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Group Life Terrorism Coverage Resurfaces As Issue In Hearings

By Matt Brady

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The issue of increasing protections from terrorism in the group life market was raised during a Sept. 27 joint hearing of 2 House Financial Services Subcommittees.

Rep. Sue Kelly, R-N.Y., who chairs the Subcommittee on Oversight and Investigations, said the failure to include group life coverage under the umbrella of the Terrorism Risk Insurance Act, or its extension, “is equal to a neutron bomb,” the weapon that is supposed to leave buildings and other structures intact while killing the people within them.

Ed Harper, a senior vice president at Assurant, who testified on behalf of the American Council of Life Insurers, Washington, also raised the issue.

“While much of today’s discussion has focused on the need for adequate terrorism insurance within the property and casualty insurance industry, it is also important to discuss how this issue affects the life insurance industry and its policyholders, particularly with regard to group life insurance,” he said. “We respect the need for adequate insurance for buildings, but does it make sense to insure buildings and not the people whose lives might be lost if those buildings go down as a result of a terrorist attack?”

Harper noted that group life insurers, who accounted for 44% or $7.63 trillion out of $17.5 trillion of all life insurance in force at the end of 2004, are especially vulnerable to terrorist attacks because many of their insured individuals are often in close proximity, such as in an office building. Also, a sudden, unexpected death of numerous insureds would put a strain on company surpluses, and could conceivably drive a company into insolvency, he said.

On an industry-wide scale, Harper noted that group life insurers have been unable to obtain catastrophic reinsurance for their terrorism risk. “To the extent that such reinsurance is available, it is limited in coverage and very expensive,” he noted.

Additionally, Harper noted that workers’ compensation, which like group life is provided to many workers, was included under TRIA, and has enjoyed a far greater availability of reinsurance coverage.

“We are confident that catastrophic reinsurance would become more available and affordable for group life if it were added as a covered line in any TRIA extension,” he said in his testimony. “This added reinsurance capacity would significantly reduce the risk of insolvency that many group insurers would surely face if a large scale terrorist attack were to occur.”

Congress voted in December 2005 to extend a scaled-down version of the original Terrorism Risk Insurance Act reinsurance program for 2 years. The extension is set to expire Dec. 31, 2007. The Act did not include group life insurance.

A few days before the joint hearing, the U.S. Government Accountability Office published a report which said life and health insurers are not sure how well they can exclude coverage for terrorist attacks involving nuclear bombs, biological weapons, chemical weapons or radiological materials.

“Measuring and predicting NBCR risks present distinct challenges to insurers because the characteristics of the risks largely diverge from commonly accepted principles used in determining insurability,” GAO officials write in the report.

Moreover, representatives from the ACLI and life insurance company executives “told us they believed that most states do not allow for terrorism or NBCR exclusions in life insurance policies,” GAO officials write in the report. “In 2 of the states specifically included in our review – New York and California – state insurance law and implementing regulatory policy prohibited both individual and group life insurance policies from excluding NBCR or other terrorism events.”

The GAO officials note that group life insurers are excluded from TRIA.

“Representatives of 2 group life insurers we interviewed said their companies either had not found reinsurance for NBCR risks or the costs were very high relative to the amount of insurance that could be purchased,” the GAO officials write.

GAO makes no recommendations in the report. But they argue that NBCR risks are different from the risks private insurers and reinsurers usually cover because of the potential for catastrophic losses, the lack of knowledge pertaining to the long-term consequences of an NCBR attack, and a lack of historical experience with these types of catastrophic attacks on the U.S.

Currently, members of the President’s Working Group on Financial Markets appear to be close to completing a report of their own that will conclude that the private insurance and reinsurance markets should take over for the TRIA program when the current extension expires.

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