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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Risk managers, your facilities, employees and customers are safer from terrorism thanks to President Barack Obama's strategies. That's not a quote from Keith Olbermann or Homeland Security Secretary Janet Napolitano. Leading terrorism experts are saying this.

With his March Internet message to the Iranian people and his June speech in Egypt, by dropping the term "War on Terror" and promising to close Gitmo, Obama is trying to win the proverbial hearts and minds of the global Muslim community. This "Obama effect" will take time, but such improvements in U.S. strategic counterterrorism are needed, according to Rohan Gunaratna, head of the International Center for Political Violence and Terrorism Research in Singapore.

"The use of force against terrorists can only be a partial solution," he said.

Isolating the thousands of extremists from the billions of other Muslims, drying up any sympathy or support (passive or active), makes the jobs of policing, security and counterterrorism so much easier, said Woo, because authorities can focus on the men and women actually planning and carrying out bad things.

Despite all the hyperheated accusations flying on cable TV, when it gets down to it, the Bush and Obama administrations have more in common than not when it comes to counterterrorism.

Where Obama has broken with Bush, it's been "prudent," according to Bruce Hoffman, terrorism researcher and professor at Georgetown University.

What's more, the administration didn't carry out the usual wholesale bureaucratic purges that often are the case when the White House changes hands. Many experienced personnel from the Bush and Clinton administrations still remain, especially in the National Security Council and the Defense Department, said these terrorism experts, speaking at the RMS terrorism seminar in New York City.

PRUDENT UNDERWRITERS

According to Woo, the catastrophe risk consultant at modeler RMS, underwriters are prudent too. They are very aware of where and what risks they're being asked to insure and whether an exposure fits into their current accumulation of risks. Underwriters limit how much terrorism capacity they offer in high-risk areas.

Tarique I. Nageer, vice president with the property specialized risk group at insurance broker Marsh, sees underwriters asking prospective clients more questions, about security at their properties and how it's been improved, and delving into the particular history of areas where clients have locations.

"Underwriters are quite vigilant overall," he said, adding, "They're comfortable with the risk."

They are comfortable, but not complacent, according to John Cogliano, vice president of homeland security solutions with Lexington Insurance Co. Lexington considers prospective policyholders on a case by case basis, looking at the geographical spread of a portfolio; the exposure types and location; the proximity to other possible targets; occupancy types; and the limits, deductibles and other aspects of the program.

Rates on the terrorism insurance market are trending slightly upward, though not to the degree that other property-catastrophe insurance coverages are. According to Marsh, at least as late as 2008, stand-alone rates were at time more "aggressive" than so-called TRIA insurance.

Of course, certain types of risks can elicit tougher questioning from underwriters. Just ask a hospitality risk manager about how hotels seem to be a favorite terrorist target lately. A company with properties in New York City, D.C. or some other so-called "Tier-1" city could be looking at stiffer prices in the stand-alone market. Or for international locations, say, in the Philippines or Indonesia.

"Overseas is where the action is, so to speak," said Marsh's Nageer.

Still, competitive rates are but one reason for the attraction to stand-alone markets.

TRIA terrorism coverage, which is the insurance imbedded in a policyholder's property policy that all commercial property insurers must offer to policyholders under the TRIA law, only covers attacks on U.S. soil. Stand-alone terrorism coverage can be key for global corporations looking to protect international locations.

In addition to companies buying stand-alone coverage, there has been a slight increase in companies choosing to embed their property terrorism coverage in an all-risk policy, according to Cogliano.

Nageer said that new players have entered the market to meet the demand, like Pembroke Managing Agency Ltd., which manages Lloyd's Syndicate 4000, and Bermuda-based Ironshore, among others. Some older players in the stand-alone space are also still in the game, though according to Nageer they have become more selective in what they write. Here, we're talking Axis, Lancashire Group and Lexington.

Rumor had it that Axis in particular, a forerunner in writing stand-alone terrorism coverage, is backing out of the market in a big way. Axis declined to participate in this article. Nageer would just say that Axis is writing less and less.

According to a Marsh report on the stand-alone market in the first quarter of 2009, Axis' max capacity in the space was $150 million. The report gave a "theoretical maximum" capacity for the entire market at $3.08 billion, with Berkshire Hathaway ($1 billion) and Lloyd's ($900 million) providing the most capacity.

Stand-alone cover for NCBR exposure--nuclear, chemical, biological or radioactive attacks--istricky. Basically, it's not available except for one "a lot more expensive" offering from Caitlin, said Nageer.

Lexington offers its BioChem Shield sublimit, in which buyer interest is up, reported Cogliano.

THE CAPTIVE SOLUTION

To fill in the gaps of their terrorism risk management program (even for NCBR), to keep control over their money, to tap into the federal TRIA program, to access reinsurers directly and for all of the other numerous reasons cited for alternative risk transfer, many companies use captives for terrorism coverage.

Typically, said Nageer, corporations can use a captive insurer for primary coverage, then access reinsurance to cover anything the federal government doesn't under TRIA, such as the 20 percent retention, 15 percent quota share and anything under the $100 million trigger.

"This can be done at very competitive prices," he said.

According to Steven R. Bauman, senior vice president and head of captive services for Zurich's Global Corporate in North America, interest and activity with TRIA-related captives have been high and steady. It's one of things that "works" with captives, he said.

Besides approaching the stand-alone market or the captive solution, some companies might opt for a third path: to save money. As has been the case perhaps with every commercial insurance line, with all-risk terrorism insurance, buyers might be cutting back on their limits, looking for other opportunities to save on premium.

"The fact there are very few threats that actually become public and lead to an event, some clients have become a bit complacent on recognizing the true terrorism exposure" said Lexington's Cogliano.

Of course, as the recent bombings in Jakarta indicate, a won't-happen-to-me risk management strategy can be the wrong one. Despite indications that the "Obama effect" could be positive down the road, the world currently has more than enough violent, angry people to go around.

At least 30 to 40 groups affiliated with al-Qaida are in existence, including Somali's al-Shabaab group that is recruiting Americans. The Taliban and other insurgents in Afghanistan and Pakistan now number upward of 20,000, estimated Gunaratna. And then there's Iran, which funds the "A team" of terror, Hezbollah, according to Hoffman.

Let's not forget al-Qaida too.

"We're faced with a continuing threat from al-Qaida," said Hoffman:

Something else for underwriters to question.

October 1, 2009

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