BY STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets
With the nine-year anniversary of the Sept. 11, 2001, attacks upon us, insureds and insurers alike must still cope with this relatively new risk through, but by no means only with, insurance.
Plots abound. Failures such as the Christmas Day so-called underwear bombing in the Detroit Airport, as well as the almost comically incompetent Times Square bombing earlier this year, keep the terrorist threat fresh in the mind with the old cliché that the good guys have to succeed all the time while the bad guys have to get it right only once.
The market for terrorism insurance remains stable But one cloud looms on the horizon.
For the past two years, the Obama administration has threatened to scale back the program set up in the Terrorism Risk Insurance Program Reauthorization Act of 2007. His chances for success may seem slim, but enactment could present a destabilizing factor.
Little doubt remains that the threat of terrorism looms over nations and companies alike, with the latter looking to insurance in increasing numbers.
London-based Gordon Woo, catastrophe risk consultant and lead architect of the terrorism model at Risk Management Solutions Inc., said that conventional explosives have so far remained the favorite weapons of the homegrown jihadist groups, with smaller bombs to circumvent security measures the likelier attack mode. He noted that the Times Square May 1 attempt tracked with current trends.
"The use of gasoline and propane is an inventive way to achieve a much larger explosion using unmonitored materials," he said. "Thankfully, this is much more technically challenging to accomplish for any terrorist group. Neither gasoline nor propane gas is explosive on its own, but a mixture of them within narrow composition limits would be explosive."
According to a report issued by Marsh earlier this summer, the number of companies purchasing terrorism insurance--the so-called take-up rate--has climbed steadily since 2003, when the figure was 23 percent, to last year, when it came to 61 percent.
Companies with total insured value of more than $1 billion had the greatest take-up rate--64 percent--while companies with values of less than $100 million had the lowest--55 percent--last year.
Rob Cruz, vice president, war terrorism and political violence, at Hiscox USA, sees the largerorganizations with a global or heavy metropolitan exposure viewing terrorism as another catastrophic threat to their business.
To defend themselves, they have been seeking the broadest coverage possible.
"Smaller organizations in most cases do not seem to see as much of a threat and purchase coverage out of regulatory or bank obligation, seeking the most convenient and cost-effective option," he said. "However, I have seen very savvy small-company buyers."
Among industry sectors, according to the Marsh report, utilities topped all with a take-up rate of 81 percent last year compared with the energy industry, which came in at the bottom with a 40 percent take-up rate. Businesses in the Northeast had a terrorism insurance take-up rate of 73 percent compared with 47 percent in the West.
Aaron Davis, managing director for the Aon National Property unit, said the take-up rate for his client base has remained relatively constant for the past three years at 65 percent. Real estate and financial institutions lie outside the norm with about an 80 percent take-up rate.
"Within real estate, it is driven by loan covenant requirements for those clients that are leveraged with large real estate portfolios," he said.
Terrorism coverage as a percentage of overall property coverage continued to rise, according to the Marsh report, with smaller companies feeling the greater brunt because such coverage is less subject to credits for higher retention and loss-control efforts. Financial institutions allotted the largest percentage of property premium to terrorism risk coverage at 24 percent, rising from 14 percent in the previous year.
The market appears to be able to meet this demand.
Paul Bassett, London-based chairman of Aon Crisis Management, put the world terrorism insurance capacity at $2 billion.
"The market is unlikely to harden, but it could be the end of a soft market, especially for emerging countries," he said.
As far as the exact cost of that capacity, Marsh reported that 2009 rates showed declines from the previous year for 11 of 15 industry categories. Transportation showed the largest reduction, with rates going from $74 per million dollars of coverage to $46. Real estate showed the only increase, with the comparable coverage figure rising to $50 from $42 in 2008.
While more companies are purchasing terrorism insurance, the same cannot be said of insurers purchasing secondary coverage, according to a report published earlier this year by New York City-based reinsurance broker and Marsh & McLennan Cos. subsidiary Guy Carpenter & Co.
"The dynamic being played out in the terrorism reinsurance market is not unlike other low-frequency, high-severity lines where a combination of the passage of time, the lack of further market defining loss events and constrained reinsurance budgets converge to allow the market to drift gently downward from supply/demand imbalances," the report stated.
The report said that the largest terrorism reinsurance placements have been to back up large government pools that exist in countries such as Australia, Belgium and France, where coverage can reach up to $2 billion. (Programs in the United States for individual companies rarely go beyond $700 million.)
In the United States, federally provided reinsurance stemmed from the seeming unquantifiable nature of the risk. The safety net was first codified in 2002 and renewed three years later as a short-term solution.
The Terrorism Risk Insurance Program Reauthorization Act of 2007 was meant to provide some stability in that it was set to expire in 2014.
President Obama has proposed over the past two years to remove acts of domestic terrorism that were added in the 2007 TRIP renewal, along with increasing deductibles and event triggers, all of which has brought an outcry from insurance groups.
Davis said his clients are already planning for what the terrorism insurance world will look like four years from now at the Act's sunset. To suddenly change the rules would present a difficult situation at best in terms of availability.
"Our clients expected a consistent application of the backstop in terms of retention, co-insurance, deductibles and such," he said.
Any removal of domestic coverage particularly troubles insurers because the difference between the two acts is not as cut and dried as it might seem. Davis cited the fact that the Times Square bomber was actually an American citizen but received his training in his native Pakistan. That could be one such blurry case.
Leigh Ann Pusey, president of the Washington-based American Insurance Association, said domestic terrorism is no more insurable that international terrorism.
"It could take a long time, if ever, to determine the source of a terrorism attack, and the uncertainty about whether the TRIP program would be activated in the aftermath of a major attack could lead to economic damage well beyond that caused by the attack itself," she wrote, in a letter to the Office of Management and Budget Director Peter Orzag.
But Davis echoed the general consensus as to the possible success of the Obama effort when he said, "It appears that it does not seem to have any political traction at this time."
While urging that the law remain intact until 2014, Hiscox's Cruz expressed concern that the untested nature of the legislation, while certainly preferable to being tested, means certain issues will always remain question marks.
"One issue is that the process is political in nature.Three political appointments of thepresident must agree to certifyan event," he said. "If the president decidesnot tocertify an event asterrorism, it is reasonable to believe his staff will not disagree."
At stake is an insurance company's sense of liquidity and ultimately the insureds'.
"With an untested law and political process, there is no guaranteed liquidity in the immediate aftermath of an event when most needed. It is likely that aninsurance companywill have multiple lines exposed to one event, it is hopeful they have truly tested their overall aggregate exposure to ensure they can pay out all claims," he said.
Cruz said that the constant state of uncertainty with the government's terrorism insurance participation will mean both insurers and insureds will have to be more vigilant than ever in analyzing their exposure.
September 1, 2010
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