Amid Fresh Terror Warnings, Insurers Eye Long-Term Risks

Also, insurers still have to keep a close eye on the future of the Terrorism Risk Insurance Act (TRIA), which expires at the end of 2005–and how the terror insurance landscape might change if the government backstop program is not renewed.

"I think there is a very high chance of an attack in the United States at some point in the next two to three years, probably on retail targets–shopping malls or shopping centers–stadiums, train stations or subway systems," commented Ben Garston, underwriting partner at MAP, a Lloyd's managing agency.

"Our business model assumes that there will be an attack in the United States at some point, and that al-Qaida is constantly looking for ways to attack aircraft, ships and properties to further their aims," said Mr. Garston.

He also added that there very well could be another airline hijacking. But this new warning is "a very specific assertion based on particular intelligence, which I am not necessarily privy to," he said. "So I am not sure it would be correct to say that our business model changes the second that the U.S. government issues an alert. This is an ongoing threat."

Plus, he noted, his firm can't necessarily react in a short-term basis since it sells 12-month policies: "But it's not in the sense that we don't care about it or that we are not interested in what the American government has got to say. We are not looking at it on a two-months basis. We are looking at it on a multiyear basis."

The Homeland Security Department has done a good job of keeping the public informed of potential threats, added Christopher Yaure, director of the specialty property-casualty unit at ACE USA, which has been offering standalone terrorism coverage since last year.

"And certainly, we pay careful attention to those threats as the department publicizes them. However, in many cases, these are not long-term threats," Mr. Yaure said. "In those events, our experience has been that, for the majority of our customers, we don't make any adjustments, either to the availability of coverage or pricing. We are writing 12-month policies typically. So one weekend threat isn't as big of an impact as it might be if you were writing, let's say, event coverage."

But, Mr. Yaure added, "if someone were to call me on Friday afternoon and say, 'I would like to have coverage that binds this weekend. What can you do for me?' At that point, I would have a concern that they may have some more information than I have available. And I certainly have to take that into consideration, just as I wouldn't write a flood policy for someone downstream if there are flood waters already cresting upstream."

Mr. Yaure also commented on the war in Iraq, noting that when the fighting began, his company saw that as increasing the short-term terrorism risk, "although, obviously, the expectation from Washington was that it would decrease the long-term risk of terrorism, he said.

Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York, said, "Each individual warning should be seen within the context of overall, ongoing threats."

"The fact of the matter is the Homeland Security Department regularly issues warnings on potential threats and methods terrorists may use," he said. "For instance, one method suggested on Aug. 11 was hijacking a ferry. Terrorists could potentially hijack a Staten Island ferry in New York, for example, and run it into a bridge or maybe crash it into the Statue of Liberty," Mr. Hartwig said.

Since these types of warnings are not unusual, the insurance industry looks at these in the commercial property and liability areas, and factors them more broadly into pricing considerations for terrorism coverage. And besides, only around 20 percent of businesses are currently buying terrorism coverage, Mr. Hartwig added. "Many businesses don't seem to care no matter how high or specific the risk is. They are not going to buy the coverage."

However, if there is another attack–even a small one–in the United States, it would have a disproportionately large impact, because what that could reveal is a crack in the U.S. security system, he added. "It's pure speculation, but certainly it would have a significant impact, as it would represent the first attack on the U.S. soil since 9/11."

According to Andrew Coburn, chief knowledge architect at Risk Management Solutions Inc., a Newark, Calif.-based risk management firm, the risk of terror attacks on the U.S. soil has jumped slightly in the past year. "Basically, the risk of attack has slightly increased overall from a year ago," commented Mr. Coburn, whose firm develops catastrophe risk models for a number of major primary insurers and reinsurers.

"The way we understand the terrorism risk against the United States homeland is that this is very much a reaction to U.S. foreign policy issues. The driver for al-Qaida attacks has been the attempt to change the U.S. foreign policy," he said.

While Risk Management Solutions said the risk from al-Qaida itself has dropped a little this year, "what we are seeing is [that] there are now around 20 other national or multinational groups that imitate al-Qaida tactics," he said. "They are certainly inspired to go after targets using the philosophy espoused by al-Qaida, and they may very well carry out attacks in the United States."

On top of these growing threats, U.S. insurers are also going through a pricing analysis for their TRIA clients, Mr. Coburn said, predicting that changes in federal coverage provisions that kick in later this year will impact 2004 prices.

This November, the deductible level on the TRIA program changes, he noted. So the level at which compensation kicks in is raised. In other words, "the insurance industry will be taking more of the risk next year," he observed.

"This was always seen as a three-year plan, where the government takes a big chunk of the risk but starts to hand it back to the industry year after year."

Mr. Coburn said that this change could result in higher terror coverage prices being charged to clients next year, because insurers would be shouldering more risks in 2004. "It depends on how insurers' portfolios are constructed, and whether clients are in New York or spread across Kansas, for example. But I believe insurers are allowed to pass that onto their customers," he said.

Mr. Coburn also predicted it would be a hard sell to reauthorize TRIA, commenting that "I would be pretty surprised if it were to be extended."

John Gallagher, senior vice president of global property at ACE USA, also argued that the changing deductible level in TRIA could certainly raise the pricing, which is now "fairly stable."

(The most recent Council of Insurance Agents and Brokers survey also found the pricing to be stabilizing, with 27 percent of the risks renewed registering no change in rates, while 18 percent had an increase of between one and 10 percent. Most responses were concentrated around no pricing change or changes in the up-to-10 percent range.)

Mr. Gallagher also added that Insurance Services Office's rates were developed to change and increase over time based on the change in retention. "As the retention goes up, we certainly have to be aware that our exposure increases, particularly in major urban areas where we have large concentrations of risks. It will have less of an impact on small towns," he said.

Furthermore, the mandatory make-available provision of TRIA expires at the end of 2004 unless extended by the Secretary of Treasury for an additional year. "And the Treasury makes that determination at around September 2004.

"So if the make-available requirement is not extended, insureds may find that, as early as January of 2005, some carriers once again may not be providing any terrorism coverage," Mr. Gallagher said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 18, 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.