Expert Commentary

Terrorism Insurance Update 2003

At the Risk and Insurance Society (RIMS) 2003 Conference in Chicago, risk managers and underwriters looked for ways to handle the terrorism risk facing their companies. With the possible exception of the asbestos crisis, insuring the exposure of terrorist attacks within the United States presents the industry with the most difficult and important challenge it has faced in 25 years or more. Coverage options do exist, however, and care must be taken in reviewing and choosing between these alternatives.

Terrorism Risk Management and Insurance
June 2003

"Terrorism is a risk that can be managed like any other," said Gail Norstrom of Aon Risk Services during the panel discussion "The New Rules of Managing Terrorism Risk" at the Risk and Insurance Management Society (RIMS) Conference in Chicago in April (6-10). He went on to offer this analogy: "Think of it like diabetes. You get it and can't get rid of it, but you can treat it."

The panel, which included Joe Wojdula, manager of Corporate Insurance for Motorola, Jim Lewis, president and CEO of CNA Property and Casualty Operations, and Dan Rockwell, senior vice president of Property for CNA, essentially concluded that, while it is far from solved, the terrorism risk and insurance problem is much reduced from a year earlier.

One of my goals at this year's RIMS conference was to learn as much as I could about the current state of terrorism insurance in the United States. To achieve it, I attended various workshops and seminars on this topic and discussed it with as many risk managers and underwriters as possible. After RIMS, I also spoke separately by phone with James H. Costner, senior vice president of Willis Risk Solutions, about his recent experiences in the marketplace and his thoughts on the implementation of the Terrorism Risk Insurance Act of 2002 (TRIA). This article summarizes my findings.

TRIA Coverage Compliance Offerings

Insurers are pursuing very different pricing strategies in their TRIA coverage offerings. Some have clearly decided they don't want to write it and are issuing very noncompetitive quotes so that coverage will be rejected. Most are attempting to price it at what they feel are reasonable levels, but what is reasonable to one company may seem totally inadequate to another. According to Aon's Mr. Norstrom, TRIA property insurance quotes have ranged between 2.6 and 300 percent of the property insurance premium. The median, he said, is around 12 percent.

Many risk managers rejected the initial rollout coverage quotes. Those with whom I discussed it said they felt the premiums were out of line for the exposure their companies faced. Mr. Norstrom confirmed this anecdotal evidence for large accounts, saying that about 12-15 percent of Aon's clients bought the midterm offering during the TRIA coverage roll out in the first quarter of this year.

Of course, this observation was also confirmed by the CIAB survey conducted in March. Nearly 60 percent of brokers responding to the CIAB survey said fewer than 10 percent of their small commercial property/casualty accounts and fewer than 20 percent of medium-sized accounts have purchased the terrorism coverage offered to them by insurers. Of the brokers handling large accounts, 48 percent said fewer than 1 in 5 of the biggest customers have bought terrorism coverage.

With one exception, Mr. Costner confirmed a similar experience with Willis accounts. The exception is for those with property insured by FM Global, where there is a higher uptake. "FM Global is pricing coverage for certified acts (TRIA) and noncertified acts so that it will be attractive to their customers," he said.

Mr. Costner explained that many businesspeople around the country have concluded that it is a problem only for Washington, D.C., New York, and trophy buildings such as stadiums and convention centers. Thus, they believe that it won't happen to them.

"This logic breaks down when you consider that one of the buildings to which anthrax was sent is located in Boca Raton, Florida. A single anthrax-laced envelope caused a loss that may amount to $100 million," he said. "Further, Newsweek and the New York Times have run articles claiming that there may be hundreds or even thousands of embedded terrorist cells in the United States and they are most likely to strike local targets where they can kill or hurt a lot of people, create fear, and disrupt the local economy."

Aon's Mr. Norstrom did say he believes risk managers will take a closer look at TRIA and the other coverage approaches on renewal, and my discussions with risk managers seemed to confirm his belief. They are taking the time to analyze their exposures, learn more about the alternatives, and let the market settle down a bit. Mr. Norstrom recommended risk managers consider the following in their analysis.

  • Corporate exposure assessment: are you in the crosshairs?
  • Type of insurance coverage: will it cover only certified acts or all acts?
  • Limits available: are they adequate to cover your exposure?
  • Insurance program structure: consider layering freestanding insurance below and TRIA coverage in the higher layers.
  • Physical location and type of risk
  • Price

A question that has been raised by some IRMI customers and contacts is whether an insurer may make the purchase of TRIA coverage mandatory. While the Act requires insurers to disclose the charge being made for TRIA coverage, it does not specifically require the insurer to make purchasing the coverage optional. Indeed, this isn't even possible with workers compensation insurance because regulators do not allow terrorism to be excluded.

Thus, it appears that an insurer can simply decide that it will cover TRIA in all the policies it writes in a given line of insurance and include a charge for the coverage, just as is done for workers compensation. We see no issue with this as it is no different than, for example, refusing to offer purchasers of property insurance the option to exclude vandalism and receive a premium credit for the reduced coverage. This may not occur with high exposure lines, like property insurance, in the near future. However, it is likely to be prevalent with lines such as directors and officers (D&O) liability, where there is very little perceived terrorism risk.

In fact, I spoke with an underwriter from a major D&O insurer who said they don't consider TRIA coverage when rating policies. They simply develop a premium based on their regular underwriting guidelines and show an arbitrary percentage of the premium they develop (usually 1 percent) for the mandatory TRIA disclosure. They have no intention of making this an optional coverage.

Jim Lewis of CNA revealed some encouraging news during the RIMS panel discussion: reinsurance for terrorism risk is now available. He indicated that while costly, reinsurance coverage for certified terrorism risk and/or noncertified terrorism risk was available for their January treaty renewal. In a separate conversation in the exhibit hall, Richard Soja, senior vice president and Global Marine & Energy manager with Chubb & Son, confirmed this, telling me that coverage for non-TRIA risks is now readily available in treaties. At this time, however, there are virtually no reinsurance markets for terrorism acts involving nuclear, biological, or chemical attacks—the so-called NBC perils.

Going Beyond TRIA

Of course, TRIA coverage is no panacea for the terrorism risk, especially with property insurance. To be covered, the act causing a loss has to be certified and this leaves acts of domestic terrorism uncovered.

"The definition of 'terrorism' is very narrow. More than half of the acts defined as 'terrorism' by courts prior to September 11 would not be included, with Timothy McVeigh as the best example. If you buy TRIA coverage, you either must go bare on the rest or buy separate insurance," said Mr. Costner.

This is one of the reasons acceptance of TRIA coverage by large accounts has been low. It is also a reason to consider buying full terrorism coverage (i.e., for certified and noncertified acts) from one of the markets that offers it. For U.S. exposures, these include ACE, AIG, AXIS Specialty, Berkshire Hathaway, Endurance Specialty Insurance, Ltd., FM Global, Lloyd's, and Montpelier Re. These companies are all affirmatively seeking to write the insurance as opposed to simply meeting the law. (Although I have been unable to confirm it, I have also been told that, Everest Re and Renaissance Re are markets for stand-alone terrorism coverage.)

Coverage approaches differ among insurers. Some, particularly the Bermuda companies, write the coverage in stand-alone policies while others prefer to include it in the policy covering all other perils. For example, FM Global will write it only for those accounts for which it writes the other perils, and does not offer a stand-alone form. AIG prefers to include coverage for certified and noncertified acts within the regular property program if they write it, but will offer stand-alone coverage when they don't write the other property coverages. During RIMS, ACE announced a new program offering stand-alone direct damage and business interruption terrorism coverage with $100 million capacity, subject to a minimum deductible of $100,000.

"Many big property insurers are now willing to provide coverage for certified and noncertifed acts as part of a new business or renewal quotation. FM Global, for example, will provide policy limits TRIA coverage and substantial sublimits (e.g., $250 million) for noncertifed acts," said Mr. Costner. "When we take submissions to market for large accounts, we are providing a target rate that includes TRIA and noncertified acts coverage, and it's working."

One of the more interesting programs I discovered at RIMS is offered by Hiscox (Lloyd's Syndicate 33). Hiscox has put together an innovative program that can work for midsize and small accounts as well as large ones. "The Hiscox Terrorism Extranet" gives authorized wholesalers a fast and easy way to quote stand-alone terrorism insurance through an innovative online trading platform. James Christopherson, E-Commerce Development director for Hiscox, demonstrated the system for me. It took us only about 10 minutes to underwrite and reserve coverage capacity for a hypothetical $10 million building in Dallas. The resulting premium—which he asked me to keep confidential—seemed quite reasonable to me given the high premiums for stand-alone coverage of which I have been told. The minimum premium is $2,500.

The Hiscox policy covers foreign and domestic terrorism with a capacity through their extranet of up to $25 million per building (multiple locations can be covered under a single policy). (Hiscox also has the capacity to write up to U.S. $50M terrorism insurance on the box at Lloyd's, where it is the market leader.) As opposed to most other markets, there is no deductible. "Since a terrorism loss is likely to be total, what purpose would a deductible serve?" asked Mr. Christopherson. The extranet automatically tracks Hiscox's geographical exposure to loss both through the extranet and the box, and will not allow more than $150 million of coverage to be bound within any 750 meter diameter circle. This is done in real time as brokers use the extranet system, and they can reserve capacity for up to 45 days to give the insured time to decide whether to accept the quote.


With the possible exception of the asbestos crisis, insuring the exposure of terrorist attacks within the United States presents the industry with the most difficult and important challenge it has faced in 25 years or more. In my mind, the terrorism challenge is the more important of the two because it will be with us forever and it influences the entire business climate in the nation, and perhaps the world.

Now that the reality of this exposure has begun to sink in, we are realizing that the risk can be managed and at least some of the risk is insurable. As Gail Norstrom put it at RIMS, "It's a tough risk, but you can think it out, put it in a bucket, and manage it."

TRIA was certainly not a complete solution for the problem. To misquote one of my favorite lines from a Jimmy Buffet song, it's "a temporary solution to a permanent condition." Willis's Jim Costner calls it a "flawed law, not well-considered, that shows no evidence that the drafters had ever read a standard fire policy." He went on to make the excellent point, "The marketplace hasn't a clue as to how a loss that emanates largely from fire following a terrorist attack will be paid."

While not a panacea, at least TRIA told insurers how large a bucket they need by placing a known cap on the amount of losses they will incur if we ever experience another catastrophic attack. The industry is realizing that it must find ways to serve its customers by providing protection against this exposure and is developing coverage approaches and pricing models to do the job. While we are still a long way from solving the problem, we are probably on the right path.

The hard part will be finding ways to deal with the NBC perils. Affordable coverage for these catastrophic exposures may never develop. Regardless, risk managers must find ways to manage these risks using security, business continuity planning, and other risk control techniques.

Note: See other terrorism articles on

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