The Clock Is Ticking

The attack also reminded the Western world of a kind of threat that stands in stark relief to the "super-terrorism" risks dominating the public imagination since 9/11. Although the Westgate attack was by members of Al-Shabab (an Islamic Somali militant group seeking revenge for Kenya's military intervention against them in Somalia), the choice of the target was no coincidence: Westgate was Nairobi's most upscale shopping center, built to Western standards. And the primary targets in the mall were any non-Muslims as well as Westerners. But most chilling of all: the attack was the sort of action that could be repeated far more easily than the airline attacks of 9/11.

If terrorism is not going to go away, then TRIPRA's backstop shouldn't go away either, say the collective voices of the Terrorism Risk marketplace.

As a whole, the market for Terrorism Risk Insurance is becoming competitive for carriers seeking lower-risk clients, says Robert Cruz, Regional Executive-Southwest for Hiscox USA and the product line expert for War, Terrorism and Political Violence.

New carriers have entered this arena in recent years, providing more capacity and targeting accounts that are less risky (those that may not have a major city exposure like New York, San Francisco or Chicago or have a federal government building on the property), making the market more competitive, he says. Hiscox is seeing a lot of Terrorism take-up among commercial office buildings in many different cities, like Orlando.

"Those accounts are being sought after by the new carriers into the marketplace," says Cruz. "Those are seeing some rate decreases because they are more desirable accounts, because they are less risky."

Some insurers are adding new enhancements to Terrorism Risk policies to both lure in clients and speak to rising concerns about kidnapping, extortion, stalking and political upheaval.

The market has seen anywhere from a 10 percent to a 20 percent rate decrease year-to-year. The Property market on Terrorism, Cruz adds, "has come down tremendously since 2005."

Hiscox's Terrorism cover includes only terrorism and not Political Violence, but the company does offer a separate, more robust policy that combines the two.

"Political Violence takes into account different types of coverages, which we don't see much of in the U.S," Cruz says. "It's more for other countries like Mexico, Asia, and the Middle East, those types of locations."

Generally, interest in Terrorism cover increases whenever there is a major event, like the Boston Marathon, after which Hiscox saw an rise in requests for public-events cover, such as other marathons, concerts and "anything that has large attendance for the public," Cruz says.

"I see a lot more buyers of this type of insurance than I've seen even in the marketplace before," he notes. Prices have dropped since the onset of Terrorism insurance in 2002-2003, and there's more capacity in the marketplace, which allows for more competition.

That, in turn, is attractive to certain types of locations—large metropolitan areas, or areas with an aggregate of federal buildings—that pretty much have to buy Terrorism insurance.

"They don't necessarily oppose it too much because the prices are so low as opposed to what it used to be," Cruz says.

A lot of the Terrorism policies in the U.S. marketplace are Property policies with Terrorism tacked on, as insurers are required to offer Terrorism coverage under TRIPRA, Cruz says. The closer we move toward TRIPRA's expiration date, however, the more inquiries Hiscox is getting about coverage beyond that expiration.

If TRIPRA is not taken up by Congress this year, "it's a guessing game whether it will be taken up early next year or sometime next year at all," says Cruz. "If history is a guide for this law, it has always come down to the last week of December."

One of the new carriers entering the Terrorism Risk market is XL Group, which in September launched a new Crisis Management team to oversee coverage for Terrorism, Political Violence, and Kidnap, Ransom & Extortion, as there is crossover among these areas, says Ben Tucker, head of Terrorism and Political Violence business for XL U.S.

In certain countries a Terrorism policy might not be available; instead, an insurer would use a standalone approach, he says. In countries like Asia, Africa, and the Middle East, for example, the risk goes beyond Terrorism into those growing areas of volatility.

"We are seeing clients coming to us putting assets into countries such as Libya, which is being reconstructed; people are still looking for Political Violence coverage in Libya," Tucker says.

XL's Terrorism product is a Property policy, providing property loss and Business Interruption coverage for clients' assets; it also includes coverage for war, civil war, insurrection, revolution, coup d'état, strikes, riots, civil commotion and malicious damage.

"You're really looking at any kind of civil strife that could cause loss of damages to a client's assets: physical loss or damages to an asset," says Tucker.

The breadth of potential clients is "considerable" and includes everything from large multinational corporations to smaller companies to even private individuals, he says.

Political Violence coverage is growing, and is sought mainly by clients who have bought standalone Terrorism cover in the past and feel their current Terrorism coverage is not broad enough; or, by those with exposures in developing markets (Asia, Africa, the Middle East and some parts of South America) who have refocused their concerns on country risk, Tucker says.

"More people are buying it," he adds. "It's a big market that has grown considerably over the year."

Rates are still quite high for high-risk accounts; for low-risk accounts outside of central business districts, "the competition is just incredible," Tucker says. "The rates are declining for lower risk exposures and there is a lot of competition for those types of exposures."

As the world becomes "more volatile," buyers are becoming more aware of the need to protect their assets, says Pamela Fox, associate director for Terrorism and Political Violence at Arthur J. Gallagher (UK) Ltd., London.

Depending on a client's perception of risk, they are buying anything from "plain vanilla" Supplier's & Transporter's cover—purchased primarily by companies that provide products or services to operators of nuclear facilities in the U.S.—to full Political Violence cover, she says.

"To address the growth in chemical warfare, some are buying Nuclear, Chemical, Biological and Radioactive cover" (NCBR) both for property and liability, Fox adds. She's also seeing "keen competition" in the UK among underwriters, with prices reflecting their perceptions of the risk.

Should TRIPRA not be renewed or extended, she anticipates more buyers turning to the commercial market, "although some will choose to go uninsured," Fox says. "Whilst there are many underwriters in this market, with the capacity becoming available each year there will be limited capacity available for certain ZIPs, especially in Manhattan and L.A."

What's more, about $1.7 trillion worth of commercial real estate loans are scheduled to mature over the next five years (see chart). Without terrorism risk insurance, these loans face the risk of not being eligible for refinancing and will go into default.

The U.S. insurance is also watching TRIA/TRIPRA quite closely in terms of the possible impact for carriers, Tucker says. "For me, right now we're in a period of uncertainly around TRIA and it's important to companies to begin looking at the program and considering an alternate solution."

It's difficult for insurers to model against Terrorism Risk as they can with natural catastrophes, says Martin DePoy, Steering Committee Coordinator for the Coalition to Insure Against Terrorism (CIAT) in Washington, D.C. That's why the extension of TRIA/TRIPRA is so important for commercial entities, he says.

"TRIA provides a backstop; it sort of walls off what the potential risk might be to an insurer," says DePoy. "It gives them the comfort to be able to come back in the market and provide some insurance capacity up to those limits that TRIA provides."

Without that "comfort," he continues, insurers could pull out of the market and leave large commercial clients without cover. CIAT, which represents a wide range of businesses and organizations—including the American Bankers Insurance Association, the Real Estate Roundtable and the U.S. Chamber of Commerce—had a voice in the initial creation of TRIA and its extensions. It intends to have a say in the upcoming renewal talks.

DePoy attended one of the initial TRIPRA extension hearings with the House Financial Services Committee (HFSC) in September, representing CIAT's large portion of overall U.S. commercial insurance buyers.

"We are, in essence, the consumers of that product, and as such, I think we offer a unique perspective to this issue," DePoy says.

In a Sept. 19 press release, CIAT praised the HFSC for holding the hearing, which explored the current state of the industry: "Recent events, including this spring's deadly Boston Marathon bombings, have clearly demonstrated that the threat of terrorism is still very much with us, as is the potential for crippling economic damage resulting from a major attack," DePoy stated.

"TRIA is as necessary today as it was in the wake of the 9/11 attacks, and we strongly advocate that it be renewed as soon as possible to avoid the marketplace uncertainty and negative financial impact on a broad range of businesses that could result from delaying the passage of new legislation."