Opportunities Still Exist For Standalone Terrorism Coverage

Mr. Mandel told National Underwriter that premiums often range from 3-to-5 cents per 100 dollars in the value insured, but there are also much higher rates for high-risk properties. The majority of policies have one-year policy terms.

Currently, New York-based American International Group Inc., ACE USA in Philadelphia and Berkshire Hathaway in Omaha, Neb., as well as Lloyd's of London syndicates, are offering standalone coverage to U.S. insureds, Mr. Mandel noted. Additionally, there are a few Bermuda-based companies–AXIS Specialty, Endurance Re and Renaissance Re–that continue to write freestanding terrorism policies after the passage of the Act.

"One thing that is important to note is that standalone policies offer broader coverage," said John F. Graham, senior property executive for AIG. "They also provide coverage for terrorism by domestic terrorists, whereas the government protection does not offer that. The bill has not diminished AIG's standalone product," said Mr. Graham.

Another concern regarding the terrorism bill is what will happen when the federal reinsurance program ends in a couple of years, and whether it could be extended, he said.

"We still found several clients after the passage of the Act," Mr. Graham said. He added that the company had only one or two cancellations of its policies since last November, even though many insureds had the option of choosing a two-way, 30-day notice period for either party to cancel the coverage.

He noted AIG currently has more than $200 million in written premiums and some 300 clients for its standalone terrorism policies, and that the capacity limit per location is usually $150 million. "These are typically national accounts, including landmark-type properties," Mr. Graham said.

ACE USA, which has been offering standalone coverage since last May, is even looking at ways to expand its business, according to Christopher Yaure, director at the company's specialty property-casualty unit.

Mr. Yaure said his company expects to do better in 2003 than it did last year and offered a couple of reasons for this forecast.

"Now, everyone is aware of terrorism coverage. People have to face the question of whether they want to buy the coverage in their standard property policies."

"With TRIA, the standalone terrorism policy is a more-recognized product, and it's harder for risk managers not to buy something for terrorism coverage. But they also recognize that TRIA is incomplete," Mr. Yaure said.

"We have gotten a couple of cancellations since Nov. 26,"–when President Bush signed the terrorism bill–"but there have been no massive cancellations," Mr. Yaure noted, even though roughly half of ACE clients with standalone coverage have cancellable policies.

To be sure, many standalone policies, with their one-year lifespan, have yet to reach renewal periods and no one can be certain how many insureds will keep their coverage.

Plus, the insurance industry is still in a period where insurers are required to give quotes on the broader coverage–companies have until Feb. 26 to comply–and buyers have 30 days after receiving the quotes to respond whether to accept the coverage at additional costs.

But Mr. Yaure agreed with Mr. Graham that the most significant factor that helps standalone coverage is that TRIA applies only to international acts of terrorism, while standalone policies can cover both international and domestic terrorism.

"Our standalone policy also covers acts that are committed for religious reasons, and that's not necessarily covered by TRIA," Mr. Yaure added.

But when asked whether insureds now have a chance to get better deals on coverage from their traditional insurers, Mr. Yaure said there are many variations, since the pricing for terrorism insurance is still at an early stage. "They can now get better deals from traditional insurers and vice versa. But standalone also offers broader coverage, so it's not really comparing apples to apples," he argued.

Another opportunity for insurers that currently offer standalone terrorism policies could be in liability coverage, since standalone specialty policies have previously been property-only, according to Mr. Yaure. "I have heard demands for standalone terrorism liability coverage from some brokers," he noted.

Stephen Ashwell, terrorism underwriter at Hiscox, one of some 20 Lloyd's of London syndicates that offer standalone coverage to U.S. insureds, said TRIA will definitely have an impact. But "the choice for our clients is whether they want the limited coveage TRIA provides or the certainty that we offer," Mr. Ashwell said.

Mr. Ashwell estimated that, overall, Lloyd's syndicates had some $150 million in written premiums for standalone coverage in the United States last year. "At Hiscox, we quoted about 4,000 risks and got orders for about 1,000 of them," he said, adding that the pricing had also become more reasonable during 2002–and more competitive, compared to what other insurers could offer for their broader coverage.

Gail Norstrom, managing director of Aon Corp. in Chicago, agreed there was a general downturn in standalone coverage pricing last year, but he added there is still more room for the price to drop.

"It started out very, very expensive and ended up just being expensive," Mr. Norstrom remarked.

"There have been a very few cancellations of standalone terrorism coverage because these are very senior-level decisions, and because the standalone covers domestic and foreign terrorism" he said.

Another industry expert who sees a continuing need for standalone terrorism coverage, even in a diminished capacity, is Richard Betterley, president of Sterling, Mass.-based Betterley Risk Consultants Inc.

"I would imagine that the Act would diminish the amount of business they would write. I would also expect that they would have to consider lowering the rates, but there is still a role standalone coverage plays," said Mr. Betterley.

P.J. Crowley, vice president at the Insurance Information Institute in New York, added that much depends on what policyholders now want to do following the passage of the terrorism bill, and that standalone coverage can play a complementary role to what traditional insurers are now required to offer.

"The insurers are now required to offer comparable coverage in terrorism that exists in broader policies. In some cases, when there is a low risk, some insurance companies are providing the coverage at little or no costs," Mr. Crowley said.

"But on the higher-end of the scale, for properties that represent highest potential risks, it may well be that they want to negotiate separate standalone policies in addition to broader policies," he added.

"The narrow market has been expanded by the bill, but it doesn't mean standalone terrorism coverage will be abandoned. It just won't be the only option," Mr. Crowley said.

Reproduced from National Underwriter Edition, February 10, 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.