Insurance Law

Terrorism Risk Insurance 2010: Marsh survey reveals more than 60 percent of organizations bought coverage in 2009

By GC Capital


Despite an ever-changing terrorism risk insurance market, businesses from every industry sector continue to purchase coverage - more than 60 percent of organizations surveyed by Marsh bought coverage in 2009.


This report provides a snapshot of the major issues and trends surrounding terrorism insurance in 2010. Key issues and findings include:


An Overview of the Terrorism Risk Insurance Act (TRIA)


   The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) was signed into law in December 2007, extending the TRIA federal backstop program through December 31, 2014.


   The definition of an “act of terrorism” has been revised to include acts of domestic terrorism, which were excluded in previous versions of TRIA.


   The issue of noncertified acts of terrorism remains an important consideration. Although coverage through TRIPRA removes any exclusion to the extent the act of terrorism is certified, some property insurers add exclusionary language related to noncertified terrorism coverage.


   The Standard Fire Policy (SFP) - mandated by statutes in 29 states - may, in some circumstance, provide coverage from losses if they arise from a fire caused by a terrorist attack.


Property Terrorism Insurance Purchasing in 2009


   Sixty-one percent of companies purchased property terrorism insurance in 2009.


   Utility, real estate, health care, transportation, financial institutions, and media companies purchased property terrorism insurance at higher rates than any other industry segments in 2009, with take-up rates exceeding 70 percent in these sectors.


   The median premium rate for terrorism insurance was down from $37 per million (0.0037 percent) in 2008 to $25 per million (0.0025 percent) in 2009.


   Construction, hospitality, utility, and real estate companies experienced the highest median premium rates for terrorism insurance in 2009, exceeding $50 per million of TIV.


   When looking at terrorism insurance pricing as a percentage of overall property premiums, financial institutions and transportation companies paid the largest share, allocating 24 percent and 17 percent of their total property programs, respectively. Hospitality firms saw significant decreases in the percentage of property premium paid for terrorism, down from 11 percent in 2008 to 4 percent in 2009.


The Standalone Insurance Market


   The standalone property terrorism insurance market offers coverage for both TRIA-certified and noncertified risks and enables companies to tailor capacity to their coverage needs.


   Approximately $750 million to $2 billion per risk in standalone capacity is available to companies that do not have sizeable exposures in locations where insurers have aggregation problems. Capacity excess of $2 billion is available but is more expensive.


   For locations where markets have aggregation issues the estimated market capacity is approximately $1 billion; additional capacity can be accessed at significantly higher rates.


Workers Compensation and Liability


   Insurers and qualified self-insured employers cannot exclude coverage for acts of terrorism from workers’ compensation policies.


   Because workers’ compensation provides lifetime medical care for on-the-job injuries, some computer models project that the “worst-case” cost of a terrorism incident could exceed $90 billion. In contrast, some experts put the total workers compensation capacity for the entire insurance marketplace at $30 billion.


   The National Council on Compensation Insurance (NCCI) approved the “Domestic Terrorism, Earthquakes, and Catastrophic Industrial Accidents Premium Endorsement (DTEC)” for workers’ compensation, which took effect January 1, 2005. It provides funding for some catastrophic losses, including acts of terrorism specifically excluded by TRIA, but not for TRIA-certified acts of terrorism.


   In 2009, the percentage of clients that purchased TRIA general liability (GL) coverage appears to have dipped to just above 50 percent. The actual rate - charged as a percentage of premium for the overall coverage - held steady at about 1 percent.


TRIA, U.S. Terrorism, and International Terrorism: Effect on the Insurance and Reinsurance Markets


   Commercial insurers continue to avoid accumulating high-profile urban exposures due to the residual risk for terror events retained by insurers below the triggers and retentions levels set by TRIPRA, coupled with the relatively high cost of reinsurance in key exposure zones.


   The Act’s design results in a number of gaps in reinsurance protection for insurers, including personal lines insurance; the deductible, co-pay share, and event trigger for TRIA-certified events; and nuclear, chemical, biological, and radiological (NCBR), depending on primary policy coverage (many traditional property policies exclude the nuclear and radiation risks).


   Most reinsurers have identified a limited portion of their risk capital to make available to cover terrorism cover exposures and typically prefer to manage terror risk by offering terrorism coverage in a standalone contract rather than offering coverage within a normal “all-risk” catastrophe treaty, especially for insurers writing a national portfolio.


   An estimated $700 million of per-occurrence coverage is available. For certain programs, notably worker’s compensation programs where the terrorism exposure is limited to a single state it is feasible to secure more than $1 billion of capacity.


   Compared to natural perils such as hurricane or earthquake, terrorism modeling is still young and untested. Quantifying the economic and human losses from an act of terrorism continues to pose major challenges for insurers and reinsurers.


Captives: Opportunities and Considerations


   Captive insurers that issue direct policies and otherwise meet the definition of a “qualified insurer” must make available coverage for insured losses resulting from an act of terrorism as defined under TRIA.


   Using a captive to insure an organization’s exposures against acts of terrorism can be a viable, cost-efficient alternative to traditional property programs including terrorism.


   There are several key areas of opportunity to enhance TRIA coverage via use of a captive. Because property policies typically exclude these coverages or because costs of insuring such risks are generally prohibitive, using a captive to provide the coverages can be particularly beneficial.


International Terrorism and Political Violence Insurance


   The standalone terrorism insurance market can offer coverage for assets in countries where the insured’s risks are located (subject to certain country limitations), “high-risk” countries, and/or countries where terrorism insurance is required by the lender of mortgagee.


   In situations where property insurance is extended to include coverage in accordance with the local pool, and standalone terrorism policy will be on a difference in conditions (DIC) or difference in limits (DIC/DIL) basis.


   Political violence policies are designed to respond to a broader class of perils in developing countries than only terrorism.


   Standalone political violence program limits of between US$100 million and US$500 million are commonplace. Within a terrorism insurance program, political violence sublimits ranging between US$50 million and US$200 million are becoming more common.


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