The cost of terrorism insurance coverage is expected to become “volatile” if the federal terrorism insurance backstop is not extended, Marsh, Inc. says in a new report.
Marsh’s annual “Terrorism Risk Insurance Report” was released today as part of a roundtable discussion at the Visitor’s Center of the U.S. Capitol, which brought together industry experts, clients and policymakers.
The report says uncertainty over whether the current Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) already has affected organizations that purchase property and casualty insurance.
The report also says the alternative/nontraditional reinsurance market that recently emerged for natural hazard property catastrophe risk “has not yet widely deployed to the risk of terrorism.” Marsh says this appears to be because of less confidence in the probability component of terrorism models, the (long) tail risk/payout patterns for workers’ compensation and the possible correlation of a downturn in the equity/investment market to a large-scale terrorism event.
“It is expected that the alternative nontraditional reinsurance market will be addressing these challenges and will likely offer additional terrorism capacity in the future,” the report says.
Dan Glaser, president and CEO of Marsh & McLennan Companies, who hosted today’s roundtable discussion, says, “We believe TRIA is a model public-private partnership. Marsh’s new report confirms there is strong, long-term demand for the insurance it backstops with more than 6 out of 10 companies in the survey purchasing coverage. The existence of the federal program plays a major part in the availability and affordability of the coverage.”
What is a terrorist attack?
As the report was being released, Philip Edmundson, co-founder of William Gallagher Associates, a Boston national brokerage firm, was quoted in the San Francisco Chronicle as saying that, as a result of last year’s Boston terrorism event, 80% of Gallagher's 5,000 small and midsize customers now have terrorism coverage, compared to 50% before the blasts.
The Marsh report says the Boston bombings “are a sensitive reminder of the ever-present threat of mass violence in the U.S.” and that the event “also sheds light” on how and when TRIPRA is triggered.”
While the attack has not been classified as an act of terrorism under TRIPRA’s requirements—an event must be certified as a terrorist event by the Secretary of the Treasury, the Secretary of State and the Attorney General, and have losses exceeding $5 million—it was described to reporters as an “act of terrorism” by President Barack Obama and law-enforcement officials, Marsh says.
“This highlights the need for a reauthorization bill to include a streamlined TRIPRA certification process that can clarify what type of event may or may not be certified and the timeframe for certification after an event occurs,” the Marsh report says. “As TRIPRA covers certified acts of terrorism, this event highlights the potential importance of including noncertified acts of terrorism on coverage forms.”
The take-up rates for terrorism-risk insurance in 2014 was 62% of P&C property policies, according to Duncan Ellis, Marsh’s property practice leader, but that as a result of the uncertainty, workers’ compensation insurers are evaluating what their business will look like absent TRIPRA, causing some to stop underwriting risks of employers in certain high-profile industries with large employee concentrations or in certain major cities. Ellis made the major presentation at the U.S. Capitol event.
The report said many property-insurance policies in 2014 were endorsed with sunset clauses that cancel terrorism insurance coverage effective Dec. 31, 2014, if TRIPRA expires.
The report said that, according to interviews conducted by Marsh in 2013 and 2014, approximately a third of property insurers will include full-term terrorism coverage for policies extending into 2015, and almost half of the property insurers surveyed indicated that they will not offer standalone terrorism coverage after TRIPRA’s scheduled expiration.
The report also says that, this year, some employers with large concentrations of workers and companies in major U.S. cities have experienced limited terrorism insurance capacity and increased pricing, while others have not been able to purchase it at all.
Should Congress not renew the federal backstop, the market dynamics for terrorism insurance will be disrupted and will likely result in increased pricing and limited capacity, especially for risks in the central business districts of major cities, the report says.
“Commercial-property lines are especially sensitive,” the report says, noting that property insurers likely will exclude or dramatically reduce terrorism coverage from policies. “The private-insurance market is unlikely to be an adequate substitute to TRIPRA; what limited coverage is available will be met with increased pricing,” the report states.
Who’s buying coverage?
The report says education organizations purchased property terrorism insurance at a higher rate—81%—than any other industry segment in 2013. Health care organizations, financial institutions, and media companies had the next highest take-up rates among the 17 industry segments surveyed, all above
70%. “This may be due in part to concentrations in those sectors of organizations in central business districts and in major metropolitan areas, which are likely perceived as being at higher risk for terrorism,” the report says.
The construction, manufacturing, and food and beverage sectors were among the industry segments with the lowest take-up rates, all in the mid-40% range.
Companies in the Northeast are more likely to purchase property terrorism insurance than in any other region. “This is likely attributed to the Northeast’s concentration of large metropolitan areas, including Washington and New York City; the perception that major cities may be at higher risk of a terrorist attack; population density; and that previously the region was the site of the 2001 attacks,” the report says. The West saw the lowest take-up rate in 2013, at 55%.