Insurers Must Be Open, Clear When Pricing Terrorism Risks
With an exposure as difficult to underwrite as terrorism, it is inevitable that insurers will be challenged by regulators and consumer advocates about how they go about pricing the risk.
The first clash is occurring in Washington, D.C., the backyard of the U.S. Congress, which required carriers to offer the coverage as part of its landmark Terrorism Risk Insurance Act.
The insurance commissioner of the District of Columbia, Larry Mirel, loudly challenged data developed by the Insurance Services Office suggesting that businesses located in D.C. were 100 percent more likely to be the target of a terrorist attack than those in bordering Maryland and Virginia. He called ISO's assumptions "off the wall."
ISO–and everyone else in the insurance industry, for that matter–is under tremendous time pressure to get a handle on rating terrorism exposures. This despite the fact that one of the reasons insurers shied away from the risk in the first place is that it is so inherently unpredictable. Even ISO admits that it doesn't have a lot of historical data to go on.
Still, isn't it common sense that Washington, D.C. would be a prime terrorism target? Perhaps, but sections closely on the border of neighboring states are anything but secure. The same could be said of ISO's own headquarters in Jersey City, N.J., right across the Hudson River from Ground Zero (and close by our own editorial headquarters in Hoboken), yet we wonder if the same rates for terrorism coverage will be charged for risks in this part of New Jersey as apply to the heart of New York City.
Insurers, historically, have been very reluctant to discuss their underwriting and rating criteria, in large part due to proprietary concerns. However, with the highly sensitive nature of terrorism risk, carriers need to be absolutely open and clear as to how they are distinguishing one particular exposure from the rest.
Location has always been a very touchy topic in insurance underwriting, but clearly it is a factor of prime concern when it comes to assessing terrorism exposure. Still, application of this controversial underwriting criterion must be clearly justifiable.
We do not mean to take ISO to task. The organization faces a daunting challenge–to define the undefinable; to put a price on a risk of potentially enormous severity, but relatively little frequency. Not even natural disasters–which are just as devastating but not nearly as unpredictable–put ISO and individual company underwriters in such a tough spot.
Still, insurers lobbied hard for the Terrorism Risk Insurance Act. Certainly, the law did not provide a backstop in the way the industry would have preferred, but politics is compromise, and this case is no exception. Insurers must make the best of it, and that starts with pricing the exposure reasonably and sensibly.
Those insurers that are arbitrary or overtly discriminatory in their terrorism pricing decisions risk being accused of another form of redlining. That could bring regulators–including the new kids on the block, the federal government–charging to the rescue of aggrieved commercial insurance buyers. Insurers need to make sure it doesn't come to that.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 20, 2003. Copyright 2003 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.
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