Sunday, April 27, 2003

Terrorism Insurance Blows... Up

I've been wondering about how insurance companies can best rip people off and it looks like terrorism insurance takes the prize. Granted, most people don't want or have a policy that insures them against property and/or human losses in the event of a terrorist attack, but those who might want it are priced out and those who don't need it aren't buying.

With opposite ends of the spectrum literaly not buying in means that risk cannot be spread out, so the premiums for companies and structures that may indeed want the insurance - high-rise buildings in population centers, stadiums, energy facilities (including nuclear plants) - are over the high end. But, in the long run, that's probably a good thing, because the owners of such facilities won't pass the cost along and probably will never need to file a claim in the first place.

To paprphrase a famous president, let's not let facts get in the way of rumor and hype, here. There have been exactly two terrorist attacks in the United States over the past ten years and they have both been executed against the same target, the World Trade Center Twin Towers in New York. In 1994, the damage was contained to the lower levels, but of course, we all know what happened on September 11, 2001. It was a horrific loss.

But, let's be realistic. What are the chances of terrorists actually pulling off a major attack against ANY kind of facility in the US in the next ten years? Actually the odds of them doing ONE are probably pretty good. There is the likelyhood that some terror group will cause damage in the billions of dollars (again, maybe). Now, how about the chances of terrorists pulling off 10 or more successful major terrorist attacks? Probably not so good. We've got Homeland Security and the FBI and the CIA and the Coast Guard, etc. at the watch. And if you ask what the chances are that there will be 50 or more successful major terrorist attacks in the next ten years, you'll probably be laughed at all the way back to Mecca. That would be an average of 5 per year and that's pretty much beyond anyone's perception.

So, OK, the actual risk is to roughly 10 as yet unnamed facilities or structures. And the costs to each would be, let's say, $5 billion, so that's $50 billion overall, which, when you think of it, is a pretty large bananna. If the terrorists blow up an empty stadium, it's a $600 million clean up and rebuild job. Of course, that number skyrockets if the stadium is full. But that would really take some effort, and it's not likely. Also not likely is a skyscraper or nuclear facility being blown up, so our figure of $5 billion per hit actually looks pretty tame. Fine, now for the math.

The insurance industry is really good at managing and identifying risk, so they've probably come up with about 100,000 structures and facilities that are at risk (personally, I would like to believe that the rotten crooks at the major insurance companies went straight to the municipalities like New York and Los Angeles and San Fran and tried to bully them for $100 million a year to cover everything and were turned down. I have faith in the audacity of insurance people.). The average annual premium is probably in the range of $20,000. Heck, just to get $100 million of coverage in a high risk area costs about $30,000, according to an April 14, 2003 BusinessWeek article. So, if the insurance companies were to sell coverage at $20K per year to 100,000 businesses, that would be $2 billion a year, so over 10 years, $20 billion. If there were no claims, WINDFALL! for the bad guys, the insurance companies. To make matters worse, the federal government will pick up the the entire tab if terrorist losses exceed $10 billion in a year. They'll pay out before that, but those poor insurance companies will have to pay them back, at some point.... we're not sure when.

The silver lining to all this bleak, black talk is that the consumers are not biting on the latest insurance scam. And it is a scam. Almost all insurance is a scam. Even, yes, homeowners insurance. Has your insurer offered additional terrorist insurance? Not yet? Don't worry, it's coming. Fortunately, you don't have to buy it and neither do the big businesses of America. And it's a good thing, because the number of successful terrorist attacks since 9/11 - remember almost 90% of the population, according to a poll taken shortly after the WTC attack, thought another terrorist attack was probable or highly probable - has been exactly ZERO. And that's the best news of all.

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