Stand-alone terrorism insurance coverage rates are decreasing,but as capacity expands, coverage for some markets remainsexceedingly expensive and availability scant, an insurancebrokerage analysis finds.

The report, "Stand-alone Terrorism Market Update," comes fromAon Crisis Management in London, a member of the Chicago-based AonCorp.

Aon's study said worldwide rates for stand-alone carved-outcoverage have fallen 50-to-60 percent since 2002, and capacity hasincreased by around 20 percent. However, locations such as New YorkCity, where the risk is deemed high, are the exception.

A generally soft market with decreases in property rates hasallowed buyers to afford the purchase of stand-alone coverage wheretheir primary insurer does not offer it, the report said. It foundthe product is usually priced between .01 percent and 1 percent oftotal values.

Insurers have increased capacity, but this comes primarily fromthose carriers who were in the market. Since January 2005, thereport said capacity has increased 15 percent, currently at $1.5billion.

Layered programs are available, but limits above $1 billionmeans turning to Berkshire Hathaway, and compared to other marketsthe insurer "tends to be expensive," Aon said.

Will Farmer, the author of the report and a director in Aon'sCrisis Management, said in a statement that most buyers renew theirpolicies and there is a steady stream of new buyers.

However, the report noted, some cities still experience capacityproblems, notably for New York City and for midtown and downtownareas in Chicago, London, Toronto, Frankfurt, Brussels, Dublin,Hong Kong and Singapore. Certain buildings, such as RockefellerCenter in New York, will find scant capacity, the studyadvised.

Event modeling remains impossible, the report said, because ofthe unpredictability of terrorism. However, impact models, orterrorism probable maximum loss, are available and more valuable toinsurers. The models provide assessment of the threat, mitigationmeasures and highlights in any gaps.

While the stand-alone coverage is purchased primarily to fillgaps in the primary property insurance policy, there is anincreasing demand worldwide for liability coverage where existinginsurers refuse to provide coverage, according to the study.

"It is possible that liability insurers' appetite for retainingterrorism risk will decrease in the near future," the reportcautioned. "Another large liability claim following terrorism willaccelerate withdrawal of terrorism liability cover."

Currently, 95 percent of stand-alone terrorism cover is forproperty.

The flight from terrorism cover was primarily driven byreinsurers, many of whom instituted absolute exclusions effectiveJan. 1, 2002. Since then, there has been some softening, but themarket remains restrictive, according to Aon.

Overall, the report notes, while there is enough capacity tofill current gaps in coverage for property placements, "it isunlikely that insurers will soften their position on terrorismwhile the threat of more catastrophic terrorism losses remain."

Mr. Farmer added, "While most buyers would prefer their property'all risks' insurers to cover full terrorism and only to use thestand-alone terrorism market as a last resort, the reticence ofproperty insurers to soften their position while the threat of morecatastrophic terrorism losses remain means that the stand-alonemarket will continue to have an important role to play in providingcover for terrorism."