Preparing for Terror

When the U.S. government recently extended its Terrorism Risk Insurance Act (TRIA) through to 2007, it highlighted yet another interesting cultural gap between Canada and the United States: U.S. private insurers must offer terrorism coverage to businesses and individuals, whereas Canadian private insurance companies are under no such legal obligation. As a result, there is a patchwork quilt of terrorism coverage in Canada – if such coverage is offered at all.

The gap seems counterintuitive, given that both Canada and the United States have been designated future targets of terrorist activities by Al-Quaeda, the group responsible for the 2001 destruction of the Pentagon and the World Trade Centre.

Consumers taking stock of this situation might fairly deduce the U.S. is better prepared to handle losses arising from terrorist attacks than the Canadian insurance industry. Obviously the U.S. insurance industry got a head start thinking about these matters as a result of trauma, fear and preparation.

On Sept. 11, 2001, the U.S. government and business sectors were rocked by suicidal plane attacks that killed thousands of people within a 30-minute span. The destruction, the tragic loss of life, and the business interruption that resulted prompted the U.S. government to sign TRIA into law in November 2002. TRIA backed up the nations insurance companies to help cope with the crisis.

TRIA requires insurers to make terrorism insurance coverage available to their clients.

It also identifies financial markers, or ‘triggers,’ indicating when the U.S. government will assume financial responsibility to help insurers pay for damage losses.

The December 2005 TRIA extension, for example, changes – and increases – the aggregate loss targets that must be met before federal funds start to flow in the event of a terrorist act.

Up until Mar. 31, 2006, aggregate losses due to a terrorist attack much reach US$5 million before the federal government funds kick in. Between April 1, 2006 and Dec. 31, 2006, that number gets bumped to US$50 million. And in 2007, the number increases to US$100 million.

Such targets are designed to establish a finite level of loss, which theoretically makes it possible for U.S. private insurers to offer, price and properly underwrite terrorism coverage.

The state of terrorism insurance in Canada seems almost lackadaisical in comparison. There is almost a nave faith in Canada that, as the adage goes, “God protects fools.”

This is perfectly sensible, as Canada has yet to experience a significant terrorist attack on its own soil. For Canadians, terrorism fears are not based on any real traumatic experience; and as a direct result, terrorism coverage is not a hot commodity.

According to Business Insurance, “Canadian risk managers often see terrorism insurance as a ‘luxury product,’ because the risk of a terrorist attack on Canadian soil is generally considered to be extremely remote.” Perhaps that’s why minimal annual premiums for specific forms of terrorism coverage hover around $1,000 or more – if terrorist acts on Canadian soil are covered at all.

After Sept. 11, 2001, the Insurance Bureau of Canada (IBC) noted: “Many [Canadian] insurance providers have opted to exclude terrorism coverage in commercial property policies that are written on an ‘all risks’ basis.” The IBC noted, “a yawning gap remains in commercial property coverage for terrorism that is simply not possible for the property and casualty insurance industry to fill.”

People familiar with offering insurance in this area will tell you the Canadian government has a good track record of financing the clean-up of catastrophic disasters. It is presumed, therefore, that the Canadian government – not private companies – will be responsible for paying to clean up the mess.

Some in the industry have suggested that if the Canadian government were to articulate the true scope of its financial commitment in a TRIA-like agreement, private insurance carriers would be given a much-needed incentive to offer terrorism insurance.

If a TRIA-style program were available in Canada, the logic would read that private insurers could begin to calculate premium on the assumption that their exposure to such acts would be finite.

Still others in the industry believe Canadian private companies should provide terrorism coverage, and then deal with exclusions through sound underwriting.

Either way, there is a sense that Canadian insurance companies should be offering, not excluding terrorism coverage. The Canadian government seems to be preparing for the prevention of terrorism. Why not prepare in advance for the financial clean-up as well?

It’s time to clarify who will pay for the clean-up if and when threats against Canada become more than just empty words on a TV screen.