Terrorism Insurance Capacity Up, But Demand Flat

NU Online News Service, Jan. 31, 10:52 a.m. EST

WASHINGTON—Capacity has increased for terrorism risk insurance since 2006, but take-up rates remain about the same, a Treasury working group reported late Friday.

The report said that take-up rates among commercial insurance policyholders reached approximately 60 percent in 2006, "but have remained roughly flat since then."

The fact that the take up rate has remained at 60 percent despite a decline in the price of various products indicates demand for terrorism risk insurance has "leveled off," the report said.

The report said improvements in the terrorism risk insurance market may have occurred due to "improvements in modeling and managing accumulation and concentration of aggregate loss exposure."

Other factors include new market entrants, increased competition and heightened capital positions of the property and casualty insurance and reinsurance industries.

At the same time, the report suggested that the "industry better understands aggregate risk and the increased capacity and competition have resulted in decreases in price generally."

Nevertheless, capacity remains constrained in some markets and some commercial insurance policyholders in high-risk urban areas still have difficulty obtaining coverage with sufficient lists, the report said.

Moreover, the report implied that a federal role in the market will remain for at least some time to come because "market participants—policyholders, insurers, and reinsurers—remain uncertain about the ability of models to predict the frequency and severity of terrorist attacks.

"Such views influence policyholder perception of risk and purchase decisions, as well as insurer and reinsurer capacity allocations," the report said. "This may limit further development of reinsurance capacity."

The report was based on independent analysis and the views of a number of interested parties that commented on the issue.

The report concluded, "As many commenters point out, the [TRIA] program provides an incentive to property and casualty insurers and reinsurers who might not otherwise provide terrorism risk insurance at current capacity levels, or at current prices, absent Federal support or state law mandates. It does this by providing some degree of certainty of an insurers' maximum loss exposure.

"However, policymakers should review aspects of the program in order to encourage further development by the private sector."

The report was issued by the President's Working Group on Financial Markets. It is required under the 2002 Terrorism Risk Insurance Act, and is the first since 2006.

The group said the next report will be issued in 2013.

Members of the working group include the Department of the Treasury; the Board of Governors of the Federal Reserve System; the Securities and Exchange Commission; and the Commodities Futures Trading Commission.