VideoLeave it to the insurance industry to turn a threat to its advantage.
Faced with the prospect of losing federal backing for terrorism insurance, property/casualty insurers are jacking up prices on the coverage, insurance brokers say. What's more, some insurers are apparently making a market out of the fear that corporations could end up shorn of insurance if the Terrorism Risk Insurance Act is allowed to expire at year's end.
Indeed, insurers have made it very clear what will happen if Congress fails to reinstall TRIA, which banned insurers from excluding terrorism coverage from their property/casualty policies: They would immediately start excluding it again.
That position inevitably puts pressure on Congress to continue its support of the industry — or else risk "a severe, negative effect on the national economy, including job loss, stalled commercial transactions, and delayed construction projects," as Brian Duperreault, chairman of ACE Ltd., said in testimony before the Senate banking committee last month.
It's understandable that insurers would trot out their big rhetorical guns. The act's passage seems to be somewhat in jeopardy, since it's by no means clear that the Bush administration will support it. The President might, after all, have trouble justifying public backing for the currently flush insurance industry as he tries to drum up support for privatizing Social Security.
For their part, p/c insurers have greatly benefited from TRIA, which has curbed their terrorism risk. Under the act, the federal government would pay 90 percent of an insurer's losses, above a deductible, in the event of a foreign-engineered terrorist attack; a carrier would pay the deductible and 10 percent of the losses. The entire program would pay out a maximum of $100 billion.
Besides providing insurers with a structure in which their losses would be limited, the act bought them time to spawn models of the risk, setting the stage for them to create a potentially lucrative pricing structure for the future. In recent years, the industry has hatched a "stand-alone" market for terrorism risks not covered by TRIA, including domestic exposures and threats to foreign subsidiaries of U.S.-based multinationals.
Lacking taxpayer-supported backing, however, insurers claim that they won't be able to amass nearly enough private reinsurance to write the coverage. In fact, they're poised to exclude it from future policies. In May 2004, the industry began filing policy-form changes that would reinsert coverage limits banned by TRIA if the act isn't extended, Acting New York Insurance Superintendent Howard Mills said at the Senate banking committee hearing.
Besides protecting carriers from added exposure, "the filings demonstrate that the insurance industry is not yet willing to assume the full risk of terrorism losses at this time," said Mills, who's also chairman of the National Association of Insurance Commissioners' terrorism insurance working group.
The filings could erase terrorism insurance from policies that extend coverage into 2006. "For policies renewing this year, underwriters are putting in [a provision that says,] "if TRIA isn't renewed, we have the option to cancel," Wendy Peters, a senior vice president with Willis, the big insurance brokerage, told CFO.com. Further, prices are rising, and insurers' capacity to cover terror risks in major cities is shrinking, she said.
Coverage Gaps
The potential for wholesale erosion of coverage is apparently creating fears among certain corporate insurance buyers — fears that some carriers could exploit handsomely. "Some clients have tried to lock up capacity commitments now at predetermined prices should TRIA not get renewed," says Bob Blumber, a Marsh managing director. Executives in the lending, real-estate, and hotel industries have been especially anxious to retain coverage, he notes.
But corporate insurance buyers who want to purchase such peace of mind would have to pay a pretty penny. Insurers are charging "fairly significant" upfront fees for the privilege of buying terrorism coverage for next year and beyond, according to Blumber.
Cautioning that fees and premiums could vary widely by location, the broker offered a hypothetical example of how such a deal might be structured for a company in a potentially high-risk area like midtown Manhattan or downtown Boston for a year's worth of coverage starting June 1. For the option to buy $100 million worth of stand-alone property terrorism insurance at a premium of $2 million to $3 million, a company might have to shell out a fee of between $200,000 and $300,000 "to reserve the capacity," he says. If TRIA founders, the fee could be applied to the premiums; if the act is renewed, the fee would be nonrefundable, although the buyer could choose not to buy the coverage.
At those prices, one wouldn't expect many takers, and Blumber reports that few of the options have been sold. Instead, most potential buyers appear to holding off on their purchasing decisions until Secretary of the Treasury John Snow comes out with his report on the terrorism insurance program. That report, slated to be issued no later than June 30, is widely expect to send the re-enactment debate into overdrive. But the current political uncertainty, says Blumber, presents corporate executives with a choice: "Do I want to pay this cost now, [or] take the chance that TRIA is not renewed?"
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