Frank Cilluffo, who until 2003 served as President Bush's special assistant for homeland security, said he is fascinated by the idea of offering less expensive insurance against terrorism to companies that take appropriate precautions. He said it would constitute "a business case for homeland security to ensure that the private sector is fulfilling its share of their responsibility."
The system would encourage companies to protect against limited threats, such as truck bombs or internal sabotage, and the government would guard against greater threats, such as nuclear terrorism.
"Hopefully, these steps, which will be incentivized and/or mandated, will raise the bar higher and improve our countermeasures against terrorism," said Cilluffo, now head of the Homeland Security Policy Institute at George Washington University. "This is not the panacea. This is not the solution. But it takes us a whole lot closer."
But many homeland security and insurance specialists caution that there are obstacles that must be resolved before an insurance-driven system could work. The challenges include getting insurance companies to provide terrorism insurance and determining which security measures are necessary in each industry.
The first problem arises because very few terrorist attacks have occurred in the United States. So, unlike with hurricanes or car crashes, there is little historic data that can be used to predict the risk of attacks now that the United States is at war with Al Qaeda and other Islamist jihadists.
Charles Benda, the homeland security practice leader for Lexington Insurance, said insurers have started to understand damage from terrorist attacks that use conventional methods such as truck bombs, based on blast radius data from military research. But predicting the frequency of attacks is trickier, he said.
"The way to get accurate data is to have more data points to map it out and analyze it," Benda said. "Fortunately, we don't have too many data points, so that makes it very difficult to price insurance costs in terms of future attacks. You can make some assumptions about target cities, target buildings, and target industries, but that still doesn't address the issue of frequency."
Because a terrorist attack from an unconventional weapon, such as a nuclear bomb, would result in incalculably high damages, specialists say the government probably would have to serve as an "insurer of last resort," backstopping the insurance industry against losses above a certain amount.
Still, insurers probably would lobby against legislation that forced them to reduce premiums for companies that follow someone else's guidelines. Each insurer probably would want to preserve the freedom to make pricing decisions, which could jeopardize the uniform standards coveted by security analysts.
"Until you can show that this certified list of things actually does have an impact and does prevent losses, insurers should not be told to provide a discount," said Julie Rochman, senior vice president for the American Insurance Association, a trade group. "Otherwise, you're artificially suppressing the price of coverage, and you've done nothing to prevent the losses."
Richard Thomas, the chief domestic underwriter for AIG, said he "would not recommend any government regulation in this area," adding that his company was closely monitoring efforts to establish uniform standards.
"We're not going to cede our underwriting judgments to the Department of Homeland Security," Thomas said.
But Cilluffo said insurance companies could work together with security specialists in various industries to develop appropriate precautions they agreed with.
He also warned that if the private sector does not establish a "standard of care" on its own, trial lawyers suing businesses after a future terrorist attack would fill that vacuum.