AFX, Sept 3 – Terrorism insurance has become increasingly common and affordable five years after Sept. 11. But that market has only emerged with the federal government’s pledge to serve as an insurer of last resort — assistance that is tenuous, and guaranteed only through the end of 2007.
If Congress decides the government has no business helping private insurers absorb terrorism losses, advocates seeking a continued government role warn coverage may revert back to what it was just after 9/11 — hard to find, expensive, and out of reach for most property owners.
"Without some sort of federal support in place, we will have a return to the dysfunctional market we had before," said Martin DePoy, a spokesman for the Coalition to Insure Against Terrorism, a Washington-based group representing property owners in industries such as real estate, retail and entertainment.
At issue is the Terrorism Risk Insurance Act, which took effect in November 2002 after insurers’ costs from the Sept. 11 attacks climbed to an estimated $32 billion. Losses and fear of more attacks prompted most mainstream carriers to begin excluding terrorism from property insurance policies that had generally included coverage before the attacks.
While some insurers continued writing their own stand-alone terrorism policies without federal back-up, the government agreed to reimburse insurers up to $100 billion under the so-called TRIA law should foreign terrorists strike again — a pledge criticized by some as an unwarranted favor to the industry. The federal guarantee doesn’t apply in case of domestic terrorism.
The law had been due to expire at the end of last year. But Congress extended TRIA through 2007, in hopes that the government and industry could find a permanent solution that keeps the terrorism insurance market viable while reducing the federal role.
The market has steadily grown since TRIA was enacted, according to a study by Marsh & McLennan Companies Inc.’s risk and insurance services subsidiary, Marsh Inc.
Nearly 60 percent of Marsh’s risk management and middle-market clients bought terrorism insurance last year, up from 27 percent in 2003 and 50 percent in 2004. Coverage cost an average of 25 percent less in 2005 than in the previous year, the report found.
Financial, real-estate and health care firms were the most likely to buy coverage, with at least 75 percent participation in those industries, Marsh said. From 2004 to 2005, the so-called "take-up" rates increased most dramatically in the West, from 34 percent to 53 percent, and in the Northeast, from 53 percent to 67 percent.
Among major U.S. metropolitan areas, Boston had the highest take-up rate last year, with 80 percent, followed by New York with 71 percent, and Washington D.C. and Dallas tied at 70 percent.
"We’ve seen a continual uptick in the take-up rates as more and more organizations get a little bit better understanding of the risk of terrorism," said Robert Blumber, head of Marsh’s terrorism insurance practice. "Maybe they’ve started to see their peers purchase it, and figure out they should as well."
But if Congress lets TRIA expire at the end of 2007 without action, "You will see a mad rush into the standalone terrorism insurance market," Blumber said. "There is a limited capacity in that market. I’m not sure we’re going to have the capacity to meed the client demand out there."
Without federal help to absorb losses, the Reinsurance Association of America estimates only $6 billion to $8 billion of reinsurance is available to cover foreign acts of terrorism. And such coverage generally doesn’t cover nuclear, biological, chemical and radiological attacks.
Absent federal help, the market for terrorism insurance will dry up in part because of the difficulty in calculating terrorism risks to set coverage rates, advocates say.
"There are no accurate risk models," said Joseph Annotti, spokesman for the Property Casualty Insurers Association of America. "And I don’t know that there ever will be, because there’s no way to predict what the next attack will look like, where it will be centered, and what materials might be used."