Story Of The Year: Terrorism Bill Passes At Last
It took over 14 months and a lame duck session of Congress, but a law establishing a federal reinsurance backstop for terrorism losses was finally approved. The big questions now are how to implement the program, and will it do the trick?
Reactions from industry observers run the gamut, from consumer advocates fretting that insurers will seize the opportunity to price-gouge, to rating agencies concerned that carriers will practically give terrorism insurance away to land a big account.
The law appears to solve the key insurance problem facing buyers following the terrorist attacks of Sept. 11, 2001: availability of coverage. Or does it? While the law seemingly mandates that carriers provide terrorism insurance, might insurers be able to pass on nuclear, biological or chemical events if states permit such exclusions, as early indications from the Treasury Department suggest? That would be a huge loophole.
In addition, there is no federal control over pricing, and no mandate for buyers to take the coverage. So it remains to be seen who in fact will buy terrorism insurance, and at what cost.
Officials at ACE Ltd. believe the coverage will be reasonably priced, because it is in the best interests of the industry to spread the risk as widely as possible, thereby arguing for affordable premiums. But the truth is no one knows what the price will be, or even what it should be–although there won't be any shortage of modeling firms that will try.
The Bottom Line: Insurers will give it their best shot on pricing, and risk managers with high-profile locations or high concentrations of employees or facilities will have to swallow hard and pay whatever it costs to secure coverage. What CEO is going to risk having to explain after another terrorist attack that the company was offered insurance but refused it due to short-term cost considerations?
No Light At The End Of The Hard Market Tunnel
In November 2001, the market barometer produced by Dallas-based MarketScout.com showed the average premium increase hitting 19 percent. A year later, the barometer has topped off at a whopping 32 percent, with no letup in sight.
Last year, the market was hardening even before the Sept. 11 attacks, with the barometer coming in at 11 percent for August 2001. The terrorist attacks soaked up tens of billions in industry surplus, hammered the economy, undermined the stock market, and assured premium hikes for as far as the eye can see.
Insurers, hard put to produce returns-on-equity high enough to attract new capital even with premiums soaring, have no choice but to keep hiking rates to improve profitability.
The only solace buyers can take is that after years of falling premiums and expanding coverage, prices are only now beginning to approach levels from the early-to-mid-1990s. But that rationalization will offer little comfort to risk managers who have to explain skyrocketing insurance costs and shrinking coverage to CEOs obsessed with belt-tightening in this poor economy.
The Bottom Line:
Despite severe price hikes two years running, insurers are not rolling in cash. Indeed, boosts to reserves, low interest rates and a poor equity market are forcing carriers to use current income to pay for prior-year losses, and to write insurance for a profit. This is bad news for buyers, who should not expect much if any rate hike relief for all of 2003.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 30, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.