Self-Insuring Terrorism Is Risky

Commercial insurance buyers looking for terrorism coverage basically have three choices–they can buy expensive standalone policies (if they can find any), they can set aside funds and self-insure their exposure, or they can go bare and hope for the best.

Standalone terrorism markets do exist, including Lexington, AIG and London entities, said Scott Wightman, vice president of public sector and scholastic risk at A.J. Gallagher & Company in St. Louis. “People are buying it, but its not cheap.”

In a recent teleconference held by the Public Risk Management Association in Arlington, Va., Mr. Wightman said that whether a public entity should buy terrorism coverage would depend on many factors, such as the types of risks it is concerned with, and whether any bond covenants exist “that would mandate that you not have that included on your policy,” he said.

“Unfortunately, terrorism is a low-frequency, high-severity issue,” he said. “You would love to be able to transfer that risk to an insurance company if you could, but obviously in this marketplace, that might not be possible.”

Instead, he said, it becomes a matter of whether you self-insure the exposure by pre-funding for a possible loss, or just assume the risk and not set aside any funds, “but make sure senior management knows that if we get hit, well be in big trouble.”

As commercial buyers have discovered, most standard property insurance carriers are excluding terrorism, although this varies depending on whether a particular states insurance department has allowed terrorism to be excluded, and under what circumstances, he explained.

He noted that Congress has two conflicting terrorism insurance bills in a House-Senate Conference Committee. “Were all hopeful that something will come out of that with a bill that lets the insurance community feel comfortable enough to provide terrorism coverage again,” he added.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 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.

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Self-Insuring Terrorism Is Risky

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