January 14th, 2011

Industry Issues and Trends: Terrorism Insurance: Costs Decrease as Insurance Increases

Posted at 1:00 AM ET

141x141jan1thumb9The perception of an elevated potential for terror attacks remains high. Meanwhile security breaches via WikiLeaks are providing a roadmap to crucial sites exposed to terrorism. The risk of terrorism remains a critical challenge for companies and for the broader population. The attempted attacks on Times Square in New York in May 2010 and the Detroit-bound flight on Christmas 2009 are reminders of the ongoing risk.

In Marsh’s annual report on terrorism, “The Marsh Report: Terrorism Risk Insurance 2010,” data was analyzed from 1,382 clients that purchased terrorism insurance in 2009. The survey found a take-up rate - the percentage of companies buying property terrorism insurance - of 61 percent for property terrorism insurance. An estimated 50 percent of general liability (GL) clients also purchase coverage against the peril of terrorism. To compare, only 27 percent of US companies surveyed purchased property terrorism insurance in 2003, when the Terrorism Risk Insurance Act (TRIA) was in its infancy and the market was still unstable in the wake of the attacks on September 11, 2001.

Marsh’s report looked at the data by industry segments (as defined by Marsh); the following five had the highest take-up rates:

■ Utilities (80 percent)

■ Real Estate (76 percent)

■ Health Care (76 percent)

■ Transportation (75 percent)

■ Financial Institutions (74 percent)

In addition to the above sectors, more than half of all companies in the following industries purchased terrorism insurance in 2009: media, hospitality, education, technology/telecommunications, public entity, retail and construction.

Although the purchasing of terrorism coverage is highest in the Northeast (73 percent), companies in all regions of the United States continue to purchase terrorism insurance in significant numbers: Midwest (60 percent), South (58 percent) and West (47 percent).

The cost of property terrorism insurance has fallen gradually over the years, with a more significant drop in 2009. The median premium rate for terrorism insurance was down from USD37 per million (0.0037 percent) in 2008 to USD25 per million (0.0025 percent) in 2009.

Terror Reinsurance Market Dynamic

At the January 1, 2011 renewal, loss-free terror reinsurance programs sustained rate decreases of 4 to 5 percent. This modest price softening is a continuation of the longer trend whereby the US stand-alone terror reinsurance market has generally drifted downward in activity and overall pricing since peaking during post- September 11, 2001 market conditions between 2002 and 2004. The downward trend has continued yearly at roughly the same pace, with a very minor blip in exploratory interest when the Obama Administration first mentioned its plan to consider decreasing TRIA as part of the 2010 budget proposal.

Terror reinsurance pricing methodologies remain comparatively less technical than methodologies used for pricing treaties exposed to natural perils only, partly because models are relied upon less with respect to terror exposures than with natural peril exposures. That said, reinsurers are using models to price terror more frequently than ever before as they find their own comfort level with balancing technical and non-technical price drivers.

A stabilizing factor for demand, and in turn for pricing, is the more formal, consistent attention being given by rating agencies to the impact that terrorism risk has on the financial strength of insurance carriers. This should continue to drive the evolution of technical underwriting for terrorism risk and better alignment between risk and rate.

In terms of capacity, in the current US marketplace, up to USD700 million of per-program coverage is estimated to be available, although that figure may vary based on the location and severity of the original insured risk. In the global terrorism market, certain regionalized governmental facilities secure reinsurance coverage of more than USD2 billion of capacity from the reinsurance market. For certain other US programs, notably workers’ compensation programs where the terrorism exposure is limited to a single state, it is feasible to secure more than USD1 billion of capacity. Such capacity may expand or contract based on price, type of risk and overall reinsurance market conditions. With reinsurer capital levels at historically high levels, the marketplace is approaching the peak of hypothetical capacity, although we have yet to see demand to test that availability.

Click here to read the Executive Summary of Guy Carpenter’s report: Global Reinsurance Outlook: Points of Inflection; Positioning for Change in a Challenging Market >>

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