Stand-alone terrorism insurance rates may be plummeting for many risk managers, but even as capacity expands, coverage for some markets remains exceedingly expensive amid scant availability, an insurance brokerage analysis reveals.

The report–”Stand-Alone Terrorism Market Update”–comes from Aon Crisis Management in London, a member of the Chicago-based Aon Corp.

Aon’s study said worldwide rates for stand-alone, carved-out coverage have fallen 50-to-60 percent since 2002, while capacity has increased by around 20 percent.

However, locations such as New York City, where the risk is deemed high, are the exception, the report found.

A generally soft commercial insurance market, featuring decreases in property rates, has allowed buyers to afford the purchase of stand-alone terrorism coverage where their primary insurer does not offer it, the report said. It found the product is usually priced between .01 percent and 1 percent of total values.

Insurers have increased capacity, but this comes primarily from those carriers already in the market. Since January 2005, the report said, capacity has increased 15 percent to its current level of some $1.5 billion.

Layered programs are available, but limits above $1 billion mean turning to Berkshire Hathaway, and compared to other markets, the insurer “tends to be expensive,” according to Aon.

Will Farmer, the author of the report and a director in Aon’s Crisis Management unit, said in a statement that most buyers renew their policies, and there is a steady stream of new buyers.

However, certain locations (see infographic) as well as high-profile buildings, such as Rockefeller Center in New York City, will find scant capacity, the study advised.

Event modeling remains impossible, the report said, because of the unpredictability of terrorism.

However, impact models, or terrorism probable maximum loss, are available and more valuable to insurers, noted Aon, which said the models provide assessment of the threat, mitigation measures and highlights any gaps.

While the stand-alone coverage is purchased primarily to fill gaps in the primary property insurance policy, there is an increasing demand worldwide for liability coverage where existing insurers refuse to provide coverage, according to the study.

“It is possible that liability insurers’ appetite for retaining terrorism risk will decrease in the near future,” the report cautioned. “Another large liability claim following terrorism will accelerate withdrawal of terrorism liability cover.”

Currently, 95 percent of stand-alone terrorism cover is for property, Aon noted.

The flight from terrorism coverage was primarily driven by reinsurers, many of which instituted absolute exclusions effective Jan. 1, 2002. Since then, there has been some softening, but the market remains restrictive, according to Aon.

Overall, the report notes, while there is enough capacity to fill current gaps in coverage for property placements, “it is unlikely that insurers will soften their position on terrorism while the threat of more catastrophic terrorism losses remain.”

Mr. Farmer added that “while most buyers would prefer their property ‘all risks’ insurers to cover full terrorism and only to use the stand-alone terrorism market as a last resort, the reticence of property insurers to soften their position while the threat of more catastrophic terrorism losses remain means that the stand-alone market will continue to have an important role to play in providing cover for terrorism.”