The stand-alone terrorism insurance market is growing healthier, but customers in high-risk zones can pay a substantial premium, and the expiration of the Terrorism Risk Insurance Act may only exacerbate the situation in the United States, according to an insurance broker's report.

Chicago-based Aon's London office has issued a report titled “Stand-Alone Terrorism Insurance Market Update,” reviewing the history and current status of the stand-alone market.

The report said the terrorism insurance market has increased capacity, filling a gap worldwide, and since 2002 rates have declined 40-to-50 percent, but some hot spots are the exception.

While the few insurers willing to write the coverage are reluctant to drop prices on renewals this year, post-Hurricane Katrina, there are rate reductions of 5-to-15 percent where brokers have generated competition, the report said.

“The lack of any knee-jerk reaction to the Madrid commuter train attacks and the events in London in July last year demonstrates the stand-alone insurance market's maturity,” said Will Farmer, a director in Aon's crisis management division, in a statement.

Mr. Farmer added, “The debate over the extension of the Terrorism Risk Insurance Act (TRIA) at the end of last year highlighted the market's growing importance.

“While government-backed schemes such as TRIA have assisted in providing terrorism capacity, their effectiveness varies. The necessity of such schemes in countries where the private market is able to meet demand is questionable. The stand-alone market has a very important role to play going forward,” he said.

The report asserts that the number of insureds buying terrorism insurance has increased as risk managers take advantage of a soft market and spend their budgeted insurance costs on the insurance, coupled with lower rates in the stand-alone market. Banks are also influencing the purchase of a program as lenders insist that clients obtain the coverage.

Market capacity has grown 25 percent since January 2004 and currently stands at $1.3 billion, but much of this has come from existing underwriters increasing capacity and not new entrants into the market. Premiums range from .025-to-1 percent of total insured values, the report said.

Reinsurers are limiting capacity and forcing large insurers to take on large retentions for each event, the report said. Pricing is high, which “has been a significant barrier to entry into the stand-alone market” for new insurers.

The demise of TRIA, the report went on to say, will mean insurers will re-impose terrorism exclusions. Rates will also increase for stand-alone coverage.

TRIA has helped increase capacity, Aon said, but unless there is a “sea-change” in the government's thinking, the broker believes the program will not be renewed or extended in its current form beyond its sunset at the end of 2007.

Robert P. Hartwig, vice president and chief economist for the Insurance Information Institute based in New York, said Aon's report is similar to earlier reports from others and only underscores the success TRIA has had in helping to develop solutions for terrorism risk.

He said the TRIA backstop has been wildly successful, allowing insurers to develop programs and businesses to have an incentive to purchase the insurance knowing the full faith of the U.S. government is behind it.

“The extreme irony here is that this program is bringing such great benefit to workers and businesses, and it is now threatened with extinction,” Mr. Hartwig remarked. “I don't believe the business community has yet to become engaged in working to get this backstop reinstituted.”

Special Reports /

Aon Report Sees Upswing In Terrorism Insurance

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