Terrorism Insurance: Pricing Steady, But Long Term Solution Needed, Says Expert

By Andrew G. Simpson | February 16, 2006

Pricing to cover terrorism risks is unlikely to change in the short term following renewal of the federal reinsurance program, however that could change quickly if there is another terrorist event, according to a n industry expert.

Dr. James Valverde of the Insurance Information Institute says there are several reasons pricing will not be affected right now.

“The most obvious is that we have not seen a terrorist incident in this country since 9/11 and that goes a long way towards explaining why, for the moment anyway, premiums are not expected to increase. On top of that we can throw in the strong financial performance and the underwriting performance of the industry in the past couple of years and its ability to, in effect, deal with substantive events,” Valverde explained in a video interview on IJ Broadcasting, from Insurance Journal.

III Valverde Interview

Another attack would have a dramatic effect, adds the III’s director of economics and risk management. “If we are talking about trillion dollar mega events clearly, and this has been the argument from the industry from the very beginning, clearly those kind of events begin to call the whole situation into question because the industry does not have the capacity in a sustainable way with those kind of mega events. For the short to medium term and certainly for the duration of the extension of the original version of the TRIA, we do not expect that premiums would be affected in an adverse way. But recognize again that if a terrorist event occurs tomorrow, that situation changes dramatically.”

In the event of an attack, the risk “becomes very real and visceral to people and I’m sure that that would have, at least in the short term, a destabilizing effect on insurance markets and the pricing that stems from that.”

Valverde discusses the new reinsurance program, its coverage triggers and how it shifts risk to the private sector compared to the program it replaces.

“I don’t know that I would say that it is major but it is certainly substantive in the sense that what Washington is clearly doing is sending the private insurance market a clear signal that they want the insurance markets to bear the bulk of this risk. And the federal government’s role in all of this would only come to play or come to pass in the case of so called mega-events or mega-catastrophes where the kinds of insured losses, to say nothing of the broader economic losses that we might see, would be on such a level that it would severely disrupt, if not entirely decimate, the property and casualty insurance industry in this country.”

The new reinsurance backstop expires in two years. As for a long term solution, Valverde believes the industry and government together face a challenge in coming to a solution not just for terrorism but for all extreme events.

” Now with the past hurricane season and all the questions that has raised in peoples minds, people are now beginning to wrestle with the more difficult issue of how this country deals with extreme events in general be they man made on the one hand or natural on the other. And how you manage extreme events in general in a society as complicated as ours is really a question that the Congress will be grappling with for many years not just the two years leading up to the eventual expiration of the Terrorist Risk Insurance Act as we have come to know it,” he added.

The complete Insurance Journal interview with Valverde can be viewed at www.insurancejournal.com.

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