Terrorism-Insurance Sales Climb as Rates Rise 

Wall Street Journal 16jun04

The percentage of commercial real-estate owners that purchased terrorism insurance rose in the first quarter to the highest level since enactment of the Terrorism Risk Insurance Act in 2002, according to new data compiled by insurance broker Marsh Inc.

The data, to be released today, show that 52% of commercial real-estate owners purchased the insurance in the first quarter, up from 28.1% in the fourth quarter of 2003. Overall, 44.2% of U.S. businesses obtained coverage in the first quarter of 2004, also the highest take-up rate since the act was signed into law by President Bush, according to Marsh, a unit of Marsh & McLennan Cos. The figures include renewals and initial purchases of coverage.

Stephen Lundin, senior vice president of Marsh and head of the firm's national property practice, attributes the rise, in part, to falling and moderating prices for property insurance. "As the costs of their property-insurance programs have become more manageable," he says, "more businesses are seeking to obtain protection against potential terrorism risks. Clients [have more] dollars to shift into buying terror insurance, either increasing the limits or also filling in gaps that may have been in place in their terrorism coverage in the past." Mr. Lundin says initial data for the second quarter show a similar trend among all businesses.

Some of the increase for real-estate owners in particular also could be attributed to lenders requiring that building owners have the insurance -- especially owners in areas perceived to have higher degrees of terror risk. The rise was strongest in central business districts and in the Northeast, where there is a higher concentration of tall buildings and financial headquarters. Eric T. Schake, a managing director with Marsh, said the take-up of coverage was greatest among office-building owners, followed by retail-property owners, hotel owners, apartment and condo owners and industrial-building owners.

The act requires insurers to offer coverage for certain acts of terrorism in the U.S. that are certified by the Treasury secretary, secretary of state and attorney general. Businesses can buy additional insurance beyond that.

The data come as the real-estate industry is pushing Congress and the Treasury Department to extend a key "make available" provision in the act, which is expected to expire at the end of 2005. The provision requires all insurers doing business in the U.S. to offer terrorism insurance on the same terms and conditions that they offer property and casualty coverage.

• See: 
  GAO Report to the Chairman, Committee on Financial Services, House of Representatives - April 2004 
  TERRORISM INSURANCE Implementation of the Terrorism Risk Insurance Act of 2002 (39 page PDF file)

• Executive Summary of GAO report

  Implementation of the Terrorism Risk Insurance Act of 2002

  Treasury and industry participants have made significant progress in implementing TRIA during its first year, but Treasury has important work to complete in order to comply with its responsibilities under the act. For example, Treasury has issued regulations to define program requirements, created and fully staffed the Terrorism Risk Insurance Program office, and begun data collection efforts in support of mandated studies. Insurers also have adjusted their operations and policies to comply with TRIA. However, insurers have expressed concerns that Treasury has not yet decided whether to extend through 2005 the requirement that insurers offer terrorism coverage on terms that do not differ materially from other coverage. Although the act gives Treasury until September 1, 2004, to decide this issue, a more timely decision is needed to avoid hindering underwriting and pricing decisions for policies that are issued or renewed through 2005. In addition, Treasury has not fully established a claims processing and payment structure. Insurers are concerned that a delayed payment of claims by Treasury, whether because of the length of time taken to certify that an act of terrorism met the requirements for federal reimbursement or from inadequate claims processing capability, might seriously impact insurer cash flows or, in certain circumstances, insurer solvency.

  It appears that Congress’s first objective in creating TRIA—to ensure that business activity did not materially suffer from a lack of available terrorism insurance—has been largely achieved. Since TRIA was enacted in November 2002, terrorism insurance has been generally available to businesses. But most commercial policyholders are not buying the coverage. According to insurance industry experts, purchases have been higher in areas considered to be at high risk of another terrorist attack. However, many policyholders with businesses or properties not located in perceived high-risk locations are not buying coverage because they view any price for terrorism insurance as high relative to their perceived risk exposure. Further, those who have bought terrorism insurance remain exposed to significant perils. Insurers have broadened long-standing policy exclusions of nuclear, biological, and chemical events. Congress’s second objective—to give private industry a transitional period during which it could begin pricing terrorism insurance and develop ways to cover losses after TRIA expired—has not yet been achieved. Industry sources indicated that under TRIA, insurance market participants have made no progress to date toward the development of reliable methods for pricing terrorism risks and made little movement toward developing any mechanism that would enable insurers to provide terrorism insurance to businesses without government involvement.