Terrorism Coverage Remains Stable—But Is Subject To Change

On the 10th anniversary of 9/11, terrorism insurance remains stable, but availability and affordability could be affected should there be a catastrophic event that reduces capacity, according to a report from Guy Carpenter.

The reinsurance broker, a subsidiary or Marsh & McLennan Cos., released in August an 18-page report, "Terrorism: Terror Market Continues To Provide Abundant Cover." According to the report, capacity in the United States is estimated to stand somewhere between $6 billion and $8 billion.

However, the report notes that a portion of the capacity remains available through the Terrorism Risk Insurance Act of 2002 (TRIA), which provides a government backstop to acts of terrorism.

On a global basis, there is $9 billion of capacity, with an additional $2 billion of excess capacity authorized but not assigned.

Despite the capacity, the report continues, reinsurance pricing has begun to flatten out after years of downward movement. The report notes that while acts of global terrorism peaked in 2006, at more than 14,400, acts of terrorism "still remain at historically high levels" at more than 10,000 in 2010 alone.

Due to its unpredictable nature, insurers and reinsurers struggle to quantify the risk. "The human element means the nature of the threat is forever changing as groups relocate and adapt their tactics in response to counterterrorism measures," says the report.

The cost of terrorism insurance is "predominantly driven by the supply/demand equation" rather than sophisticated underwriting, unlike with natural perils. While that may lead some to assume pricing would decline, terrorism capacity is affected by other capacity events. The reason is that reinsurers put the capital in a pool for low-frequency, high-severity catastrophe claims.

The catastrophe events of 2010 and 2011 have depleted some of that reinsurance capital. Depending on events during this Atlantic hurricane season, reinsurers could see capacity reduced even further.

Capacity has not changed over the past five years, the report says, and is "not expected to change in 2012, barring major events or very strong currency movements."

As for TRIA, talk of cuts to the program has given way to "more pressing financial matters," and it is not expected to become an issue until its expiration in 2014.