Terrorism Policies Not Created Equal

London Editor

London

Although a standalone terrorism market for property and business interruption has grown post-Sept. 11, not all policies are equal and capacity amounts vary, according to market practitioners.

As underwriters get more comfortable with the risk, standalone terrorism capacity has grown, but there still are only a handful of market leaders. (The need for standalone terrorism cover became a priority after 9/11, when insurers and reinsurers started excluding terrorism from property policies, which was particularly an issue in the U.S. market.)

Lloyds led the pack in October by extending its underwriting sphere to embrace the United States beyond the traditional international terrorism hot spots that had been covered for years, said Julian Taylor, vice president with Marsh Inc. in London, where he heads the terrorism insurance team.

Lloyds was quickly followed by American International Group, Berkshire Hathaway, and the Bermuda company, Axis Specialty, he said.

ACE USA also has entered the fray, announcing recently that it is offering terrorist capacity for the U.S. market. In addition, some of the Bermudian companiesnew and not so neware putting their toes in the water, while a new company called Special Risk Insurance and Reinsurance is awaiting regulatory approval to begin underwriting European-based terrorism cover.

Mr. Taylor said he believes that the Axis, Berkshire and Lloyds policies have some advantages over the other policies in the area of business interruption and in their cancellation clauses, which “give those markets a real cutting edge.”

On the business interruption side, the Axis, Berkshire and Lloyds policies mirror whats in the property policy, he said, and theyll pay for lost business income up to a maximum limit on a traditional U.S. gross earnings form.

“If its on a gross earnings basis, its only limited by the limits. The underwriters will keep paying until you reach the limit provided,” he said.

For a U.K. business interruption form, Axis, Berkshire and Lloyds underwriters will pay out until the indemnity period has ended, Mr. Taylor continued.

“AIG is only offering 25 percent of the limit for [business interruption], so if you have a $100 million limit [on property], theyll only provide $25 million of coverage,” he said.

With regards to ACEs business interruption terms, it has adopted a position to allow the timeframe on business interruption to be negotiable and is no longer limiting the coverage to 90 days, as originally planned by the company, according to Mike Kmetz, vice president, property, at ACE USA in Philadelphia.

“We will work with each client to find a BI timeframe that is mutually appropriate,” he said.

In the area of policy cancellations, Mr. Taylor said that AIG insists on a 30-day cancellation provision, allowing the company to cancel at any time within 30 days notice.

“Any standard property policy has a 30-day cancellation clause,” said Don Nelson, senior vice president of American International Underwriters, which is a New York-based subsidiary of AIG. He questioned why a standalone terrorism policy should be any different. “This is normal market practice and is nothing new,” he said.

Mr. Taylor responded that the triggers for cancellation under a normal property policy are within the control of the insured and include requirements for risk management programs.

On the other hand, he added, the triggers for cancellation of a terrorism policy are beyond the control of the insured. Mr. Taylor noted that these triggers could include changes in political climate or an escalation in the war on terrorism.

“Axis, Berkshire Hathaway, and Lloyds all write the policies noncancelable, which gives them a fantastic advantage,” said Mr. Taylor, noting that all Marshs U.S. programs are noncancelable.

Mr. Nelson pointed out that the Lloyds policies are noncancelable either way for both the underwriter and the client, which could be a negative for the client.

However, Mr. Taylor said the advantages of a noncancelable policy outweigh its disadvantages. “Youre always better off having a guaranteed policy.”

The pressures on clients who bind terrorism are coming predominantly from lenders and from D&O and corporate governance needs, Mr. Taylor noted.

The lenders and the banks, particularly in the real estate market, want to see a noncancelable product, he said. “The cancelable product, as far as theyre concerned, is almost like having a unguaranteed loan.”

Mr. Taylor said AIG has also included a clause that says it has to earn 25 percent of the premium. “So they could theoretically issue a note of cancellation on day one of the policy and still collect 25 percent, although I suspect the clients would see them in court first.”

But Mr. Nelson emphasized that “we wouldnt be in business if we issued notice of cancellation after an event.”

Mr. Kmetz said ACEs product is only cancelable if:

There is nonpayment of premium from the insured and

There is a significant change in the occupancy of the building and material effect of the operation.

When ACE originally started offering the standalone terrorism policy on April 10, its product was cancelable if there was any cancellation of treaty reinsurance. However, Mr. Kmetz said that stipulation has been removed.

“Given the interest by the market to layer terrorism risk, we needed to have an option to issue our policy with a 30-day cancellation notice, so cancellation terms would be consistent,” he said.

Therefore, ACE is now offering both cancelable and noncancelable policies, he said, noting that this issue will be negotiable on each account.

“We feel its the right way to approach this product, giving customers the comfort level to know that were not in and out of the business, that were committed to having our policy out there, giving them real coverage,” Mr. Kmetz told National Underwriter.

“Our intent is not to be in a situation where if the next terrorist act occurs, that we start canceling policiesthats not the right thing to do,” he said.

Discussing the capacity available in some of the markets, Marshs Mr. Taylor said Lloyds provides $150 million of capacity for good risks, which he defined as something in the back waters of Wisconsin rather than on Fifth Avenue in Manhattan.

AIG provides a facility up to $150 million of capacity, said Mr. Nelson.

Berkshire Hathaway will quote $500 million or more “if it is the right sort of deal,” Mr. Taylor said, noting that the $500 million on offer is net to Berkshire.

All Berkshires standalone terrorism deals are personally authorized by Warren Buffett, Mr. Taylor affirmed. (An official at Berkshire wouldnt comment on Mr. Buffetts involvement in the underwriting of terrorism cover.)

Axis Specialty (which is run by John Charman, the former Lloyds underwriter and deputy chairman of Lloyds) will write standalone terrorism up to $125 million, Mr. Taylor said, while ACE in Philadelphia is offering $100 million.

There is additional capacity emerging from Bermuda, he said. “There is talk of Montpelier and there is talk of Renaissance Re. We havent actually done anything with them yet, but both of these markets have been talking about providing terrorism.”

“On many of the placings, in practice, all of the markets have to work together, if you consider some of the values for a medium-sized factory or even a medium-sized office block,” said Ben Garston, underwriting partner at MAP, the Lloyds managing agency. Mr. Garston runs the war, terrorism and political risk department.

“Lloyds isnt big enough on its own, AIG isnt big enough on its own,” he said. “You actually need several players, including Bermudian players, potentially, to use all of their capacity to insure these risks.”

As a result, he said he didnt expect constant competition between AIG and Lloyds or other players,” he said. “I think the brokers realize that they have to use the capacity intelligently and perhaps layer the business or co-insure, using several different markets,” he said.

The standalone terrorist policies exclude nuclear, chemical, biological and cyber-risks, sources say.

These are prudent exclusions because if the worst happens, “the market would find it very difficult to respond,” said Stephen Ashwell, war, terrorism and political violence underwriter at Syndicate 33, which is managed by Hiscox plc, a Lloyds managing agency.

The Lloyds market commonly uses a standalone terrorism policy called “T3,” which was developed last October, while “T3A” is the business interruption extension, sources say.

T3 is has an all-risks terrorism wording, said Mr. Garston. It would cover bombs, fires, aircraft, gun attacks, and it would cover someone driving a truck into a building, he noted.

“The only thing it doesnt cover is acts of war, which we arent allowed in Lloyds to cover for domestic risk anyway, and chemical, biological and cyber-riskfor which we have no accurate rating or aggregation methodology,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 13, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Special Reports /

Terrorism Policies Not Created Equal

Related Stories

Recommended For You