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Terrorism insurance capacity is already more restricted because property capacity is shrinking in general, said Aaron Davis, vice president of property syndication at Aon Risk Services.

Now with the Terrorism Risk Insurance Extension Act, insurers are also saddled with more exposure.

Kim Prather, underwriting risk leader for commercial insurance at GE Insurance Solutions, agreed with Davis, saying that TRIEA leaves the industry exposed to "smaller" terrorism events.

As more than one expert has pointed out, an event the magnitude of Sept. 11 would fall into insurers' laps under TRIEA.

Indications are that carriers most likely will write smaller all-risk lines unless a customer declines terrorism coverage--not to mention hike up premiums--said George Stratts, vice president and property division executive at Lexington Insurance Co.

Reinsurance costs are part of the reason, said Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes Center. Insurers don't know what their reinsurance will cost, or if there will be any reinsurance capacity available. That translates into higher prices, reduced coverage or both for buyers, said Kunreuther.

"I think it's going to make it more difficult for industry, other than very large corporations who can self-insure at the 50 and 100 million dollar level, to have cover for less catastrophic terrorism losses, because I don't think it's going to be easy to find it in the market," said Christopher B. Kende, vice-chairman of the Reinsurance Practice group for law firm Cozen O'Connor.

Davis, who spoke at an Aon webinar in February, said, however, that for small and midsize companies, "TRIEA isn't as big an issue" compared to the issues facing Fortune 1000-type firms.

Generally, carriers have not been imposing exclusions on these smaller companies because their policies tend to have low loss limits and low aggregation of value in high-risk major metro areas.

For bigger insurance buyers, Davis added, the all-risk market and its TRIEA issues aren't the only option. These companies, as Kende said, can self-insure.

In fact, said Davis, captives can be one of the most cost-effective ways to tackle terrorism risk. They can provide tailored coverage, large limits and even NBCR (nuclear, biological, chemical, radiological) protection.

Standalone terrorism coverage is another option for those who can afford it. "Buying coverage from the standalone market provides continuity," Davis said.

This market, according to Aon estimates, can provide $1.5 billion in per-risk capacity, with average limits of $550 million for any one buyer.

President George W. Bush signed TRIEA into law on December 22, 2005, nine days before the original terrorism insurance bill was set to expire. TRIEA is considered a scaled-down version of the original act, designed by the administration and Senate Republican leadership as a way to wind down the public-private partnership.

April 1, 2006

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