The cost of terrorism insurance coverage is expected to become"volatile" if the federal terrorism insurance backstop is notextended, Marsh, Inc. says in a new report.

Marsh's annual "Terrorism Risk Insurance Report" was releasedtoday as part of a roundtable discussion at the Visitor's Center ofthe U.S. Capitol, which brought together industry experts, clientsand policymakers.

The report says uncertainty over whether the current TerrorismRisk Insurance Program Reauthorization Act (TRIPRA) already hasaffected organizations that purchase property and casualtyinsurance.

The report also says the alternative/nontraditional reinsurancemarket that recently emerged for natural hazard propertycatastrophe risk "has not yet widely deployed to the risk ofterrorism." Marsh says this appears to be because of lessconfidence in the probability component of terrorism models, the(long) tail risk/payout patterns for workers' compensation and thepossible correlation of a downturn in the equity/investment marketto a large-scale terrorism event.

"It is expected that the alternative nontraditional reinsurancemarket will be addressing these challenges and will likely offeradditional 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 isa model public-private partnership. Marsh's new report confirmsthere is strong, long-term demand for the insurance it backstopswith more than 6 out of 10 companies in the survey purchasingcoverage. The existence of the federal program plays a major partin the availability and affordability of the coverage."

What is a terrorist attack?

As the report was being released, Philip Edmundson, co-founderof 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% ofGallagher's 5,000 small and midsize customers now have terrorismcoverage, compared to 50% before the blasts.

The Marsh report says the Boston bombings "are a sensitivereminder of the ever-present threat of mass violence in the U.S."and that the event "also sheds light" on how and when TRIPRA istriggered."

While the attack has not been classified as an act of terrorismunder TRIPRA's requirements—an event must be certified as aterrorist event by the Secretary of the Treasury, the Secretary ofState and the Attorney General, and have losses exceeding $5million—it was described to reporters as an "act of terrorism" byPresident Barack Obama and law-enforcement officials, Marshsays.

"This highlights the need for a reauthorization bill to includea streamlined TRIPRA certification process that can clarify whattype of event may or may not be certified and the timeframe forcertification after an event occurs," the Marsh report says. "AsTRIPRA covers certified acts of terrorism, this event highlightsthe potential importance of including noncertified acts ofterrorism on coverage forms."

Sunset clauses

The take-up rates for terrorism-risk insurance in 2014 was 62%of P&C property policies, according to Duncan Ellis, Marsh'sproperty practice leader, but that as a result of the uncertainty,workers' compensation insurers are evaluating what their businesswill look like absent TRIPRA, causing some to stop underwritingrisks of employers in certain high-profile industries with largeemployee concentrations or in certain major cities. Ellis made themajor presentation at the U.S. Capitol event.

The report said many property-insurance policies in 2014 wereendorsed with sunset clauses that cancel terrorism insurancecoverage effective Dec. 31, 2014, if TRIPRA expires.

The report said that, according to interviews conducted by Marshin 2013 and 2014, approximately a third of property insurers willinclude full-term terrorism coverage for policies extending into2015, and almost half of the property insurers surveyed indicatedthat they will not offer standalone terrorism coverage afterTRIPRA's scheduled expiration.

The report also says that, this year, some employers with largeconcentrations of workers and companies in major U.S. cities haveexperienced limited terrorism insurance capacity and increasedpricing, while others have not been able to purchase it at all.

Market disruption

Should Congress not renew the federal backstop, the marketdynamics for terrorism insurance will be disrupted and will likelyresult in increased pricing and limited capacity, especially forrisks in the central business districts of major cities, the reportsays.

"Commercial-property lines are especially sensitive," the reportsays, noting that property insurers likely will exclude ordramatically reduce terrorism coverage from policies. "Theprivate-insurance market is unlikely to be an adequate substituteto TRIPRA; what limited coverage is available will be met withincreased pricing," the report states.

Who's buying coverage?

The report says education organizations purchased propertyterrorism insurance at a higher rate—81%—than any other industrysegment in 2013. Health care organizations, financial institutions,and media companies had the next highest take-up rates among the 17industry segments surveyed, all above

70%. "This may be due in part to concentrations in those sectorsof organizations in central business districts and in majormetropolitan areas, which are likely perceived as being at higherrisk for terrorism," the report says.

The construction, manufacturing, and food and beverage sectorswere among the industry segments with the lowest take-up rates, allin the mid-40% range.

Companies in the Northeast are more likely to purchase propertyterrorism insurance than in any other region. "This is likelyattributed to the Northeast's concentration of large metropolitanareas, including Washington and New York City; the perception thatmajor cities may be at higher risk of a terrorist attack;population density; and that previously the region was the site ofthe 2001 attacks," the report says. The West saw the lowest take-uprate in 2013, at 55%.