The events of September 11, 2001 constituted the largest catastrophe in the history of insurance. Despite the shock of estimated combined claims of over $32 billion, the global insurance network held and adapted. Before that date, the market for terrorism insurance was small and specialized. After that date, the demand exploded and prices rose as many insurers excluded terrrorism coverage.
Some corporate insurance buyers found the resulting prices to be unaffordable, or were unable to purchase terrorism coverage at any price. In response, the United States Congress passed the Terrorism Risk Insurance Act of 2002 ("TRIA") which provided $100 billion in federal reinsurance, nullified terrorism exclusions, and required insurers to "make available" terrorism coverage.
TRIA expires at the end of 2005, and may or may not be extended. The continuing need for TRIA, or a measure like it, has been a topic of intense political and economic debate as corporate risk managers and insurance providers plan their 2006 insurance and reinsurance programs.
Released on December 15, 2004, a new study, "Terrorism Risk Management & Risk Transfer Market Overview" is now available (free registration required) from the global insurance brokerage firm Aon. According to its Executive Summary, the report "summarizes the salient features of the central components of today's global marketplace for terrorism insurance," and is "designed and intended to provide a current snapshot of the state of the terrorism insurance marketplace and to describe metrics, risk control, and other issues surrounding it." Ibid.
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Aon reported on its examination of data regarding 500 of its corporate accounts that renewed coverage in the previous 12-month period. The report includes detailed graphs and tables of data regarding "take up" rates and pricing for terrorism coverage broken down by variables including account size, industry segment, total insured values ("TIV") and geographical location. Aon concluded that the presence of TRIA increased availability and affordability of terrorism coverage, and that the percentage of insureds that purchase or "take up" terror coverage has increased substantially in the past year.
Aon also examined the upsides and downsides of the use of single-owner captive insurers to handle terrorism exposures. It also examines U.S. Treasury Department interpretive letters addressing concerns over potential use of captives to "game" the TRIA system, and suggests ways of styling a captive program to satisfy the concerns of Treasury.
"Fire following" an event is a hazard that must be covered under the 1943 New York Standard Fire Policy ("SFP") language required by statute in 29 jurisdictions. Fire following the terrorist attack played a key role in the destruction at the World Trade Center on September 11. Aon notes 9 states that amended their statutes to allow insurers to exclude from such SFP coverage "fire following" an otherwise uninsured terrorist event.
The study examines arguments for and against extension of TRIA beyond 2005, and bills pending that would continue its "back stop" provisions. It also offers hypotheses on what the market would look like if TRIA were not extended, and raises doubts that satisfactory alternatives can evolve before the end of 2005. It also provides a view of how TRIA coverage would "unwind" if not renewed or extended, predicting a "clear potential for significant confusion and disruption in the market as TRIA expires." Id., page 40.
Available capacity for "Stand-Alone" terror coverage is also presented in tables in the Aon study, based upon information obtained by Aon in the course of placing coverages for its customers. It also provides information about Stand-Alone coverage form language and the definition of terrorism, generally based upon the London market "T3" definition: "an act of terrorism means an act, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organization(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes."
The study report closes with an analysis of the challenge and importance of corporate management of the terrorism risk.
Appendices include summaries of recent U.S.Treasury Regulations, a listing of international terrorism risk programs and a list of some officially recognized terrorist organizations and examples of potential methods of attack.
Although Aon clearly discloses its support for the continuation of the TRIA provisions, its report provides substantial information of interest to objective students of the issue.
Other Unintended Consequences postings about TRIA resources available online: