NCPA - National Center for Policy Analysis

Insurers Scrambling to Set Terrorism Rates

December 6, 2002

Adoption of the new federal terrorism-insurance program has forced insurance companies to calculate quickly the rates they are going to charge owners of trophy properties and those considered possible terrorist targets. The final figure won't be cheap and could end up doubling the cost of insurance to property owners.

Insurers have a huge financial incentive to move quickly:

  • The legislation immediately reinstated halted coverage and put insurers on the hook for billions of dollars in potential terrorism losses -- even though they may not have collected a penny in premiums for specific coverage.
  • Insurers have 90 days from the signing of the bill -- which took place last week -- to tell policyholders how much their coverage will cost.
  • Buyers have 30 days after receiving a quote to accept or decline the coverage.
  • In the interim, insurers would have to foot the bill for any terrorism damage that could occur.

The Sept. 11 attacks are expected to cost the insurance industry about $50 billion.

Under the new law, the government is responsible for 90 percent of insurance industry losses that arise from any future terrorist incidents that exceed a minimum amount: $10 billion in the first year, rising to $15 billion in the third year. The government's losses are capped at $100 billion a year.

Each insurer has a maximum amount it would pay before the federal aid kicks in. In 2003, the amount is 7 percent of each company's commercial property-and-casualty premiums -- rising to 15 percent in 2005.

Source: Christopher Oster and Dean Starkman, "Cost of Terror Insurance Is Weighed," Wall Street Journal, December 6, 2002.


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