CIAB Shows Businesses Rejecting Terrorism Coverage
March 2003
Insurers are offering terrorism
coverage, but many U.S. commercial interests are not buying because
they do not consider themselves targets and/or due to the high cost
of coverage. Some high-risk properties nonetheless are finding the
market tight. These are the findings of the Council of Insurance
Agents & Brokers survey of its members, the top tier of the nation's
insurance brokers who collectively write 80 percent of the commercial
property/casualty premiums annually.
by
The Council of Insurance Agents & Brokers
Washington, D.C.
Insurers are offering terrorism coverage, but many buildings,
businesses, and other commercial interests across the United States
are not buying the insurance because they do not consider themselves
targets of terrorism, the cost is too high, or both, according to
a special terrorism insurance survey conducted by The Council of
Insurance Agents & Brokers (CIAB).
Brokers noted, however, that in the days leading up to the war
in Iraq, more businesses were buying coverage out of fear that terrorists
may retaliate for U.S. actions in that region.
Nearly 60 percent of brokers responding to the survey said fewer
than 10 percent of their small commercial property/casualty accounts
and fewer than 20 percent of medium-sized accounts have purchased
terrorism coverage offered to them by insurance carriers. Of the
brokers handling large accounts, 48 percent said fewer than one
in five of the biggest customers have bought terrorism coverage.
The CIAB survey, conducted in the same manner as The Council's
quarterly report on commercial property/casualty market trends,
also provides the first national sampling of the cost of terrorism
coverage. Most of the small and medium accounts are being assessed
10 percent of premium, while large accounts typically are paying
20 percent of premium or less.
The Council represents the top tier of the nation's insurance
brokers who collectively write 80 percent of the commercial property/casualty
premiums annually.
Council President Ken A. Crerar said responses of brokers to
a number of open-ended questions indicate that despite the passage
of the federal terrorism insurance backstop at the end of last year,
there are some significant gaps in terrorism coverage around the
country.
"On balance, the market is significantly more stable with the
Terrorism Risk Insurance Act (TRIA) than without it. However, cost
and availability of coverage remain key issues," Crerar said. "Small,
relatively low-profile accounts seem to be able to find terrorism
coverage at a reasonable cost, but many are opting not to buy it
because they don't think they are at risk. On the other hand, some
of the riskier operations, with real exposures, choose to do without
coverage because of the cost."
"There are a number of market challenges that remain," Crerar
noted. "The full set of regulations for TRIA implementation are
not yet in place. We have been operating for several months under
the threat of a war that has now begun, and insurers still face
significant financial risk under the legislation. So it is not altogether
surprising that gaps in coverage continue to exist. We will watch
the marketplace closely in coming months and expect more stability
and predictability in time."
The bulk of insurers' losses from the September 11, 2001 terrorist
attacks were covered by reinsurance. But following the September
11 attacks, much of the reinsurance market for terrorism coverage
disappeared. Last November, Congress passed TRIA to fill some of
that gap by putting a federal safety net under commercial insurers
for terrorist attacks for 3 years. Under TRIA, insurance carriers
are required to offer coverage for foreign terrorism and certified
acts to their customers, but insurers must absorb a portion of the
loss from acts of terrorism before the government backstop clicks
in. The backstop does not cover domestic terrorism.
The Council's survey indicates that while carriers want to take
advantage of the higher rates now being charged for commercial property/casualty
insurance, they don't particularly want the added exposure to perceived
terrorist targets.
"They have shown concern for offering the [terrorism] coverage
because they are not being reinsured [in the existing marketplace],"
said a broker from the Southwest. "However, they still want to write
business and take advantage of the higher rates, so they are taking
the risk net."
"When a carrier does not want the exposure, they are pricing
coverage at 100 percent of the property rate so that no clients
elect the coverage," said a broker from the Southeast who handles
large accounts.
"If there is a terror exposure, the coverage is difficult to
obtain and expensive," added another respondent.
A broker from the Northeast said location of risk is key to the
terror quotes. "Risks in Manhattan can run as high as 100 percent
in the outer boroughs, or out of the city, 5-10 percent of the property
premium," he said.
But in other areas, the market is not that clear.
"There is great variance with no apparent logic," said a broker
from the Midwest. "In some cases (for small and medium accounts),
there is virtually no charge, and in others, over 100 percent. One
insurer offered a local city coverage at about 105 percent, and
the county in which the city is located at 2 percent."
In addition to cost and the belief that they are not vulnerable
to terrorist attacks, another reason some commercial interests are
giving for not buying terrorism insurance is that the coverage is
not broad enough to do any good, the survey showed.
"Many larger insureds don't feel that TRIA coverage is adequate
[for covering their exposures]," said a broker from the Northeast.
"Nuclear, biological agents exclusions negate coverage," said
a broker from the Pacific Northwest.
The TRIA covers terrorist acts sponsored only by foreign interests,
and CIAB survey respondents said many of their clients do not understand
that. They said the market for domestic terrorism is mixed. Some
carriers are offering coverage—and in some cases, coverage for no
cost if the risk is not perceived to be high. But other carriers
are excluding coverage if they can for the riskier situations.
"Companies … are not offering coverage for domestic terrorism
freely," said one broker in the Northeast, "and you have to be very
proactive to obtain it if the client asks for it. Availability is
limited. Pricing is expensive. Limits are on the low side."
"We are finding that many insurers are not expressing concern
about domestic terrorism. Foreign terrorism is the key issue for
them, and they are not charging additional premium for the domestic
terrorism risk. Other insurers are attempting to exclude it," reported
another broker from the same region.
Although 90 percent of the brokers said they have not seen an
appreciable increase in nonrenewals, and an equal number said insurers
are giving customers the option to buy terrorism coverage, some
high-risk properties nonetheless are finding the market tight.
"Carriers are managing their limits down to the block or refusing
to quote if the hazard is a high risk," said one broker from the
Northeast.
A broker from the Pacific Northwest said his nonrenewals have
involved "proximity to high-rise, high visibility properties such
a government buildings or in high risk areas," while another said
he has experienced problems with airports, landmark buildings, and
anything within a six-block radius of those entities.
Asked to detail the sort of properties, cities, and regions of
the country that are emerging as high-risk in the eyes of insurers,
the brokers' responses spanned the country, east to west and north
to south.
Listed as problem areas were virtually every major metropolitan
area including New York, San Francisco, Los Angeles, Washington,
D.C. and its suburbs, Boston, Baltimore, Chicago, Atlanta, Miami,
Orlando, Tampa, Philadelphia, Denver, Seattle, Dallas, Houston,
Oklahoma City, and Tulsa.
Structures, businesses and locations listed as encountering problems
securing terrorism coverage included some of the most highly visible
properties: marine and petroleum storage terminals, petrochemical
plants, nuclear plants and biotechnology firms; large office buildings
and mercantile centers; trophy buildings; hospitals, government
buildings, and military bases; bridges; stores, hotels, and restaurants
in city centers; high-rise apartments and skyscrapers; stadiums,
concert halls, and convention centers; and high-profile businesses,
such as technology firms and military contractors.
Note: See other
terrorism articles on IRMI.com.
The Council of Insurance
Agents & Brokers is the voice of the market leaders and the
premier association for commercial insurance and employee benefits
intermediaries in the United States and abroad. From its headquarters
in Washington, D.C.—with programs conducted throughout the nation
and world—The Council represents the largest, most productive, and
most profitable of all commercial insurance agencies and brokerage
firms. Only the top one percent of all agents and brokers qualify.
The Council's members in more than 3,000 locations, place 80 percent—well
over $90 billion—of all U.S. insurance products and services protecting
business, industry, government and the public at-large, and they
administer billions of dollars in employee benefits.
Since 1913, The Council of Insurance Agents +
Brokers has worked in the best interests of its members, securing
innovative solutions and creating new market opportunities at home
and abroad. website:
http://www.ciab.com.
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