S&P Downplays Firms' Terror Cover Lack
NU Online News Service, Jan. 9, 12:29 p.m. EST?Analysts for Standard & Poor's in New York said today that although commercial insurers won't renew many types of commercial policies as they seek to cut terror risks the rating implications of non-renewal actions will be limited for corporate insureds.
Sol Samson, a managing director with Standard & Poor's Corporate Ratings group, said in a statement that, "The ratings implications for corporates are likely to be very limited and selective."
While there may be additional risk for corporations that results from lack of coverage or the much greater expense to obtain coverage, he said "the impact would be material only in situations where the perceived specific risk of a terrorist incident was high."
To illustrate the point, Mr. Samson drew an analogy to the availability of earthquake insurance, noting that the lack of earthquake coverage isn't a problem in regions that are not exposed to such natural events.
He also noted that the impact of lack of terror coverage would be diluted to the extent a company is diversified by operating many plants or facilities.
In addition, he said that even in cases that might be considered to carry serious terrorist attack potential, possessing insurance coverage could sometimes be irrelevant.
"If cruise ships were perceived as targets, who would take cruises? If a landmark building were viewed as vulnerable to terrorist attacks, what rents could it command?" he asked. "Insurance cover for the boat or building wouldn't resolve the risk exposure," he added.
Don Watson, a managing director of S&P's Insurance Ratings Group, noted the gaps in coverage could be filled after scheduled renewal dates.
"It is not unusual for policies to be signed after their effective date, meaning these gaps could be filled quite swiftly," he said, adding that other types of market forces could fill coverage gaps. For example, "brokers may create a private sector pool of funds that could provide some limited coverage," he speculated.
S&P said that insurer withdrawal from the commercial insurance market, allowing 2001 policies to go unrenewed for 2002, will spread beyond property and aviation insurance to include risks such as workers' compensation.
While Congress may pass legislation that would help to cap losses to the industry caused by terrorism, "many insurers will not want to provide significant coverage for terror losses regardless of government action," Mr. Watson said.
He explained that terror losses, by their nature, "are difficult to price, and the potential concentration within an insurer's portfolio are such that it would be imprudent for insurers to write coverage without effective reinsurance."
Since most reinsurers are not willing to provide large policy limits, much less uncapped coverage for terror risk, some insurers "are thinking it's better just to opt out of terrorism coverage altogether," he said.
S&P noted that while some relief from terror exposure now exists in 47 states, where some exclusions are allowed, in three states (New York, California, and Connecticut) insurance commissioners have not publicly followed the National Association of Insurance Commissioners' recommendation to allow exclusions. (See related NU articles on New York and California actions.)
Until Congress acts, or the states mandate coverage, the gap in coverage shifts risk back to the corporate, industrial, and real estate markets exposed to the risk, S&P said.
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