Terrorism Insurance Sales Lag Sticker shock anda perceived lack of exposure to terrorist events in non-urban areasare dissuading many organizations from purchasing terrorisminsurance, according to those involved in selling or buying thiscontroversial coverage.

There are those, however, who did buy, often after spiritednegotiations over premiums and terms with insurers uncertain onexactly how to price and underwrite this new product. The TerrorismRisk Insurance Act of 2002 requires insurers to offer terrorismcoverage, but does not mandate its purchase and does not specifywhat insurers can charge.

“Only about 15 percent of clients with property values over $100million have purchased the terrorism coverage,” said CynthiaMichener, a spokesperson for The Hartford Financial Services Group,based in Hartford, Conn. The 85 percent that turned it down “didn'tconsider themselves in hazardous locations for terrorism,” Ms.Michener added. “These are large clients with risk managers andthey decided to assume the risk themselves.”

Clients located in states with “fire-following statutes” weremore inclined to reject terrorism coverage, according to Ms.Michener. She explained that these states are ones with lawsproviding that fire damage from an event is covered, even if theevent that caused the fire is not. “So a fire from a terrorist actwould be insured, regardless of whether they have or don't haveterrorism insurance,” Ms Michener said.

Hartford's small and mid-size clients (generally those under$100 million in property values) did not have to make a decisionabout terrorism cover, as it was provided to them at no charge, Ms.Michener said.

St. Paul Cos. also indicated that about 10 to 15 percent oftheir large clients had purchased the terrorism cover. PatrickHirigoyen, senior manager of corporate communications for the St.Paul, Minn.-based insurer, noted that many clients are still withinthe window period of the time provided to respond to the offer, sothat figure may rise.

“After 9/11, terrorism was excluded for approximately 5,000 ofour policyholders,” Mr. Hirigoyen said. “They were the first groupthat we notified under the law [TRIA] and offered terrorismcoverage tothese are the ones that still have time to respond. Foreveryone for which we did not exclude it, we are offering thecoverage at renewal, and that happens all throughout the year.”

Mr. Hirigoyen added that it is mainly “large operations” thathave purchased terrorism coverage. He did not have data on whetherclients in any particular part of the country were more likely tobe buyers.

Geography seems to be a key factor in the terrorism coveragebuying decision. Preston Moss, a broker with Blanchard and Calhounin Augusta, Ga., got right to the point: “In this region we justdon't see ourselves at risk. There is no demand for it [terrorismcoverage]. If we were in Los Angeles, Chicago or New York, therewould be more buyers.”

Mr. Moss added that the insurers he places business with aregenerally giving the coverage at no cost to “Main Street risks.”One of Blanchard and Calhoun's larger clients, the Augusta RegionalAirport, rejected terrorism cover after receiving a quote of$165,356. “Weighing the risk versus the cost, I could not recommendthat they spend that money,” Mr. Moss admitted.

Unlike Augusta Regional, the Dallas-Fort Worth Airport did see aterrorism exposure worth insuring. Norma Carabajal Essary, theairport's risk manager, obtained terrorism coverage for a premiumof $156,540 from Johnston, R.I.-based FM Global Insurance Company.D-FW Airport purchased $500 million in coverage for acts by foreignterrorists and $100 million for acts of domestic terrorists, Ms.Essary noted.

The year before, D-FW Airport received a quote of $2.5 millionfor $100 million in coverage, so Ms. Essary is happy with hercurrent premium. “We are an HPR (highly protected risk) facilitywith superior security and operations spread over a wide area,” Ms.Essary explained when asked about the relatively low premium shenegotiated.

To put that $2.5 million quote in perspective, it is about equalto the airport's renewal premium for its entire property insuranceprogram.

“A prudent risk manager or broker must assess the size of theentity, its ability to withstand catastrophic loss, and the numberof patrons it serves in deciding whether terrorism coverage makessense,” Ms. Essary added.

Airports appear to be among the most serious shoppersalthoughnot necessarily buyersas respects terrorism coverage.

A survey conducted by the D-FW Airport found that the majorairports serving Boston, Los Angeles and Chicago have purchasedterrorism insurance. Major airports serving Atlanta, Denver andHouston rejected the coverage, according to the survey.

Mike Natale, risk manager for the Metropolitan WashingtonAirport Authority, said that he purchased terrorism coverage afterit was offered as part of the insurer's TRIA obligation. TheAuthority operates two major D.C.-area airports, Reagan WashingtonNational and Dulles International.

The Port Authority of New York and New Jersey, which operatesthe three major New York City-area airports, did not returntelephone calls requesting information on terrorism insurance. TheWorld Trade Center, destroyed in the 9/11 terrorist attacks, wasowned and managed by the Port Authority.

Wayne Salen, director of risk management for Niagara County(N.Y.), concluded that terrorism coverage was worth the additionalpremium due to a nearby airbase and the extensive publicrecreational facilities connected to Niagara Falls.

Mr. Salen negotiated a $20,000 premium for the coverage afterthe county's insurer, Hartford, Conn.-based Travelers PropertyCasualty Corp., had originally quoted about $60,000.

“We thought we would have to place terrorism coverage in theexcess and surplus market, but TRIA came along and Travelers had tooffer it,” Mr. Salen explained.

He added that he wanted the coverage to be on admitted paper, soTRIA was beneficial in that regard. Mr. Salen noted that the countyhad been insured by Travelers for many years. That goodrelationship was instrumental in holding down the terrorismpremium.

But the fact remains that the vast majority of organizationshave snubbed terrorism coverage. “Most companies just don't feelexposed,” said Gail Norstrom, managing director in the New YorkCity office of Aon Risk Services. “They can't quantify theexposure, can't use risk management tools or modeling.”

The way in which insurers are offering the coverage is alsopartly to blame, Mr. Norstrom said. “The roll-out process has beenchaotic. Insureds got three-page memos from their carriers. Mostdecided to wait until renewal.”

Mr. Norstrom indicated that pricing also became an issue.

“There was such diversity of pricing. With multiple carriers onmost programs, you could have rates from 25 cents to $10″ per $100of property insurance coverage, he said. “The clients werewondering if the carriers knew what they were doing,” he said,adding that “some [carriers] quoted terrorism premiums equal to 25to 50 percent of the entire property insurance premium.”

Mr. Norstrom also noted that the 15 percent “hit ratio” figurecited by some insurers for this coverage sounded “on the highside.”

A recent survey of insurance agents conducted by the Washington,D.C.-based Council of Insurance Agents and Brokers found that 60percent of the agents responding said that less than one in 10small commercial clients had purchased terrorism coverage.

For medium size accounts, that figure rose to one in five. Abouthalf (48 percent) of the large accounts purchased it.

As for the cost of terrorism coverage, the most cited cost wasabout 10 percent of the property premium, but that went up to closeto 20 percent for larger accounts, according to the survey.

Reproduced from National Underwriter Edition, April 7, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved. Copyright in this article as anindependent work may be held by the author.