have been profitable over the past several years, 
this does not mean that any premiums collected from this surcharge 
would be sufficient to cover the losses associated with a future NBCR 
attack. NAIC also provided technical comments that we incorporated as 
appropriate. We also obtained technical comments from several state 
insurance regulators and other organizations on a draft of this report, 
which were incorporated as appropriate. 

Background: 

Congress enacted and the President signed TRIA in 2002 to help restore 
confidence and stability in commercial property insurance markets after 
private insurers withdrew terrorism coverage in the wake of the 
September 11 attacks. TRIA requires that commercial property/casualty 
insurers, including (among others) workers' compensation insurers, 
"make available" coverage for certified terrorist events under the same 
terms and conditions as other, nonterrorism coverage. Following a 
terrorist attack, the federal government would reimburse insurers for 
85 percent of their losses after insurers pay a deductible of 20 
percent of the value of each company's prior year's direct earned 
premiums.[Footnote 17] Federal reimbursement is activated when 
aggregated industry losses exceed $100 million and is capped at an 
annual amount of $100 billion.[Footnote 18] TRIA also would cover 
losses caused by NBCR terrorist attacks if the insurer had included 
this coverage in the insurance policy. 

Originally enacted as a 3-year program, TRIA was reauthorized in 2005; 
in 2007, Congress extended the program until 2014. In the deliberations 
over the 2005 and 2007 Reauthorization Acts, Congress considered 
mandating that commercial property/casualty insurers offer coverage for 
NBCR risks, with significantly lower deductibles and copayments. 
[Footnote 19] Congress also considered adding group life insurance to 
the TRIA program, so that group life insurers could receive 
reimbursements for the majority of their claims from terrorist events, 
including NBCR attacks.[Footnote 20] Members of Congress supporting 
this provision argued that group life insurers were vulnerable to the 
same extraordinary losses from a terrorist attack as other insurance 
lines and could become insolvent after a catastrophic event. However, 
Treasury testified that the Administration did not want to expand TRIA 
to cover group life insurers, citing some reports that the group life 
insurance market has remained competitive after September 11. The NBCR 
requirement and the group life provisions were not included in the 
final TRIA reauthorizing legislation. 

Variation in Potential Weapons Involving NBCR Materials and Examples of 
Prior Attacks: 

Government and other experts have stated that terrorist attacks 
involving NBCR weapons could affect people and property in a variety of 
ways, depending on the weapon used as well as the location of the 
attack. Table 1 provides examples of attacks using NBCR weapons as well 
as some of their potential effects. 

Table 1: Types of Potential NBCR Attacks and Their Effects: 

Threat: Nuclear; 
Type of threat: Detonated device; 
Example of an event: A 10-kiloton nuclear device is detonated in a 
large city; 
Potential effects: Destruction of buildings with subsequent high-energy 
radiation and extreme heat forming a cloud from which highly lethal 
radioactive material would fall. 

Threat: Biological; 
Type of threat: Anthrax; 
Example of an event: A concealed device sprays anthrax spores in a 
city; 
Potential effects: Agents--such as anthrax and smallpox--can multiply 
in the human body, significantly increasing their effects. Many 
biological agents are highly virulent and toxic; they may have an 
incubation period so that their effects are not seen for hours to days. 

Threat: Chemical; 
Type of threat: Nerve agent; 
Example of an event: Sarin is sprayed into the ventilation system of 
three commercial buildings in a city; 
Potential effects: Because many chemicals are inherently hazardous, the 
release of chemicals or the risk of contamination at chemical 
facilities poses a potential threat to public health and the economy. 
Approximately 800,000 shipments of hazardous materials such as liquid 
chlorine and ammonia travel daily throughout the United States by 
ground, rail, air, water, and pipeline. Many of these materials are 
explosive, flammable, toxic, and corrosive and can be extremely 
dangerous when improperly released, and a release could cause injury or 
death and significant environmental damage. 

Threat: Radiological; 
Type of threat: Dispersal device; 
Example of an event: "Dirty bombs" are detonated in three cities in 
regional proximity; 
Potential effects: A dirty bomb uses conventional explosives to 
disperse radioactive material across the immediate area. The primary 
short-term exposure hazard to humans would be inhalation of radioactive 
material suspended in the dust and smoke from the explosion, leading to 
radiation injury and potential death. 

Source: GAO. 

Note: For additional information on NBCR attacks, see GAO, Homeland 
Security: First Responders' Ability to Detect and Model Hazardous 
Releases in Urban Areas Is Significantly Limited, [hyperlink, 
http://www.gao.gov/products/GAO-08-180] (Washington, D.C.: June 27, 
2008); Combating Nuclear Terrorism: Federal Efforts to Respond to 
Nuclear and Radiological Threats and to Protect Key Emergency Response 
Facilities Could Be Strengthened, [hyperlink, 
http://www.gao.gov/products/GAO-08-285T] (Washington, D.C.: Nov. 15, 
2007); Chemical and Biological Defense: Updated Intelligence, Clear 
Guidance, and Consistent Priorities Needed to Guide Investments in 
Collective Protection, [hyperlink, 
http://www.gao.gov/products/GAO-07-113] (Washington, D.C.: Jan. 19, 
2007); and Combating Terrorism: Need for Comprehensive Threat and Risk 
Assessments of Chemical and Biological Attacks, [hyperlink, 
http://www.gao.gov/products/GAO/NSIAD-99-163] (Washington, D.C.: Sept. 
14, 1999). 

[End of table] 

Previous attacks involving NBCR materials in United States and Japan 
also illustrate a range of consequences. In September and October 2001, 
contaminated letters laced with anthrax were sent through the mail to 
two U.S. senators and members of the media. As a result, 22 individuals 
contracted anthrax disease, and 5 of these individuals died. In 1984, 
the Rajneeshee religious cult in Oregon contaminated salad bars in 
local restaurants with salmonella bacteria to prevent people from 
voting in a local election. Although no one died, 751 people were 
diagnosed with the food-borne illness. In 1995, 12 people were killed 
and many more were injured after Aum Shinrikyo, a State Department- 
designated terrorist organization, released the chemical nerve agent 
Sarin in the Tokyo subway. 

Overview of State Regulation of Insurance and Workers' Compensation 
Insurance Providers: 

States have the primary responsibility for regulating the insurance 
industry in the United States, and the degree of oversight varies by 
insurance line and state. In some lines of insurance, state regulators 
guide the extent of coverage by approving the wording of policies, 
including the explicit exclusion of some perils. Regulators coordinate 
their activities, in part, through NAIC. According to an NAIC 
representative, while practices vary by state, state regulators 
generally review prices for personal lines of insurance and workers' 
compensation policies but not for commercial property/casualty 
policies. In most cases, state insurance regulators perform neither 
rate nor form review for large commercial property/casualty insurance 
contracts because it is presumed that businesses have a better 
understanding of insurance contracts and pricing than the average 
personal-lines consumer. Reinsurers generally are not required to 
obtain state regulatory approval for the terms of coverage or the 
prices they charge. 

Because state laws generally require employers to carry workers' 
compensation insurance, which covers employees for death or injuries as 
a result of a workplace incident, employers generally obtain coverage 
either from a private insurance company or from a fund established by 
the state.[Footnote 21] Twenty-six states have established separate 
funds, either run by the state or as a separate company, according to 
the American Association of State Compensation Insurance Funds 
(AASCIF), and most of these states provide workers' compensation 
coverage for all employers seeking it. An NAIC official told us that 
when state governments began requiring employers to purchase workers' 
compensation coverage, many states established separate funds to 
provide a mechanism to ensure coverage for those employers that could 
not obtain it in the private market. The majority of state funds are 
competitive, meaning that the state fund competes for business with 
other private insurers. However, in four states, the state fund is the 
sole insurer for workers' compensation, unless an employer is permitted 
to self-insure.[Footnote 22] The National Academy of Social Insurance 
reported that in 2006, just over half of workers' compensation benefits 
(50.38 percent) were paid by private insurers, with just under half 
coming from state funds (19.66 percent), federal programs (5.98 
percent), and self-insured employers (23.98 percent).[Footnote 23] 

Most Commercial Property/Casualty Insurers and Reinsurers We Contacted 
Exclude or Limit Coverage for NBCR Risks, While Workers' Compensation, 
Life, and Health Insurers Generally Are Required to Offer Such 
Coverage: 

Commercial property/casualty insurers and reinsurers generally seek to 
exclude coverage for NBCR risks or place significant restrictions on 
such coverage. According to industry participants, insurers interpret 
the language of longstanding exclusions developed for nuclear and 
pollution risks as excluding terrorist attacks involving NBCR weapons, 
but the use of such exclusions may be challenged in court. 
Representatives from policyholders from a variety of industries, 
including real estate, financial services, and hospitality, also told 
us that they do not have NBCR coverage either because a very limited 
amount of NBCR insurance is available or they do not view the rates for 
available coverage as reasonable. A few policyholders also reported 
self-insuring these risks through captive insurers. Representatives 
from workers' compensation, life, and health insurers we contacted 
generally reported that they cover losses from terrorist attacks, 
including those involving NBCR materials, because they said state 
regulators generally do not allow these insurers to exclude such risks. 

NBCR Coverage Generally Is Unavailable in Commercial Property/Casualty 
Insurance and Reinsurance Policies, but the Exclusions Used to Limit 
Coverage Could Be Challenged in Court: 

While few market surveys that we identified specifically have addressed 
the availability of property/casualty insurance for terrorist attacks 
involving NBCR materials, our interviews with a range of industry 
participants suggests that such coverage continues to be limited. 
[Footnote 24] Representatives from the majority of the insurers and 
reinsurers we interviewed said that their companies generally do not 
offer NBCR coverage or offer a limited amount of such coverage. 
Representatives of large insurance and reinsurance trade associations, 
as well as national insurance brokers, also reported a general lack of 
coverage for NBCR risks. According to a representative from a large 
national insurance broker, he was not aware of any primary insurers 
that offered NBCR coverage as part of their standard property/casualty 
policies. The representative said that some insurers that offer "stand- 
alone" terrorism insurance policies offer NBCR coverage, but demand for 
this product is minimal due to its relatively high price and 
restrictions. Although representatives of several reinsurers based in 
Bermuda told us that their companies offer some NBCR coverage, the 
reported restrictions on these policies help illustrate some of the 
limitations of the available coverage. For example, the policy language 
of one reinsurance contract we reviewed limited NBCR coverage only to 
losses resulting from the initial "force or violence" of the NBCR 
terrorist attack and did not cover long-term effects, such as resulting 
illnesses or business interruption. 

Insurance companies seek to limit their coverage for NBCR risks by 
relying on long-standing exclusions for nuclear and pollution risks, 
which already have been approved by state regulators. As we stated in 
our September 2006 report, insurers have written exclusions related to 
nuclear hazard risks into their standard policies for decades, 
generally to protect themselves from losses related to nuclear power 
accidents. Furthermore, representatives from the Insurance Services 
Office (ISO), a national organization for the property/casualty 
insurance industry that develops standardized policy language designed 
to comply with regulatory requirements, said that insurers also 
typically exclude coverage for losses caused by pollution and 
contamination. ISO representatives told us that the pollution exclusion 
was developed to exclude coverage for the release of many different 
substances--such as asbestos or pesticides--that could cause harm to 
people and the environment. Some insurance representatives said that 
the pollution exclusion could be applied to biological and chemical 
agents released in a terrorist attack. 

Because these exclusions were developed for other purposes, some 
regulators and insurance industry participants said that their use by 
insurers in the event of an attack involving NBCR materials could be 
challenged. Representatives from one large insurer told us that 
language in the nuclear hazard exclusion may not be clear enough to 
apply to a nuclear terrorist attack. Similarly, representatives from a 
large insurance company said the pollution exclusion would not apply 
unless the terrorist attack itself was deemed to be a polluting event. 
An official from the New York Insurance Department also said that the 
Department did not interpret the definition of "pollutants" in the 
standard pollution exclusion forms to apply to biological and chemical 
terrorist attacks. Courts determine whether a particular substance is 
or is not a pollutant based upon, among other things, the language in 
the policy, the facts and circumstances of the case, and the law of 
jurisdiction.[Footnote 25] As we stated in our September 2006 report, 
given the potential for litigation and court interpretation, insurers 
and other industry experts have raised some concerns as to how 
effectively the pollution exclusion would protect insurers against 
losses resulting from an NBCR terrorist attack. 

Property/casualty insurers also may face potential exposure to losses 
from NBCR attacks as the result of state requirements, but it is 
difficult to assess the extent of this exposure. According to industry 
officials, 16 states--including California, Illinois, and New York-- 
require property/casualty insurers to cover losses from fire following 
an event, regardless of the cause of fire.[Footnote 26] As we reported 
in 2006, in the case of a nuclear bomb detonation, once the property 
was destroyed, insurers could dispute the extent to which fire (covered 
in "fire following" states) or the blast (excluded by the nuclear 
exclusion) caused the damage. However, given the potential devastation 
resulting from a nuclear terrorist attack--including potentially 
widespread destruction and protracted evacuations--it may be difficult 
for insurers, policyholders, regulators, and courts to resolve any 
issues related to the cause of loss. 

Property/Casualty Policyholders Report That NBCR Coverage Generally Is 
Unavailable or Available at Prices They View as Unaffordable: 

Information we obtained from commercial policyholders in a range of 
industries across the country also indicate that property/casualty 
coverage for NBCR risks is very limited. For example, we interviewed 
representatives from real estate companies that own large, high-value 
commercial properties (such as office buildings or hotels) in cities-- 
including Chicago, New York, and San Francisco--that generally are 
viewed as being at high risk of terrorist attack. While representatives 
from these companies said that they generally were able to obtain 
coverage for terrorist attacks that involve conventional weapons, such 
as truck bombs, they generally did not have NBCR coverage. In addition, 
results from a recent survey of risk managers conducted by the Risk and 
Insurance Management Society, Inc. (RIMS), show that commercial 
policyholders generally have not been offered NBCR coverage in their 
insurance policies. Although the RIMS survey has several limitations, 
it found that less than 15 percent of the respondents had coverage for 
NBCR attacks.[Footnote 27] Furthermore, representatives we contacted 
from industries such as transportation, hospitality, entertainment and 
utilities also reported that they did not have NBCR coverage, or had 
limited coverage, such as for only chemical risks.[Footnote 28] 

Policyholders we contacted said that they generally lacked NBCR 
coverage because (1) their insurers did not offer it; (2) the prices 
quoted on the coverage that was available were viewed as too expensive 
to purchase; or (3) they did not seek coverage. For example, a 
representative of a shopping center development company with retail 
locations in various cities throughout the United States said that the 
company is concerned about the risks of NBCR attack and has sought 
insurance coverage. However, the representative said that the company 
has not been able to identify any insurers that would offer the company 
NBCR coverage or provide pricing information. In addition, 
representatives of a commercial real estate developer in Washington, 
D.C., said that quoted insurance premiums for NBCR coverage were five 
times higher than their total property insurance costs. Insurance 
brokers we contacted told us that although some of their commercial 
policyholder clients have inquired about NBCR coverage, the demand for 
such coverage is less than that for conventional terrorism coverage. As 
we stated in 2006, demand for conventional terrorism coverage is high 
in the commercial real estate sector because mortgage lenders generally 
require companies to purchase coverage. However, according to brokers 
and a lender that we interviewed, lenders do not require companies to 
secure coverage for NBCR terrorist attacks because such coverage is 
largely unavailable. 

Due to concerns about the potential for NBCR attacks and the general 
lack of coverage offered by insurers, some policyholders said that they 
had established captive insurers to self-insure the risk and obtain 
federal reinsurance under TRIA.[Footnote 29] Captive insurers are 
generally established by major corporations, such as large real estate 
companies, to self-insure a variety of risks. Corporations may create 
captives for several reasons, including to obtain coverage for certain 
risks that may no longer be provided by the private market (such as 
medical malpractice insurance), access additional coverage directly 
from a reinsurer, or reduce tax payments. According to a representative 
from an insurance broker that helps companies in establishing and 
managing captives, companies either may add NBCR coverage to an 
existing captive insurer or may create one to cover NBCR risks. For 
example, a representative from a national real estate company told us 
that he had difficulty finding terrorism insurance at prices viewed as 
reasonable and without restrictions, so the company established a 
captive that covered NBCR risks. Although captives may help some 
companies limit their potential exposure from NBCR attacks, available 
information suggests that captives are not widely used for this 
purpose, perhaps because companies may lack the financial resources 
necessary to do so.[Footnote 30] To illustrate, representatives from 18 
percent of the 39 policyholders we contacted and 6 percent of the 377 
respondents to the RIMS survey that we have previously discussed 
reported using captives to insure NBCR risks. 

Workers' Compensation, Life, and Health Insurers Generally Cover NBCR 
Risks Due to State Requirements: 

Unlike property/casualty insurers, workers' compensation insurers we 
contacted said that they offer NBCR coverage because they generally are 
not permitted to exclude it under state laws and regulations. As we 
found in 2006, applicable state laws generally require workers' 
compensation insurers to cover all perils, including those from NBCR 
risks. Under state workers' compensation laws, employers are 
responsible for covering unlimited medical costs and a portion of lost 
earnings for injuries or illnesses that occur during the course of 
employment, regardless of the cause, according to NAIC. 

Similarly, we were told that group life insurers generally do not 
exclude NBCR coverage from their policies, according to regulators and 
industry participants. Officials from five of the six state insurance 
regulators that we interviewed reported that they do not allow 
terrorism or NBCR attacks to be excluded from life insurance 
policies.[Footnote 31] However, officials from these regulatory 
agencies also said that their states had not enacted laws that 
explicitly require insurers to offer such coverage. Given the lack of 
statutory requirements, officials from Washington, D.C., told us that 
group life insurers in the District could exclude NBCR risks from their 
coverage. However, representatives from the American Council of Life 
Insurers, a national trade association for life insurers, reported that 
they were not aware of the use of NBCR exclusions and believed that 
group life insurers generally cover NBCR risks; officials from several 
large life insurance companies confirmed that they provided coverage. 

Finally, health insurers also generally cover NBCR risks, according to 
state regulators, representatives from America's Health Insurance 
Plans, and health insurers we contacted. According to industry 
participants, health insurers generally are required to pay claims, 
regardless of the cause that led to the claim. Insurance regulatory 
officials from several states with locations viewed as high risk-- 
California, Georgia, Illinois, Massachusetts, and New York--told us 
that they do not permit health insurers to exclude NBCR coverage from 
their policies. However, regulatory officials in Washington, D.C., said 
that health insurers were not mandated to cover NBCR risks in the 
District and insurers had filed policies with NBCR exclusions. In 
addition, a representative from one large health insurer said that the 
insurer would invoke the force majeure clause--a general contract 
provision used to relieve parties from their responsibilities due to 
circumstances beyond their control, such as acts of God--to exclude 
NBCR risks. However, representatives from two state regulators we 
interviewed told us they were not familiar with the force majeure 
clause, and an official from the Georgia Department of Insurance told 
us he did not think the clause would apply to terrorist acts involving 
NBCR materials. 

Potential Financial Consequences of NBCR Attacks Limit Property/ 
Casualty Insurers' Willingness to Offer Coverage; Insurers for Other 
Lines of Insurance Report Limited Capacity to Manage Associated Risks: 

Commercial property/casualty insurers and reinsurers generally are not 
willing to provide coverage for NBCR attacks or place significant 
restrictions on the coverage they offer because of the uncertainties 
surrounding such attacks and their potential for generating 
catastrophic losses. Although private workers' compensation insurers 
generally have greater flexibility than state funds to limit their 
exposure to losses from NBCR attacks by not offering coverage to 
certain employers, both private insurers and state funds may face other 
challenges in managing the risks associated with terrorist attacks 
involving NBCR weapons, such as limits on their ability to price such 
risks and obtain private reinsurance. Life and health insurers may also 
face challenges in managing NBCR risks, such as competitive market 
pressures and challenges in establishing appropriate premiums for their 
potential exposures. 

Commercial Property/Casualty Insurers and Reinsurers Are Concerned 
about the Uncertainty and Potential Enormity of Losses from NBCR 
Attacks: 

As we stated in our September 2006 report, many insurers view terrorist 
attacks, particularly attacks involving NBCR materials, as an 
uninsurable risk because of uncertainties about the severity and 
frequency of such attacks. Insurance companies typically manage and 
assess risk on the basis of their expected losses, using historical 
information about the range of damages (severity) and the number of 
incidents in a given period of time (frequency). For some risks, such 
as those related to driving automobiles, insurers have access to a 
substantial amount of statistical and historical data on accidents, 
from which they can predict expected losses and then calculate premiums 
that are adequate to cover these losses. Large claims from automobile 
accidents also generally do not occur to a large number of 
policyholders at the same time, which serves to limit insurers' 
exposures. In contrast, catastrophes, including natural disasters such 
as hurricanes as well as terrorist attacks, present unique challenges 
to insurers because they may result in substantial losses and are 
relatively infrequent. To address these challenges, insurers may use 
computer models developed internally and by outside firms to help 
estimate the financial consequences of various disaster scenarios, and 
in some cases, to develop appropriate premiums. However, as we have 
previously noted, due to data limitations, estimating the potential 
consequences of terrorist attacks is fundamentally different and 
substantially more difficult than forecasting natural catastrophes. For 
example, substantial data are available on the frequency and severity 
of hurricanes, but the United States has experienced relatively few 
terrorist attacks, particularly those involving NBCR materials. 
[Footnote 32] 

Estimates of the potential severity of attacks involving NBCR materials 
may be particularly difficult to produce for several reasons, according 
to insurance industry participants and representatives from firms that 
have developed computer models for catastrophe risks. For example, as 
we previously have discussed, a wide range of potential weapons are 
associated with NBCR attacks, which could result in varying amounts of 
property damage as well as injuries and deaths (see fig. 1). While 
estimates for the damage resulting from nuclear blast in an urban area 
exceed the loss estimates for a chemical attack on a single building or 
facility, loss estimates also may vary for different types of attacks 
using the same agent. For example, one modeling firm has produced a 
scenario in which a moving truck releases anthrax in a highly populated 
urban area creating total insured losses of $144 million, 20 times 
higher than if the anthrax were released through a sprayer inside the 
ground floor of a large building.[Footnote 33] Representatives of 
insurers and reinsurers we interviewed expressed concerns about models' 
ability to account for all of the potential losses associated with an 
NBCR attack, such as business interruption and litigation costs, which 
may be difficult to quantify. In addition, a recent report by one 
modeling firm stated that decisions about the extent of cleanup 
required for nuclear and radiological contamination likely will be made 
after the attack, creating further uncertainties about the cost of 
rebuilding or remediation.[Footnote 34] 

Figure 1: Examples of Potential Property/Casualty and Workers' 
Compensation Losses from Different NBCR Scenarios in New York City: 

[Refer to PDF for image] 

This figure is a chart presenting the following information: 

Attack in New York City: 

Type: Chemical; 
Form: Sarin gas; 
Size: 1,000 kg ground dispersal; 
Estimated losses (dollars in billions): $34; 
Estimated fatalities (numbers in thousands): 6,000. 

Type: Radiological; 
Form: Dirty bomb; 
Size: 15,000 curies of Cesium-137; 
Estimated losses (dollars in billions): $43; 
Estimated fatalities (numbers in thousands): A few. 

Type: Biological; 
Form: Anthrax; 
Size: 1 kilogram anthrax slurry; 
Estimated losses (dollars in billions): $118; 
Estimated fatalities (numbers in thousands): 34,000. 

Type: Biological; 
Form: Anthrax; 
Size: 10 kilograms anthrax slurry; 
Estimated losses (dollars in billions): $254; 
Estimated fatalities (numbers in thousands): 80,000. 

Type: Biological; 
Form: Anthrax; 
Size: 75 kilograms anthrax slurry; 
Estimated losses (dollars in billions): $501; 
Estimated fatalities (numbers in thousands): 207,000. 

Type: Nuclear; 
Form: Nuclear power plant sabotage; 
Size: Nearby nuclear power plant; 
Estimated losses (dollars in billions): $217; 
Estimated fatalities (numbers in thousands): A few. 

Type: Nuclear; 
Form: Nuclear bomb; 
Size: Battlefield, 1 kiloton; 
Estimated losses (dollars in billions): $205; 
Estimated fatalities (numbers in thousands): 1,300,000. 

Type: Nuclear; 
Form: Nuclear bomb; 
Size: Tactical, 5 kiloton; 
Estimated losses (dollars in billions): $584; 
Estimated fatalities (numbers in thousands): 3,000,000. 

Sources: Risk Management Solutions, Inc.; Art Explosion (images). 

Note: According to Risk Management Solutions, Inc, the dirty bomb 
scenario would use a TNT detonation to disperse spent fuel rods of 
Cesium-137. In the anthrax slurry attack, anthrax would be aerosolized 
and released in a watery mixture by a high pressure hose. A battlefield 
1 kiloton bomb would come from a suitcase-size bomb, and the tactical 5 
kiloton bomb would come from a larger nuclear device. 

[End of figure] 

Insurers also face challenges with developing frequency estimates for 
NBCR attack scenarios. Representatives of risk modeling firms told us 
they use worldwide incidents of NBCR attacks and researchers' opinions 
on terrorists' capabilities and potential targets to develop estimates 
for NBCR event frequency. However, some insurance industry participants 
described frequency estimates of NBCR attacks as too subjective to be 
used as a basis for pricing coverage, because views on the frequency of 
attacks vary. For example, while one modeling firm stated in a recent 
report that its estimates for the frequency of terrorist attacks are 
0.6 events per year, or 2.0 events every 3 years, the representative of 
a large commercial property/casualty insurer said that his firm viewed 
the risk as occurring once every 8 years.[Footnote 35] Furthermore, 
insurance experts said that terrorists continue to adjust their 
strategies, thereby making past attacks a poor predictor of future 
events. 

Because insurers and reinsurers face challenges in reliably estimating 
the severity and frequency of terrorist attacks involving NBCR 
materials and setting appropriate premiums, industry representatives 
reported that their companies focus on the most catastrophic attacks 
under scenarios with widespread financial losses. For example, some 
representatives of property/casualty insurers told us that the scale of 
a nuclear blast could have a devastating impact on an insurer that 
chose to offer NBCR coverage, because such an attack could destroy or 
render uninhabitable many or all buildings within a large metropolitan 
area. In contrast, we have previously reported that since TRIA was 
enacted, insurers have some ability to limit their potential losses 
from terrorist attacks involving conventional weapons such as truck 
bombs, because the damage resulting from such attacks might be confined 
to a smaller geographic area, such as a radius of several blocks from 
the attack.[Footnote 36] Representatives of insurers we contacted told 
us their companies may limit their property/casualty coverage in 
locations viewed as at high risk for a terrorist attack, such as New 
York City; however, they reported that the potential losses from an 
NBCR attack could far exceed what their company would be able to cover. 
As we reported in 2006, academic experts and industry participants have 
pointed out that insurers have little incentive to insure catastrophic 
events that might jeopardize their financial soundness and solvency, so 
insurers remain unwilling to offer coverage for NBCR attacks. 

Private Workers' Compensation Insurers Have Somewhat Greater 
Flexibility to Manage NBCR Risks by Choosing Which Employers to Offer 
Coverage, but Private Insurers and State Funds Face Other Risk 
Management Challenges: 

Although private and state workers' compensation insurers generally 
must cover losses resulting from NBCR attacks, private companies 
generally have greater flexibility in managing their exposures to 
losses from NBCR attacks under the TRIA program. Specifically, private 
insurers may choose to which employers they will offer coverage. 
[Footnote 37] Accordingly, representatives of private insurers reported 
that their companies have monitored or limited coverage offerings to 
employers with employees concentrated in locations considered to be at 
higher risk for an NBCR attack. For example, representatives of 
smaller, more regionally based insurers said their companies decided 
not to offer coverage for certain employers that have employees 
concentrated in densely populated locations, or limited their overall 
coverage offerings for workers' compensation in urban areas.[Footnote 
38] 

In contrast to private insurers, state workers' compensation funds 
generally are unable to limit their NBCR risks on the basis of 
employers' perceived risk levels. State laws and regulations generally 
require state funds to provide coverage to all employers--regardless of 
their location or risk level--and serve either as the state's sole 
insurer or as the insurer of last resort. While officials from some 
state funds we contacted said that they were concerned about exposure 
to losses from an NBCR attack, they also said the nature of their 
funds' operations might limit that exposure to some degree. For 
example, representatives from some funds said that because they offered 
coverage to a significantly large group of employers of varying sizes 
across the state, their exposure to losses from NBCR attacks was 
somewhat diversified. 

Finally, representatives of private workers' compensation insurers and 
state funds told us that they faced some challenges in managing NBCR 
exposures, such as pricing the risk and obtaining adequate amounts of 
private reinsurance. Recognizing workers' compensation insurers' 
exposure to terrorism risks, state regulators in at least 37 states, 
including the District of Columbia, have permitted insurers to apply a 
statewide surcharge, or additional premium, (which is on average about 
1 cent per $100 payroll) to cover the potential losses from terrorist 
attacks, including those involving NBCR materials.[Footnote 39] The 
National Council on Compensation Insurance, Inc. (NCCI), developed 
statewide surcharges based on the results of a model, as a way for 
insurers that underwrite in states that belong to NCCI to cover 
potential losses from terrorism, including those using NBCR materials. 
[Footnote 40] NCCI officials told us that their surcharges generally 
are uniform across a state and insurers using this surcharge generally 
cannot levy higher surcharges for employers they perceive to be at 
higher risk of terrorist attack. Furthermore, NCCI's surcharges were 
developed to cover potential losses from terrorist attacks involving 
conventional as well as NBCR weapons. Officials from the New York 
Compensation Rating Board, which develops workers' compensation rate 
proposals for the state of New York (which does not belong to NCCI), 
also told us the state's surcharges were developed to cover potential 
losses from both conventional and NBCR terrorist attacks. However, as 
we stated in our 2006 report, state regulators and insurance 
representatives advised us that any surcharges that insurers may be 
permitted to charge for NBCR exposure likely would not cover potential 
losses. Similarly, representatives of private workers' compensation 
insurers we contacted for this report that underwrite coverage in 
locations considered at high risk for terrorist attacks said that their 
surcharges for terrorism may not cover all of their potential exposure. 
In addition, representatives of many of the private insurers and some 
of the state funds we interviewed said that they had little to no 
private reinsurance for NBCR risks, and that they would rely on TRIA in 
the event of a catastrophic NBCR attack. 

Group Life and Health Insurers May Face Challenges in Managing NBCR 
Risks: 

In contrast to workers' compensation insurers, life and health insurers 
may have somewhat more flexibility to manage the risks associated with 
terrorist attacks involving NBCR materials. For example, unlike 
workers' compensation insurers, the prices charged by group life 
insurers generally are not subject to state regulatory approval. Group 
health insurers generally are able to negotiate the terms of health 
care coverage with employers and employees, unlike workers' 
compensation benefits that are state-mandated. 

However, based on the limited amount of work we conducted, we found 
that for terrorist attacks involving NBCR materials, group life and 
health insurers face the following risk-management challenges: 

* Group life insurers may not actively seek to limit the amount of 
coverage that they offer in geographic markets perceived to be at high 
risk of attack, according to representatives from the American Council 
on Life Insurance (ACLI) and several large companies we contacted. 
According to these officials, the group life insurance market is highly 
competitive, with insurers competing to cover employers, even in 
densely populated urban areas at risk for terrorist attacks. 
Furthermore, life insurers' use of models to manage the risks 
associated with providing coverage in densely populated areas may be 
limited. We spoke with representatives from two group life insurers 
that reported that while they have started to use models to review the 
impact of catastrophic scenarios, they lack specific data on the 
location of employees from some employers to monitor their 
concentration of insured individuals. An ACLI representative said that 
group life insurers with exposures across the country may be better 
able to manage risks from an NBCR attack than smaller, more regional 
insurers with portfolio concentrations near target locations. 

* We also previously reported on the difficulties group life insurers 
face in charging higher premium rates to employers perceived to be at 
higher risk of terrorist attacks, including attacks involving NBCR 
materials.[Footnote 41] Life insurers price their products on the basis 
of mortality tables derived from experience with prior insurance 
contracts and calibrated to the effects of individual characteristics, 
such as smoking, or group characteristics, such as occupation type. 
According to ACLI, group life insurance policies currently are not 
designed or priced to account for catastrophic financial losses and 
mass casualties from an unpredictable terrorist attack with an NBCR 
weapon. 

* Similarly, health insurers may face difficulties in setting premium 
rates to address the risks of terrorist attacks, including those 
involving NBCR materials. For example, health insurers said that they 
generally price coverage on the basis of previous experience with 
insured populations, and that without knowing the frequency and 
severity of NBCR risks, they could not develop actuarially sound prices 
for such a risk. Furthermore, because illnesses or symptoms of 
illnesses resulting from NBCR attacks could take years to develop, it 
might be very difficult for insurers to establish appropriate premiums 
for such long-term risks. 

Proposals to Increase Coverage for NBCR Attacks in the Property/ 
Casualty Market Have Advantages and Disadvantages: 

Because the current commercial property/casualty market generally lacks 
coverage for terrorist attacks involving NBCR materials, the two 
proposals we reviewed to increase the availability of such coverage 
focus on that market. The proposals involve the federal government 
assuming most or all of the associated financial liabilities of such 
attacks. For example, an early version of the bill to reauthorize TRIA 
in 2007 would have required insurers to make NBCR coverage available 
and would have lowered their exposure to potential losses. While such a 
proposal may increase the availability of NBCR insurance, some industry 
participants believe it would disrupt insurance markets. Alternatively, 
some industry participants have suggested that the federal government 
should fully insure losses from terrorist attacks involving NBCR 
materials, similar to other federal disaster insurance programs. This 
program could help ensure the availability of NBCR insurance, according 
to some industry participants, but others said the program could result 
in substantial losses to the federal government. 

Proposal 1: Amend TRIA to Require Insurers to Make NBCR Coverage 
Available with the Federal Government Assuming Greater Financial 
Responsibility for Potential Losses: 

The House of Representatives initially passed an early version of the 
2007 reauthorization of TRIA that would have amended the act to (1) 
require insurers to make NBCR coverage available to policyholders, and 
(2) require the federal government to assume a relatively high 
proportion of the associated financial risk. With certain exceptions, 
the proposal would have required insurers to offer coverage for NBCR 
attacks under terms, amounts, and other coverage limitations that did 
not differ materially from their coverage for other types of risks. The 
proposal would have allowed an insurer to exclude NBCR coverage 
altogether (except for workers' compensation or other state coverage 
requirements) or offer a separate NBCR terrorism policy at different 
terms, amounts, and other coverage limitations than other types of 
coverage, if a policyholder rejected an insurer's initial offer for 
coverage. To compensate insurers for the risks associated with 
providing NBCR coverage, the proposal initially would have set 
insurers' TRIA deductibles for such attacks at 3.5 percent of direct 
earned premiums, substantially lower than the 20.0 percent deductible 
insurers would pay under the current program for terrorist attacks in 
general.[Footnote 42] In addition, under this proposal, insurers' 
copayment, or additional share of losses, for an NBCR attack would have 
varied depending on the size of the losses associated with the attack. 
In the case of a smaller NBCR attack, an insurer would have paid 15 
percent of its losses after paying its deductible, and for very large 
NBCR attacks, 5 percent.[Footnote 43] Additionally, the proposal would 
have permitted insurers to voluntarily reserve some of their 
conventional and NBCR terrorism premiums, tax-free, in a fund 
maintained by Treasury to cover the TRIA deductibles or copayments 
associated with losses from future terrorist attacks.[Footnote 44] 

Given insurers' general reluctance to provide NBCR coverage, some 
industry participants we contacted stated that this proposal was 
reasonable. For example, a representative from one insurer said that 
unless mandated to do so, insurers would not offer coverage for NBCR 
risks. Representatives from other insurers and industry participants, 
including regulators, told us that limiting insurer losses for NBCR 
events would help insurers better manage risks associated with NBCR 
attacks. With their financial exposures limited, insurers could more 
easily develop terms and conditions for NBCR coverage to policyholders 
and offer the coverage at lower rates. In addition, some industry 
participants said that the provision in the legislation allowing for 
separate pricing of NBCR coverage would (1) allow insurers to tailor 
insurance coverage and prices to the type of terrorist attack, and (2) 
provide policyholders with the choice of purchasing NBCR and 
conventional terrorism coverage together or separately. 

A recent study by the RAND Corporation found that requiring insurers to 
offer NBCR coverage, with the federal government assuming significant 
financial liability for the associated losses from large attacks could 
be beneficial.[Footnote 45] For example, the RAND study stated that 
under such a program the number of policyholders purchasing coverage 
would increase substantially from current levels.[Footnote 46] 
Furthermore, the study concluded that the federal government's expected 
outlays for compensation and assistance following attacks involving 
NBCR materials actually might decrease. Given that property/casualty 
coverage for NBCR attacks is largely unavailable, in the event of such 
an attack, the study noted that the federal government might decide to 
provide a large amount of disaster assistance or other compensation 
following an attack, as it has done for the victims of natural 
catastrophes and terrorist attacks. If insurers were required to 
provide some coverage for NBCR attacks, the study concluded that the 
federal government's expected costs could be somewhat lower under 
certain conditions than otherwise would be the case.[Footnote 47] 

Some industry participants also suggested that insurers could use 
different strategies in addition to TRIA to further manage the risks 
associated with providing NBCR coverage, as would be mandated under 
this proposal. In particular, some participants said they favored 
insurers forming risk pools or changing tax laws to permit insurers to 
set aside tax-deductible reserves to offset some of the losses 
associated with terrorist (including NBCR) attacks, similar to 
provisions in the legislative proposal.[Footnote 48] We have reported 
that establishing a group of insurance companies to pool their assets 
could allow insurers to provide a greater amount of coverage for the 
entire market than could be provided by each individual company. 
Furthermore, as we discussed in our prior reports, allowing either a 
pool or individual insurers to maintain tax-deductible reserves could 
provide the industry with incentives to expand capacity to cover 
catastrophic risks, such as attacks with NBCR materials.[Footnote 49] 
Table 2 provides information on existing or proposed pooling 
arrangements in the United Kingdom and the United States that are 
designed to help insurers manage the risks associated with terrorist 
attacks involving NBCR materials or accidents involving nuclear 
materials. 

Table 2: Examples of Proposed or Existing Pooling Arrangements: 

Pooling arrangement: Pool Reinsurance Company, Limited (Pool Re); 
Program description: A mutual reinsurer in the United Kingdom that 
provides reinsurance for terrorism and NBCR risks for members' 
commercial property policies. Terrorism coverage is optional for 
policyholders, and participation is voluntary for insurers, but member 
insurers must reinsure all terrorism coverage with Pool Re; 
Program funding: In the event of an act of terrorism, coverage from 
Pool Re takes effect after members pay individual deductibles. If the 
resources of Pool Re are exhausted, the United Kingdom government 
provides an unlimited guarantee. Pool Re pays the government a premium 
for this guarantee and would have to repay the Treasury any amount 
received from the guarantee; 
Reserves taxed? No. 

Pooling arrangement: Industry proposed U.S. reinsurance pool; 
Program description: A national reinsurance pool for commercial 
property terrorism risk, including NBCR risks. Insurers would continue 
to charge policyholders their own rates for terrorism coverage and 
would purchase reinsurance from the pool; 
Program funding: In the event of a terrorist attack, the insurance 
industry would pay 5 percent of losses, and the pool would pay 95 
percent of losses up to $40 billion. If the pool did not have the 
resources to pay its share of losses, it could issue bonds. The federal 
government would be responsible for losses in excess of $40 billion, up 
to $100 billion. Losses above $100 billion would be reviewed by 
Congress; 
Reserves taxed? No. 

Pooling arrangement: Price Anderson reinsurance pool; 
Program description: Provides for liability coverage for all commercial 
nuclear reactors in the event of a catastrophic incident. Approximately 
22 insurance companies participate in American Nuclear Insurers (ANI), 
a joint underwriting association that underwrites and administers the 
policies. Insurers participate on a voluntary basis, subject to certain 
membership requirements; 
Program funding: All reactors are required to carry $300 million in 
primary liability insurance, which is written primarily by ANI. ANI's 
premium reserve fund and capacity from member insurers cover claims on 
these policies. If losses exceed the primary coverage, a pool financed 
by retrospective premiums equally assessed to all commercial nuclear 
reactors provides reinsurance. A 5 percent surcharge per commercial 
nuclear reactor may be imposed to provide additional funding to cover 
damages resulting from a nuclear incident; 
Reserves taxed? According to ANI, member insurers only pay taxes on 
portion of premiums they receive as reimbursement for their expenses. 

Sources: GAO, Aon, and ANI. 

Note: For more information on Pool Re, see GAO, Terrorism Insurance: 
Alternative Programs for Protecting Insurance Consumers, [hyperlink, 
http://www.gao.gov/products/GAO-02-175T] (Washington, D.C.: Oct. 24, 
2001). Aon, which is a global insurance broker, issued a report on the 
commercial property terrorism market that included a long-term pooling 
proposal to address the issue of terrorism risk in the United States. 
See Aon, Property Terrorism Update, TRIA in the Balance (New York, 
N.Y.: October 2005). 

[End of table] 

However, other industry participants cautioned that requiring insurers 
to provide NBCR coverage, even with the federal government assuming a 
relatively high percentage of the associated financial exposure, could 
have adverse consequences for insurance markets. For example, a variety 
of industry participants said that under such a mandate, insurers may 
be less willing to offer property/casualty coverage and may withdraw 
from the market or not offer coverage in areas viewed as at high risk 
of attack. Some industry participants expressed particular concern 
about the impact that such a proposal would have on smaller insurers. 
While this proposal substantially would have lowered the deductible for 
attacks involving NBCR materials, a few industry participants said that 
the proposed copayments for such attacks still could be substantial for 
smaller insurers. The officials said that smaller insurers may lack the 
financial capacity to cover such potential costs. 

In addition, some industry participants and policyholders said that 
this proposal could be prohibitively costly to policyholders and 
taxpayers. As we have previously discussed, industry participants said 
that estimates of the severity and frequency of terrorist attacks 
involve many uncertainties, making pricing difficult. Consequently, 
some industry participants said that insurers, faced with a mandate of 
providing NBCR coverage, might set premiums at rates they consider 
necessary to compensate for the risks of a catastrophic attack, which 
could deter many commercial entities from purchasing such coverage. For 
example, two researchers we contacted said that when Pool Re expanded 
its coverage to include NBCR risks after the September 11 attacks, 
prices for terrorism coverage doubled. In addition, some industry 
participants said that if the federal government were liable for a 
greater portion of insured losses resulting from an NBCR attack, then 
the overall costs to the taxpayer from that attack could be 
significant. Furthermore, although the RAND study concluded that costs 
to the federal government could be reduced by requiring insurers to 
offer NBCR coverage, the study noted that in the case of extremely 
large NBCR attacks, the federal government's financial liability could 
be larger than if it did not participate in the market for terrorism 
insurance and require insurers to offer NBCR coverage. We also note 
that the federal government's total costs could be higher under this 
option than the current situation where NBCR coverage is generally 
unavailable, and Congress later decided to provide additional funding 
to pay for uninsured losses from such an attack. 

Finally, information from our previous work, as well as interviews with 
some industry participants, raises questions about whether establishing 
pools or permitting insurers to maintain tax-deductible reserves 
materially would enhance available coverage for terrorist attacks, 
including those involving NBCR materials.[Footnote 50] According to 
industry participants and a study by a global consulting firm on a 
proposed pool for workers' compensation coverage for terrorism risk, a 
reinsurance pool might not create new industry capacity or bring in 
additional capital to support writing more business.[Footnote 51] The 
study noted that if the overall industry does not have enough capital 
to manage the risk of an NBCR attack, then neither would an industry 
pool that simply combines existing industry capital in a new structure. 
Furthermore, we have reported that overall insurance capacity might not 
increase if a pool or individual insurers were allowed to establish tax-
deductible reserves. Because reinsurance premiums already are tax- 
deductible, insurers would receive similar tax benefits from 
traditional reinsurance, pool reinsurance, or individual reserves. 

Therefore, insurers might substitute the pool reinsurance or individual 
reserves for their current reinsurance program, if that program 
includes coverage for NBCR attacks.[Footnote 52] 

Proposal 2: Federal Government Completely Insures Losses for Terrorist 
Attacks Involving NBCR Materials, with Insurers Administering the 
Program: 

Given concerns about the potential financial and other consequences of 
requiring insurers to provide NBCR coverage, some industry participants 
we contacted suggested that the federal government should develop a 
separate program to insure against such attacks. Under this proposal, 
the federal government would serve as insurer, covering all losses for 
NBCR attacks and charging premiums for providing these services. The 
insurance industry's role largely would be administrative, as some 
industry representatives reported that the industry would have the 
staff, processes, and experience in place to manage such tasks. For 
example, insurance companies could be responsible for collecting 
premiums, adjusting claims, and disbursing claims payments from the 
government to policyholders. This proposal could be similar to other 
federal insurance programs shown in table 3, where the government 
assumes most, if not all, of the risk.[Footnote 53] These other 
programs generally were created because of gaps in coverage in the 
private market or the perception that the risks were uninsurable. 

Table 3: Examples of Current and Past Federal Insurance Programs: 

Program name: Federal Crop Insurance Corporation; 
Program description: Insurance for farmers in the event their crops are 
damaged by floods, droughts, or other national disasters. The Federal 
Crop Insurance Corporation offers farmers varying subsidy rates for 
crop insurance, depending on the level of protection they seek; 
Insurance industry role: Private insurance companies sell and service 
crop insurance policies. Insurance companies share a percentage of the 
risk of loss or opportunity for gain associated with each insurance 
policy written. Companies also receive a percentage of the premium on 
policies sold to cover their administrative costs. 

Program name: National Flood Insurance Program (NFIP); 
Program description: Residential and commercial insurance available to 
participating communities to cover losses due to flooding. 
Policyholders may pay a subsidized, discounted, or full-risk rate 
premium, depending on the location of the property, amount of coverage, 
and when the community joined the program; 
Insurance industry role: Private-sector insurance agents and adjusters 
sell, service, and adjust claims. Participating insurance companies 
receive an expense allowance for their services and are required to 
remit premium income in excess of this allowance to the NFIP Fund. The 
companies also receive a fee for adjusting and settling claims. 

Program name: FAA Aviation Insurance Program; 
Program description: Prior to September 11, this program provided 
coverage for international flights into hostile territories. The 
program has since extended coverage to domestic flights, as an 
alternative to commercial third-party war risk insurance; 
Insurance industry role: None. FAA issues policies, collects applicable 
premiums, and pays claims. 

Program name: War Damage Corporation; 
Program description: A government-owned corporation that provided 
insurance against loss or damages from enemy attack during World War 
II. It was formed as the War Insurance Corporation on December 13, 
1942, after the attack on Pearl Harbor. All policies expired in 1947, 
and the War Damage Corporation was terminated, except for purposes of 
liquidation; 
Insurance industry role: The government hired insurers as agents and 
reimbursed them for their expenses. According to a Treasury official, 
they assumed risk for 10 percent of losses in excess of net premiums 
collected, subject to an industry cap. 

Sources: GAO, the Coalition to Insurance Against Terrorism, and 
Treasury. 

[End of table] 

While some industry analysts said that this proposal was the only way 
to ensure that NBCR coverage would be widely available, others 
expressed concerns about the potential costs of such a program to the 
federal government and its effects on the private market. With the 
government responsible for most, if not all, of the losses in the event 
of a terrorist attack involving NBCR materials, several industry 
participants expressed concerns about the potentially large post- 
disaster costs for the federal government and, ultimately, taxpayers. 
We note that other government disaster insurance programs have proven 
to be costly and have administrative challenges. For example, we have 
reported that while NFIP and the Federal Crop Insurance Program were 
created to provide affordable insurance coverage, they do not collect 
enough in premiums to fund potential losses from catastrophic 
disasters. Therefore, Congress has had to appropriate funds after 
disasters, such as floods, to pay catastrophic claims.[Footnote 54] 
Given the difficulties associated with reliably estimating the 
potential severity and frequency of terrorist attacks involving NBCR 
materials as discussed in this report, the federal government may face 
substantial challenges in establishing premiums sufficient to offset 
the risks involved in providing insurance coverage for such attacks. 

In addition to the large potential costs to taxpayers, industry 
participants expressed other concerns about the federal government 
assuming complete financial responsibility for potential NBCR property/ 
casualty losses. For example, some industry participants, including 
regulators, did not think that the government should be responsible for 
all of the potential losses from an NBCR attack and that insurers could 
assume some of the risk. Furthermore, we have previously reported that 
some industry participants believe that too much federal government 
involvement in disaster relief crowds out private insurance and reduces 
the private market's ability and willingness to provide insurance-based 
solutions to covering catastrophe risk.[Footnote 55] Finally, while 
insurers would play a largely administrative role under this proposal, 
some insurers expressed reservations about this potential 
responsibility because they have no experience training, equipping, and 
sending claims adjusters and other personnel into areas where NBCR 
materials have been released. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of the Treasury 
and NAIC for their review and comment. In their oral comments, Treasury 
officials said that they found the report informative and useful. They 
also provided technical comments that were incorporated where 
appropriate. 

NAIC provided written comments on a draft of this report, which have 
been reprinted in appendix II. In their comments, NAIC stated that the 
report was materially accurate and they agreed with our discussion on 
proposed policy proposals for expanding NBCR coverage in the commercial 
property/casualty market. However, NAIC reported a philosophical 
difference of opinion with comments in the draft report about the 
ability of workers' compensation insurers to charge risk-based premiums 
for attacks involving NBCR weapons. NAIC stated that our draft report 
contained references that implied that state insurance regulators, due 
to voter and legislative pressure, keep premium rates artificially low 
for workers' compensation insurers rather than relying on actuarial 
science. NAIC disputed what it characterized as our implied contention 
and suggested that the recent profitability of the insurance industry 
indicates that premiums have not been suppressed by regulatory actions. 

We made clarifications in the draft to address certain NAIC comments, 
such as more fully describing the surcharges that workers' compensation 
insurers may levy for covering losses from terrorist attacks, including 
those involving NBCR weapons. However, the draft report in no way meant 
to imply that state insurance regulators succumb to voter and 
legislative pressures in approving rates, and simply reported that 
workers' compensation insurers and some regulators we contacted for 
both our September 2006 report and this report said that they did not 
believe the permissible surcharges would be sufficient to cover the 
potential losses associated with an NBCR attack.[Footnote 56] Given 
that NBCR risks may not fully satisfy the principles of insurability, 
as we said in our September 2006 report, statements by representatives 
of workers' compensation insurers that question whether the permitted 
surcharges are sufficient to cover potential losses do not appear 
inherently unreasonable. As discussed in the final report, the 
permitted surcharge in many states is the same for conventional 
terrorist attacks and for those involving NBCR weapons and insurers 
generally are not permitted to levy higher surcharges for employers 
they perceive to be at higher risk of attack. Furthermore, we note that 
while NAIC reports that workers' compensation insurers have been 
profitable over the past several years, this does not mean that any 
premiums collected from this surcharge would be sufficient to cover the 
losses associated with a future NBCR attack. 

NAIC also commented on statements in the draft report regarding the 
ability of group life insurers to manage exposures to NBCR risks. 
Specifically, NAIC said that the competitive nature of group life 
insurance markets has more of an impact on group life insurers' 
decisions to provide NBCR coverage in their policies than any 
regulatory constraints. NAIC stated that if one group life insurer were 
to exclude coverage for NBCR risks, and other group life insurers did 
not exclude such coverage, the insurer excluding NBCR risks would be at 
a competitive disadvantage. NAIC concluded that employers may choose 
not to purchase coverage from the group life insurer that excluded NBCR 
risks, unless the price difference was substantial. We generally agree 
with NAIC that competitive market pressures may affect group life 
insurers' willingness to limit NBCR coverage, and note that the 
argument was included in the draft provided to NAIC for its review and 
comment. Nevertheless, we made some adjustments to the text to ensure 
that this analysis was better communicated throughout the final report. 
NAIC also provided additional technical comments and observations that 
were incorporated as appropriate. 

We also sent excerpts of our draft report to the six state regulators 
discussed in this report (California, Georgia, Illinois, Massachusetts, 
New York, and Washington, D.C.) for their review. Three state 
regulators responded that they did not have any changes to our 
characterization of NBCR requirements in their states, and one 
regulator provided a technical comment that we made. We also provided 
excerpts of the draft report to five other organizations referenced in 
this report, and all five responded, some with technical comments that 
were incorporated where appropriate. 

We are sending copies of this report to the appropriate congressional 
committees, the Department of the Treasury, NAIC, and other interested 
parties. The report is also available at no charge on our Web site at 
[hyperlink, http://www.gao.gov]. 

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

Signed by: 

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

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

Our objectives were to review (1) the extent to which insurers and 
reinsurers offer coverage for nuclear, biological, chemical, and 
radiological (NBCR) attacks; (2) the factors that contribute to the 
willingness of insurers and reinsurers to provide coverage for NBCR 
attacks and their ability to manage these risks; and (3) any public 
policy options for expanding coverage for these risks, given current 
insurance market conditions. 

To address the first objective, we reviewed relevant studies and 
interviewed representatives of more then 100 organizations, including 
insurer and policyholder trade associations; individual policyholders; 
national insurance and reinsurance brokers; and insurance and 
reinsurance companies with knowledge of the commercial property/ 
casualty, workers' compensation, group life, and health insurance 
markets nationwide and with expertise in specific geographic markets. 
We also interviewed local brokers, insurance companies, and local 
property owners in cities and regions with locations considered to be 
at high, moderate, and low risk of exposure to terrorist attacks. These 
locations included Atlanta; Boston; Chicago; New York; San Francisco; 
and Washington, D.C. We selected these markets on the basis of rankings 
of locations by risk of terrorism exposure from the Insurance Services 
Office (ISO), an insurance industry analytics firm. Insurers may use 
these rankings, which account for cities' risk of terrorist attacks and 
the potential for associated losses, as a basis for charging additional 
premiums for terrorism exposure, according to ISO and several 
regulators we contacted. We interviewed some participants in 
specialized insurance markets, including a nuclear pool, Bermuda 
reinsurers, and a national broker with expertise in environmental 
insurance. We spoke with representatives of policyholders that own 
hundreds of properties and other entities nationwide. These entities 
included large office towers in major U.S. cities, properties in 
proximity to high-profile federal buildings, hotels, industrial 
buildings, hospitals, sports stadiums, a chemical company, a railroad 
company, and residential properties in locations throughout the United 
States. In addition to one-on-one interviews, we also conducted group 
discussions with representatives of 14 policyholders at the annual Risk 
and Insurance Management Society, Inc. (RIMS), conference in San Diego, 
California, in April 2008. Although we selected industry participants 
to provide broad representation of market conditions geographically and 
by industry, their responses may not be representative of the universe 
of insurers, insurance brokers, policyholders, and regulators. As a 
result, we could not generalize the results of our analysis to the 
entire national market for commercial property/casualty, workers' 
compensation, group life, and health insurance. We determined that the 
selection of these sites and participants was appropriate for our 
objectives, and that this selection would allow coverage of locations 
considered to be at high, moderate, and low risk of exposure to 
terrorist attacks, and would obtain information related to NBCR 
coverage for major insurers, policyholders, and other organizations to 
generate valid and reliable evidence to support our work. 

We also reviewed the Department of the Treasury's 2005 Report to 
Congress, Assessment: The Terrorism Risk Insurance Act of 2002 and its 
results from a survey of commercial property/casualty insurers on the 
coverage they offered for NBCR risks. We were limited in our ability to 
use this information because it was unclear from the survey question 
whether an insurer offered NBCR coverage in one commercial property/ 
casualty policy or in all policies. We also reviewed results from a 
survey of risk managers conducted by RIMS of their membership. However, 
we also were limited in our ability to use results from this survey on 
purchase rates of NBCR insurance as a signal for approximating overall 
demand because of the low response rate (approximately 10 percent) to 
the survey. 

To address the second objective, we selected large, national insurance 
companies to interview on the basis of their market share in the states 
we studied--California, Georgia, Illinois, Massachusetts, and New York 
as well as Washington, D.C. In the commercial property/casualty and 
workers' compensation market, these national insurance companies held 
from 37 to 52 percent of the market share in the states we studied, 
according to information provided by the Insurance Information 
Institute. In addition, we interviewed representatives of regional 
insurance companies in our selected markets. We also spoke with 
representatives of seven reinsurance companies, including two of the 
largest worldwide reinsurance companies as well as risk modeling firms, 
state regulators, and two credit rating agencies. 

To select state workers' compensation funds, we compiled and analyzed 
available data on workers' compensation state funds based on 
information from the American Association of State Compensation 
Insurance Funds and the National Council on Compensation Insurance, 
Inc. We selected nine workers' compensation state funds on the basis of 
the: 

* presence of a metropolitan city in the state; 

* presence of cities considered at risk for terrorist attacks, 
developed using estimates from ISO; and: 

* type of state fund--either monopolistic (fund is the sole insurer in 
the state) or competitive (fund competes with private insurers to offer 
workers' compensation coverage)--and its size. 

To learn more about the coverage in the group life and health insurance 
markets and factors affecting that coverage, we interviewed state 
regulators in California; Georgia; Illinois; Massachusetts; New York; 
and Washington, D.C., as well as officials from the American Council of 
Life Insurers and America's Health Insurance Plans--two large national 
trade associations. We also interviewed several group life and health 
insurers with large shares of the market both nationally and in the 
selected states, as well as one large group life reinsurance company 
and a representative from a national brokerage firm with expertise in 
the reinsurance market for group life carriers. Although we selected 
insurers from each of the lines we studied to provide a broad 
representation of size and geographic scope, we could not generalize 
the results of our analysis to the entire population of private 
insurers or workers' compensation state funds. 

To address the third objective, we reviewed options proposed in 
legislation, discussed in our prior reports or in other reports, or 
suggested by industry participants. We also interviewed academics, 
representatives from research organizations, and consumer interest 
groups. Although these discussions did not produce a consensus about 
what measures would increase the availability of NBCR coverage, for 
this report we focused on two proposals deemed viable by a variety of 
industry participants. We selected the proposal to amend Terrorism Risk 
Insurance Act to require insurers to make NBCR coverage available and 
lower insurers' deductibles and co-payments from a recent legislative 
proposal. We selected the option for the federal government to insure 
losses for terrorist attacks involving NBCR materials from interviews 
conducted with industry participants. We compiled and analyzed the 
views of the industry participants listed above on these two proposals 
and reviewed our prior reports to obtain information about other 
federal insurance programs. We did not attempt to evaluate the 
prospective impact of these proposals and, therefore, did not come to 
any conclusions about the advisability of implementing them. 

We conducted this audit in Atlanta; Boston; Chicago; New York; San 
Diego; San Francisco; and Washington, D.C., from January 2008 to 
December 2008, in accordance with generally accepted government 
auditing standards. Those standards require that we plan and perform 
the audit to obtain sufficient, appropriate evidence to provide a 
reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the National Association of Insurance 
Commissioners: 

NAIC: 
National Association of Insurance Commissioners: 
Executive Headquarters:	
2301 McGee Street, Suite 800: 
Kansas City, MO 64108-2662: 
p: 816-842-3600; 
f: 1-816-783-8175: 
Government Relations: 
444 N. Capitol Street, NW, Suite 701: 
Washington, DC 20001-1509: 
p: 1-202-471-3990; 
f: 1-202-471-3972; 
Securities Valuation Office: 
48 Wall Street, 6th Floor; 
New York, NY 10005-2906; 
p: 1-212-398-9000; 
f: 1-212-382-4207; 
[hyperlink, http://www.naic.org] 

November 18, 2008: 

Orice M. Williams, Director: 
Financial Markets and Community Investment: 
United States Government Accountability Office: 
441 G St. NW, Room 2440B: 
Washington, DC 20548: 

RE: GAO Report on Terrorism Insurance Status of Coverage Availability 
for Attacks Involving Nuclear, Biological, Chemical, or Radiological 
Weapons: 

Dear Ms. Williams: 

The National Association of Insurance Commissioners (NAIC) appreciates 
the opportunity to comment on the captioned GAO report. The NAIC is 
always pleased to work with the GAO to make sure that members of 
Congress and the public are informed about important regulatory and 
public policy matters. 

The NAIC is a voluntary organization of the chief insurance regulatory 
officials of the 50 states, the District of Columbia and five U.S. 
territories. The NAIC's overriding objective is to assist state 
insurance regulators in protecting consumers and helping maintain the 
financial stability of the insurance industry by offering financial, 
actuarial, legal, computer, research, market conduct and economic 
expertise. Formed in 1871, the NAIC is the oldest association of state 
officials. For more than 135 years, state-based insurance supervision 
has served the needs of consumers, industry and the business of 
insurance at-large by ensuring hands-on, frontline protection for 
consumers, while providing insurers the uniform platforms and 
coordinated systems they need to compete effectively in an ever-
changing marketplace. 

There are some areas where the NATO believes there are technical 
corrections needed and a few areas where there is a philosophical 
difference of opinion about what the GAO has concluded. Our suggested 
changes follow: 

* The last sentence of the second paragraph of the Highlights says, 
"For example, state regulators generally do not permit workers' 
compensation insurers to charge risk-based premiums to employers." This 
is an area where the NAIC has a fundamental disagreement with the GAO's 
conclusion. The NAIC does not dispute that on occasion, regulators do 
not permit insurers to charge all that they wish. However, this 
reference and others imply that state insurance regulators are subject 
to voter and legislative pressure to keep premiums affordable and 
coverage readily available and succumb to these pressures instead of 
relying on actuarial science. The GAO seems to have fallen into a 
common trap of assuming that insurers and their actuaries have perfect 
information about what workers' compensation and terrorism losses will 
occur during the next year and how the economy will behave. The basic 
assumption made by the GAO and by academics that have concluded there 
is rate suppression, is that the actuaries working for insurers are 
always correct in their projections of the needed price for the future 
experience period and regulatory actuaries are always wrong if they 
disagree with the company actuaries. The truth arguably is somewhere in 
between. Projected loss costs to cover the insurer's exposure to losses 
vary widely depending on which risk modeling firm the insurer selects 
to produce its terrorism loss costs. If an insurer selects the output 
of a modeling firm that produces higher rates, the regulator might 
object and suggest that another modeling firm might be more 
appropriate. Your text and the work of academics that study this topic 
would brand that regulator as a rate suppressor, even if the insurer's 
future results prove that the regulatory actuary was correct. Recent 
financial performance for workers' compensation insurers shows that the 
industry is profitable with a 61.3% loss ratio for 2007, 60.7% for 2006 
and 65.5% for 2005. Over the three year time span, property and 
casualty insurers were able to increase their policyholder surplus from 
$427 billion to $530 billion. If the regulators are actively engaged in 
rate suppression and not letting insurers charge risk-based prices, how 
are they able to operate so profitably? 

* On page 2 of the report, the last sentence on the page says, "State 
insurance laws generally require workers' compensation insurers to 
cover all risks..." We suggest that you change "insurance" to "workers' 
compensation" as it is the workers' compensation laws not the insurance 
laws that contain this requirement. 

* The industry opinion disputed in the first bullet point of the letter 
appears again on page 6 in the 15th through 18th lines. It is correctly 
attributed to industry participants, but is incorrect as most states 
have allowed workers' compensation insurers to add a charge for 
covering acts of terrorism. The industry might believe that the 
additional rate is not sufficient; however, it is incorrect to say they 
are not generally allowed to charge higher premiums. 

* On page 6, lines 18 through 23 discuss the perspective of life 
insurers with regard to providing coverage for acts of terrorism on 
group life insurance contracts. We agree with the statements made, 
however, there is a missing element that is not captured in the text. 
It is generally the market conditions of the employee benefits market 
that have a greater influence on the coverages offered by group life 
insurers than any regulatory constraints. If one group life insurer 
decided it would not offer coverage for acts of terrorism, including 
NBCR, while other group life insurers offered the coverage, the one 
insurer excluding the coverage would be at a competitive disadvantage. 
Employers generally do not want to have to tell the surviving spouse 
and children that there is no compensation forthcoming for the loss of 
their loved one. Thus, the employer would have a natural tendency to 
select from the insurers providing the coverage rather than from those 
excluding the coverage, unless the price difference was substantial. 

* On page 12, we offer updated numbers for your consideration to 
replace those included from the Insurance Information Institute. We 
would suggest the following amended sentence: The Insurance Information 
Institute National Academy of Social Insurance reported that in 
20052006, just over half of workers' compensation benefits (50.850.38 
percent) were paid by private insurers, with the other half coming from 
state funds (19.'119.66 percent), federal programs (4,95.98 percent), 
and self-insured employers (23.823.98 percent). We believe that NASI is 
the source for the numbers used by the Insurance Information Institute. 

* On page 13, line 5 through 8, there is discussion about why workers' 
compensation insurers are not allowed to exclude coverage for acts of 
terrorism. The report says that it is "...because state regulators 
generally do not allow them to exclude such risks." A more accurate 
statement would be that state workers' compensation laws require the 
insurer to assume all of the obligations that an employer has to its 
employees as a result of work related accidents and injuries regardless 
of cause of loss. Further the mention for life insurers and health 
insurers misses the mark. See the comments for page 6, lines 18 through 
23 above. 

* On page 18, the last sentence in the second paragraph has further 
discussion on life insurance and coverage exclusions. The comments for 
page 6, lines 18 through 23 above also apply in this instance. 

* On page 19, lines 1 through 8 discuss the force majeure clause and 
the possibility that health insurers would use the standard clause to 
relieve them of responsibility for providing coverage for acts of 
terrorism. We would generally agree with the official from the Georgia 
Department of Insurance who suggested that the force majeure clause 
probably would not apply to terrorists acts involving NBCR materials. 
The force majeure clause is generally found in contracts other than 
insurance and is intended to relieve one of the parties of performance 
demanded by the contract for unforeseen events beyond the control of 
the party. These would include natural disasters or other "Acts of 
God," war, riots, crimes or the failure of third parties such as 
suppliers and subcontractors-to perform their obligations to the 
contracting party. Force majeure clauses are intended to excuse a party 
only if the failure to perform could not be avoided by the exercise of 
due care by that party. Taken to the extreme suggested by the industry 
representative, the force majeure clause could be used by homeowners 
insurers to deny claims for wind damage from a hurricane, damage from a 
riot or fire damage from a lightening strike (an Act of God). Clearly 
these contracts are intended to provide coverage for the very acts that 
the force majeure clause intends to disallow. 

* On page 19, the sixth line of the paragraph in the middle of the page 
suggests that private insurers can "restrict coverage" to certain 
employers. The choice of language implies something that insurers 
cannot do-namely restrict coverage within an individual contract. What 
the private insurer can do is not offer any workers' compensation 
coverage to the employer. This paragraph also contains the disputed 
allegation that state regulators will not let insurers charge risk-
based premiums. Please see the discussion in the first bullet point of 
this letter. 

* On page 24, the last line of the first paragraph has a missing word 
that changes the meaning of the last sentence. We suggest you add 
"offerings" between "coverage" and "for." Without the additional word, 
the sentence could be read to say that the insurers somehow limited 
workers' compensation coverage, perhaps by adding a terrorism exclusion 
or other type of impermissible coverage limitation. With the addition 
of "offerings," it is clear that the insurer is limiting coverage by 
not offering to insure certain employers. 

* On page 25, the allegation that regulators do not allow insurers to 
charge risk-based premiums appears again. Please refer to the 
explanation contained in the first bullet point of this letter. 

* On page 25, the first paragraph mentions that the rate for terrorism 
insurance is the same throughout the state. It might be tradition, more 
than regulation; that is to blame for this circumstance. The NCCI and 
other state-based workers' compensation advisory organizations have 
not, to our knowledge, ever encouraged the use of territorial rating 
for workers' compensation insurance. Workers' compensation is class 
rated using various occupational classifications that price the 
relative likelihood of the employees in the class to experience a work-
related injury or illness. It is also experience rated where an 
employer's loss experience is compared to the expected average loss 
experience of all employers with similar employees and the individual 
employer's rate is adjusted either upward or downward based on whether 
its loss experience is better or worse than average expected loss 
experience. 

* There is a discussion of the group life and health insurance 
challenges in managing NBCR risks that starts on page 25 and continues 
through page 27. The last bullet point in the section (page 26 and 27) 
has a discussion about how the insurer might have difficulty pricing 
NBCR risks because illnesses could take many years to develop. We do 
not disagree with the discussion; however, it seems to be missing one 
possible outcome. That is for the business to change health insurance 
providers. Thus the health insurer that was at-risk when the NBCR event 
occurred might not be the health insurer that ends up with the claim. 
The claim would instead go to the health insurer at-risk at the time 
the illness manifests itself. 

Overall, the reviewers believed that the report was materially accurate 
with the exceptions noted in this letter. The reviewers agree with the 
discussion regarding the options presented in the report for Congress 
to consider. 

Thanks again for all your hard work in making government accountable to 
the public that it serves. 

Sincerely, 

Signed by: 

Andrew J. Beal: 
Acting Executive Vice President and CEO: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

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

Staff Acknowledgments: 

In addition to the contact named above, Wesley M. Phillips, Assistant 
Director; Rudy Chatlos; Andrea Clark; Katherine Bittinger Eikel; Marc 
Molino; Jill M. Naamane; Linda Rego; Barbara Roesmann; Kathryn 
Supinski; and Shamiah Woods made key contributions to this report. 

[End of section] 

Related GAO Products: 

Terrorism Insurance: Status of Efforts by Policyholders to Obtain 
Coverage. [hyperlink, http://www.gao.gov/products/GAO-08-1057]. 
Washington, D.C.: September 15, 2008. 

Terrorism Insurance Availability: Initial Results on Availability of 
Terrorism Insurance in Specific Geographic Markets. [hyperlink, 
http://www.gao.gov/products/GAO-08-919R]. Washington, D.C.: July 11, 
2008. 

Homeland Security: First Responders' Ability to Detect and Model 
Hazardous Releases in Urban Areas Is Significantly Limited, [hyperlink, 
http://www.gao.gov/products/GAO-08-180]. Washington, D.C.: June 27, 
2008. 

Natural Disasters: Public Policy Options for Changing the Federal Role 
in Natural Catastrophe Insurance. [hyperlink, 
http://www.gao.gov/products/GAO-08-7]. Washington, D.C.: November 26, 
2007. 

Terrorism Insurance: Measuring and Predicting Losses from 
Unconventional Weapons is Difficult, But Some Industry Exposure Exists. 
[hyperlink, http://www.gao.gov/products/GAO-06-1081]. Washington, D.C.: 
September 25, 2006. 

Catastrophe Risk: U.S. and European Approaches to Insure Natural 
Catastrophe and Terrorism Risks. [hyperlink, 
http://www.gao.gov/products/GAO-05-199]. Washington, D.C.: February 28, 
2005. 

Terrorism Insurance: Effects of the Terrorism Risk Insurance Act of 
2002. [hyperlink, http://www.gao.gov/products/GAO-04-806T]. Washington, 
D.C.: May 18, 2004. 

Terrorism Insurance: Effects of the Terrorism Risk Insurance Act of 
2002. [hyperlink, http://www.gao.gov/products/GAO-04-720T]. Washington, 
D.C.: April 28, 2004. 

Terrorism Insurance: Implementation of the Terrorism Risk Insurance Act 
of 2002. [hyperlink, http://www.gao.gov/products/GAO-04-307]. 
Washington, D.C.: April 23, 2004. 

Catastrophe Insurance Risks: Status of Efforts to Securitize Natural 
Catastrophe and Terrorism Risk. [hyperlink, 
http://www.gao.gov/products/GAO-03-1033]. Washington, D.C.: September 
24, 2003. 

Catastrophe Insurance Risks: The Role of Risk-Linked Securities and 
Factors Affecting Their Use. [hyperlink, 
http://www.gao.gov/products/GAO-02-941]. Washington, D.C.: September 
24, 2002. 

Terrorism Insurance: Rising Uninsured Exposure to Attacks Heightens 
Potential Economic Vulnerabilities. [hyperlink, 
http://www.gao.gov/products/GAO-02-472T]. Washington, D.C.: February 
27, 2002. 

Terrorism Insurance: Alternative Programs for Protecting Insurance 
Consumers. [hyperlink, http://www.gao.gov/products/GAO-02-199T]. 
Washington, D.C.: October 24, 2001. 

Terrorism Insurance: Alternative Programs for Protecting Insurance 
Consumers. [hyperlink, http://www.gao.gov/products/GAO-02-175T]. 
Washington, D.C.: October 24, 2001. 

[End of section] 

Footnotes: 

[1] For statistics on the September 11, 2001, terrorist attacks, see 
Department of the Treasury, Board of Governors of the Federal Reserve 
System, Securities and Exchange Commission, and Commodity Futures 
Trading Commission, Terrorism Risk Insurance: Report of the President's 
Working Group on Financial Markets (Washington, D.C.: September 2006), 
8. 

[2] Charles Meade and Roger C. Molander, Considering the Effects of a 
Catastrophic Terrorist Attack (Santa Monica, Calif.: 2006). This 
scenario, developed by the RAND Center for Terrorism Risk Management 
Policy, involved a 10-kiloton nuclear bomb in a shipping container that 
explodes on the ground, shortly after the container is unloaded onto 
the pier. 

[3] Pub. L. No. 107-297, 116 Stat. 2322 (Nov. 26, 2002). Under TRIA, 
for 2007 and each year thereafter, the federal government would 
reimburse participating insurers for 85 percent of their losses up to a 
specified level, after the insurers pay a deductible equal to 20 
percent of an individual insurer's earned premium. 

[4] See GAO, Terrorism Insurance: Measuring and Predicting Losses from 
Unconventional Weapons Is Difficult, but Some Industry Exposure Exists, 
[hyperlink, http://www.gao.gov/products/GAO-06-1081] (Washington, D.C.: 
Sept. 25, 2006). Commercial property/ casualty insurance covers 
physical losses to property, business interruption or loss of the use 
of buildings due to property damage, and legal liability related to the 
maintenance of the property and business operations. Workers' 
compensation insurance covers employees for death or injuries as a 
result of a workplace incident. Group life insurers sell policies to 
members of a group, usually employees of the same company or members of 
the same association, to provide benefits to designated survivors after 
the death of the insured. Health insurance covers medical expenses 
resulting from sickness and injury. 

[5] Because TRIA requires that insurers offer terrorism coverage that 
does not "differ materially" from the coverage in the rest of the 
policy, in their initial offer of terrorism coverage, insurers may not 
add any additional exclusions or conditional language to the policies 
specifying any terrorism risk as not being covered. However, 
representatives of insurers reported that their long-standing 
exclusions for nuclear and pollution risks generally contained in their 
commercial property/casualty policies would apply to exclude coverage 
for NBCR damages caused by terrorist attacks. 

[6] TRIA provides federal reinsurance for insured losses only in 
commercial lines of property and casualty insurance, which includes 
workers' compensation policies among other things. TRIA does not 
include health or life insurance. See 15 U.S.C. § 6701 note (Terrorism 
Insurance Program § 102(12)). 

[7] Pub. L. No. 110-160, 121 Stat. 1839 (Dec. 26, 2007). 

[8] A pool of insurers provides joint coverage for losses at nuclear 
power plants. 

[9] Captive insurers are generally established by major corporations, 
such as large real estate companies, to self-insure a variety of risks. 

[10] Insurers rely on estimates of the severity (range of damages) and 
frequency (number of losses in a given time period) to predict expected 
losses and calculate premiums adequate to cover those losses. For 
example, insurers have access to large amounts of statistical and 
historical data on automobile accidents from which they can estimate 
expected losses; however, for infrequent and potentially catastrophic 
risks, such as NBCR attacks, insurers have little to no prior 
experience from which to use in estimating expected losses. 

[11] Private workers' compensation insurers are companies that may 
elect to provide coverage for workers' compensation in a state or for a 
particular employer. State workers' compensation funds are generally 
residual market programs established by the state to either (1) accept 
employers that cannot obtain insurance coverage in the private market 
or (2) serve as the monopoly or sole provider for workers' compensation 
insurance coverage in the state. 

[12] In prior reports, we have identified and reviewed other options 
for expanding insurance availability for natural catastrophes and 
terrorist attacks, such as allowing insurers to set aside tax- 
deductible reserves for such events, forming risk-sharing pools, or 
facilitating the issuance of catastrophe bonds through changes in the 
tax code. While some of these options (such as tax-deductible reserves 
and risk pools) are also discussed in this report, our analysis is in 
the context of insurers being required to provide NBCR coverage, with 
the federal government assuming a significant share of the associated 
financial exposure. The options we reviewed for this report were 
proposed either as initial legislation or by industry participants as a 
means to help insurers manage any NBCR risks that they would retain. 
However, given the nature of NBCR risks as discussed in this report, in 
the absence of a mandate that insurers provide NBCR coverage, these 
other options have limited support. See GAO, Terrorism Insurance: 
Status of Efforts by Policyholders to Obtain Coverage, [hyperlink, 
http://www.gao.gov/products/GAO-08-1057] (Washington, D.C.: Sept. 15, 
2008); and Catastrophe Risk: U.S. and European Approaches to Insure 
Natural Catastrophe and Terrorism Risks, [hyperlink, 
http://www.gao.gov/products/GAO-05-199] (Washington, D.C.: Feb. 28, 
2005). 

[13] The federal share of insured losses under TRIA is 85 percent, with 
insurers being responsible for a deductible of 20 percent of direct 
earned premiums as well as a copayment; the proposal would lower the 
deductible to 3.5 percent for losses resulting from an attack using 
NBCR materials the first year of the program and raise it incrementally 
thereafter. See H.R. 2761, 110th Cong. § 3 (2007). 

[14] Lloyd Dixon, Robert J. Lempert, Tom LaTourrette, and Robert T. 
Reville, The Federal Role in Terrorism Insurance: Evaluating 
Alternatives in an Uncertain World (Santa Monica, Calif.: 2007). 

[15] NAIC is an organization of state insurance regulators and serves 
to coordinate regulation of multistate insurers. 

[16] [hyperlink, http://www.gao.gov/products/GAO-06-1081]. 

[17] See 15 U.S.C. § 6701 note (Terrorism Insurance Program §§ 
102(7)(F) and 103(e)(1)(A)). Treasury regulation codified at 31 C.F.R. 
§ 50.5(d), defines "direct earned premium" as "a direct earned premium 
for all commercial property and casualty insurance issued by any 
insurer for insurance against all losses, including losses from an act 
of terrorism, occurring at locations" within the United States or, to 
U.S. Air Carriers or U.S. flag vessels, or at the premises of any U.S. 
mission. Treasury provided further clarification that direct earned 
premiums are "earned as reported to the NAIC in the Annual Statement in 
column 2 of Exhibit of Premiums and Losses (commonly known as Statutory 
Page 14)" and cover all risks, not only risks from terrorism. 

[18] The Terrorism Risk Insurance Program Reauthorization Act of 2007 
clarified language on insurers' liability, stating that insurers are 
not responsible for losses that exceed an annual liability cap of $100 
billion. See 15 U.S.C. § 6701 note (Terrorism Insurance Program § 
103(e)(2)(A)(i) and (ii)). 

[19] H.R. 2761, 110th Cong. § 3 (2007); H.R. 4314, 109th Cong. § 2 
(2005). 

[20] Id. 

[21] Texas is an exception; most employers in that state may elect not 
to have the protections of workers' compensation insurance. In at least 
35 states and Washington, D.C., employers may establish high-deductible 
programs with admitted insurers, where the employer covers losses under 
a net retention level and the insurer (or insurers) covers any claims 
above that amount, according to the National Council on Compensation 
Insurance, Inc. (NCCI). 

[22] As of September 30, 2008, and according to NCCI, these states are 
North Dakota, Ohio, Washington, and Wyoming. In addition, information 
from AASICF and NCCI indicated that in all but five states, the state 
fund cannot turn away or limit coverage. 

[23] Source: NAIC. In order to self-insure workers' compensation 
losses, employers must meet certain eligibility requirements proving 
they are financially able to do so. 

[24] In 2005, Treasury reported on results of a national survey of 
insurers that found, on average, that 35 percent of insurers in TRIA- 
eligible lines reported they wrote some coverage for NBCR terrorism 
risks. However, Treasury officials have stated some limitations with 
this figure, as some insurers responding to the survey may offer NBCR 
coverage in one commercial property/casualty policy and some may offer 
in all of their policies. See Department of the Treasury, Report to 
Congress, Assessment: The Terrorism Risk Insurance Act of 2002 
(Washington, D.C.: June 30, 2005). 

[25] See Couch on Ins. § 127.8 (2006). 

[26] According to information from the Insurance Information Institute 
and ISO, the states that do not allow exclusions to the Standard Fire 
Policy for terrorism--thereby requiring coverage for fire following an 
act of terrorism--are California, Georgia, Hawaii, Illinois, Iowa, 
Maine, Massachusetts, Missouri, New Jersey, New York, North Carolina, 
Oregon, Rhode Island, Washington, West Virginia, and Wisconsin. 
Connecticut and Virginia enable an exclusion of fire following a 
certified act of terrorism. Fire coverage in both of these states would 
be required if TRIA expired. 

[27] RIMS officials told us they surveyed their deputy members, or the 
company's highest-ranking individual responsible for making insurance 
decisions. Deputy members from 377 of 3,500 companies responded to the 
survey, about a 10 percent response rate. RIMS representatives told us 
that they could not determine the industry or the size of company the 
respondents represented. 

[28] In addition to one-on-one interviews with policyholders, we 
conducted group discussions with representatives of 14 policyholders at 
the annual RIMS conference in San Diego, California, in April 2008. 

[29] Under TRIA, insurers required to participate in the program are 
generally defined as entities, among others, licensed and or admitted 
to engage in the business of providing primary or excess insurance in 
any state. See 15 U.S.C. § 6701 note (Terrorism Insurance Program § 
102(6)(A)(i). Because captives are licensed and admitted by the states, 
captives may be insurers under TRIA and, therefore, may be eligible for 
payments for losses related to certified NBCR attacks. 

[30] States that allow corporations to set up captives may subject 
those captives to certain capital and licensing requirements. 

[31] Regulatory officials we interviewed were from California, Georgia, 
Illinois, Massachusetts, New York, and Washington, D.C. 

[32] In the United States, the number of terrorist attacks with 
significant insured losses includes the September 11 attacks, the 1995 
Oklahoma City Bombing, and the 1993 World Trade Center bombing, 
according to the Insurance Information Institute. In addition, as we 
previously have discussed, a limited number of incidents involving 
biological agents have occurred in the United States. See [hyperlink, 
http://www.gao.gov/products/GAO/NSIAD-99-163]. 

[33] See Stephen J. Carroll, Tom LaTourette, Brian G. Chow, Gregory S. 
Jones, and Craig Martin, Distribution of Losses from Large Terrorist 
Attacks Under the Terrorism Risk Insurance Act (Santa Monica, Calif.: 
2005). The authors concede that their analysis is limited by the sparse 
history of documented anthrax victims, so that "there is substantial 
uncertainty about the injury distribution that can be expected in an 
attack." 

[34] AIR, Proposed NBCR Changes to TRIEA [Terrorism Risk Insurance 
Extension Act] and Their Impact on Insurers' Terrorism Exposure 
(Boston, Mass: October 2007), 1. In addition, we have recently reported 
that urban plume models that federal agencies have developed 
specifically for tracking the release of NBCR materials in urban areas 
have major limitations in terms of predicting the path and the extent 
of contamination. See [hyperlink, 
http://www.gao.gov/products/GAO-08-180]. 

[35] Risk Management Solutions, Inc., Terrorism Risk: 7-Year 
Retrospective, 7-Year Future Perspective; RMS White Paper (Newark, 
Calif.: 2008). 

[36] We recently reported that insurers mitigate potential losses from 
a single, conventional terrorism attack by limiting the amount of 
property coverage that they would offer in confined geographic areas 
within cities. Using risk models, insurers map the locations of 
properties they cover as well as other types of coverage they provide 
in the area so that they can consider the extent to which one terrorist 
attack could trigger losses among multiple lines of insurance. See 
[hyperlink, http://www.gao.gov/products/GAO-08-1057] 

[37] Private insurers offering workers' compensation insurance policies 
can decide to which employers to offer coverage, but as we have 
previously discussed, their workers' compensation policies cannot 
contain any exclusions for losses from terrorist or NBCR attacks. 

[38] Residual market mechanisms called "assigned risk plans" can limit 
the ability of private workers' compensation insurers to manage NBCR 
risks in some states. In these states, employers that cannot obtain 
workers' compensation coverage in the private or "voluntary" market are 
assigned to private workers' compensation insurers, which administer 
their claims and share in the funding of those claims. Representatives 
of one private insurer we contacted told us that with assigned risk 
policyholders, their company has less information about the type and 
location of the employer. See also Patricia Danzon and Scott E. 
Harrington, "Workers' Compensation Rate Regulation: How Price Controls 
Increase Costs," Journal of Law and Economics, vol. 44, no. 1 (April 
2001), 5. 

[39] One cent per $100 payroll is the average for the voluntary 
workers' compensation terrorism surcharge. The highest surcharge 
developed by NCCI is 5 cents per $100 payroll, used in Washington, D.C. 

[40] NCCI is an organization that prepares insurance rate (price) 
recommendations for workers' compensation insurance. 

[41] [hyperlink, http://www.gao.gov/products/GAO-06-1081]. 

[42] See H.R. 2761, 110th Congress (September 2007). For property/ 
casualty insurance, this deductible would have increased by 50 basis 
points (0.5 percent) each succeeding program year. 

[43] The bill provided for different copayments depending on the amount 
of losses from an attack. The federal share of compensation for insured 
losses would have been 85 percent of aggregate industry qualified NBCR 
losses of less than $10 billion, 87.5 percent for losses from $10 
billion to $20 billion, 90.0 percent for losses from $20 billion to $40 
billion, 92.5 percent for losses from $40 billion up to $60 billion, 
and 95.0 percent above $60 billion. In contrast, the federal share of 
insured losses for terrorist attacks in general is 85.0 percent, 
regardless of the amount of losses from an attack, up to the $100 
billion cap. 

[44] Specifically, section 4 of the proposed legislation would have 
established a Terrorism Buy-Down Fund. Insurers also could have used 
the premiums reserved in this fund to pay for losses from an attack 
that did not meet the $100 million TRIA program trigger, which could 
have benefited smaller insurers. 

[45] See The Federal Role in Terrorism Insurance. Specifically, the 
study analyzed the effect of modifying TRIA to require insurers to 
offer policies that cover NBCR and conventional attacks with a reduced 
deductible for NBCR attacks and a hard program cap on the total amount 
of losses for which insurers would be responsible. The analysis in the 
study suggested that providing for a specific limit on total insurer 
losses and lowering the deductible were critical to achieving positive 
outcomes if TRIA were to be modified to require insurers to offer 
coverage for NBCR terrorist attacks. 

[46] The RAND study did not analyze the effect of allowing 
policyholders to purchase NBCR coverage separately from conventional 
coverage. However, the authors noted that because existing research 
suggests overall low demand for NBCR coverage, allowing NBCR coverage 
to be offered separately might not result in substantial increases in 
the number of policyholders purchasing such coverage. 

[47] The RAND study found that partial government reimbursement of 
insurer losses in the larger, and they presumed less likely, NBCR 
attacks would lower prices for NBCR coverage and increase the 
percentage of businesses purchasing such coverage. The higher rate of 
businesses purchasing NBCR coverage would reduce government liabilities 
in the likelier smaller attacks, across a broad range of assumptions 
about the relative likelihood of large and small attacks and the 
fraction of uninsured losses that are compensated by the government. 

[48] Under current federal tax law, insurers can take a deduction for 
losses that already have occurred and for setting aside reserves for 
fair and reasonable estimates of the amount the insurer will be 
required to pay on future losses. However, reserves for uncertain 
future losses currently are not tax deductible. Because the size and 
timing of terrorist attacks are uncertain, any reserves set aside for 
potential terrorism losses would be taxed as corporate income in the 
year in which they were set aside. According to a Treasury official, 
insurers are permitted to pool coverage under the current TRIA program. 

[49] [hyperlink, http://www.gao.gov/products/GAO-08-1057] and 
[hyperlink, http://www.gao.gov/products/GAO-05-199. 

[50] [hyperlink, http://www.gao.gov/products/GAO-08-1057]. 

[51] The Tillinghast and Reinsurance Businesses of Towers Perrin, 
Workers' Compensation Terrorism Reinsurance Pool Feasibility Study, 
Summary of Study Findings and Conclusions (March 2004). The study was 
facilitated by the American Insurance Association and funded by 14 
insurers that account for roughly 40 percent of the workers' 
compensation market. 

[52] [hyperlink, http://www.gao.gov/products/GAO-08-1057]. 

[53] For more information on these programs, see GAO, Natural 
Disasters: Public Policy Options for Changing the Federal Role in 
Natural Catastrophe Insurance, [hyperlink, 
http://www.gao.gov/products/GAO-08-7] (Washington, D.C.: Nov. 26, 
2008); National Flood Insurance Program: Preliminary Views on FEMA's 
Ability to Ensure Accurate Payments on Hurricane-Damaged Properties, 
[hyperlink, http://www.gao.gov/products/GAO-07-991T] (Washington, D.C.: 
June 12, 2007); Federal Emergency Management Agency: Improvements 
Needed to Enhance Oversight and Management of the National Flood 
Insurance Program, [hyperlink, http://www.gao.gov/products/GAO-06-119] 
(Washington, D.C.: Oct. 18, 2005); Crop Insurance: Actions Needed to 
Reduce Program's Vulnerability to Fraud, Waste, and Abuse, [hyperlink, 
http://www.gao.gov/products/GAO-05-528] (Washington, D.C.: Sept. 30, 
2005); and Crop Insurance: Federal Program Faces Insurability and 
Design Problems, [hyperlink, 
http://www.gao.gov/products/GAO/RCED-93-98] (Washington, D.C.: May 24, 
1993). 

[54] In GAO-09-7 [hyperlink, http://www.gao.gov/products/GAO-08-7], we 
reported that crop insurance subsidies totaled about $2.3 billion in 
crop years 2005 and 2006, and that flood insurance subsidies total 
about $1.3 billion annually. We also have reported that to pay $17.7 
billion in flood losses from the 2005 Gulf Coast hurricanes, the 
Federal Emergency Management Agency (FEMA), which administers NFIP, 
borrowed $17.5 billion from Treasury. As of December 2007, FEMA owed 
more than $17.3 billion to Treasury. See GAO, National Flood Insurance 
Program: Financial Challenges Underscore Need for Improved Oversight of 
Mitigation Programs and Key Contracts, [hyperlink, 
http://www.gao.gov/products/GAO-08-437] (Washington, D.C.: June 16, 
2008). 

[55] [hyperlink, http://www.gao.gov/products/GAO-08-7]. 

[56] [hyperlink, http://www.gao.gov/products/GAO-06-1081]. 

[End of section] 

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