When the Terrorism Risk Insurance Act finally runs out of steam in 2007, prospects for the insurance industry to pick up the slack appear pretty dim, according to executives with the insurance brokerage firm Aon.

In a Web seminar hosted by the Chicago-based firm, Aaron Davis, vice president, property syndication, Aon Risk Services; Tom Fitzgerald, managing director, Aon strategic account management; and Gail Norstrom, managing director, property syndication, Aon Risk Services, were joined by George Stratts, senior vice president with Lexington Insurance Company, a subsidiary of American International Group, to discuss the status and future of TRIA.

There seems to be little hope that the industry will have sufficient capacity in place when the U.S. government ends its involvement with terrorism risk in 2007, said the Aon executives. They advised clients to prepare for the end of TRIA, as there appeared to be little appetite in Congress or the White House to consider extending the program past 2007.

They predicted that 80-to-85 percent of the current capacity would disappear with the end of TRIA, leaving an estimated total capacity of $1.5 billion–back to 2003 levels–with limits of $550 million for a single risk. The exception in this estimate is Berkshire Hathaway, which would supply capacity beyond these limits, but at substantial cost. Cost for coverage also is expected to rise substantially, with insurers writing terrorism exclusions into their policies.

According to an Aon executive, approximately 60 percent of the broker's clients have purchased terrorism coverage in some form. Risks in tier-1 areas (central city centers considered high exposure risks, such as entertainment or financial centers) would have difficulty securing coverage. Conversely, those whose aggregate loss would be considered low should be able to purchase coverage either on a stand-alone basis or as part of the property insurance coverage.

Pressures are building among commercial property owners to purchase terrorism risk coverage, the executives noted. Corporate governance demands proper placement of the risk as awareness of the potential for a terror attack grows. Lenders also are pressuring borrowers to secure the coverage.

Lexington's Mr. Stratts said coverage will be available on a stand-alone basis among a handful of carriers, but insureds will have to rely upon the individual appetite for risk among these carriers.

He noted the only long-term solution is government involvement that would provide coverage for “extreme” losses.

“Absent a government mandate, insurers will not become involved in pooling risk,” said Mr. Stratts, noting some insurers would primarily be concerned that their individual exposure in such a pool would be more than they could handle.

He held out some hope that once insurance buyers understand the ramifications of TRIA's loss, they may pressure Congress to act in the future.

An Aon executive said the firm has its own idea for a plan that would be similar to Florida's wind storm pool. This plan provides property coverage for Florida property owners by insurers sharing in the overall risk through assessments. It also makes the federal government the insurer of last resort.

In the meantime, they suggested that clients begin preparations for a world without TRIA–by forming relationships with carriers and purchasing stand-alone coverage beyond 2007.

Special Reports /

Loss Of TRIA Has Negative Prospects

Related Stories

Recommended For You