Nearly six in 10 large and mid-sized U.S. businesses obtained insurance to cover property terrorism risks during 2005, a dramatic increase from the 2003 average of 27 percent and up from 50 percent in 2004.
Meanwhile, the cost of property terrorism insurance in 2005 was 25 percent lower on average than the 2004 rate.
A new report from insurance firm Marsh Inc. finds the purchase of property terrorism insurance in 2005 varied considerably, depending on a company’s total insured values, location, and industry sector.
The report is based on data compiled from 1,623 businesses and government entities that purchased or renewed property insurance policies in 2005. Notably, while smaller companies (those with total insured values less than $100 million) were far less likely in the past to purchase this coverage, nearly half of them did so in 2005.
Take-up rates– the percentage of companies buying the coverage — varied considerably by region: about 67 percent of firms in the U.S. Northeast and 58 percent of Midwest firms purchased property terrorism insurance in 2005, compared with 53 percent in the West, and 50 percent in the South. Take-up rates increased most dramatically in the West — to 53 percent from 34 percent in 2004 –and in the Northeast, where the take-up rates rose to 67 percent in 2005 from 53 percent a year earlier.
“There’s an increasing awareness of terrorism among businesses across the country,” said Robert Blumber, a managing director in Marsh’s North America Property Practice. “Clearly, businesses and their leadership at the highest levels recognize that this exposure is likely to be with us for some time and that insurance can help them address some of the financial consequences of this risk.”
Within specific industry sectors, financial institutions, real-estate firms, and health-care facilities had the highest overall take-up rates, each exceeding 75 percent. In addition, media companies, those in hospitality, transportation, food and beverage, technology and telecommunications, and educational institutions all had take-up rates above 60 percent.
Take-up rates also varied dramatically by businesses based on their overall insured property values. Firms with total insured values of $500 million to $1 billion had the highest take-up rate, 67 percent, up from 57 percent in 2004. Next were firms with total insured values of $1 billion or more (63 percent), followed by those with $100 million – $500 million (63 percent, up from 50 percent the prior year). About 47 percent of the firms with total insured values under $100 million purchased property terrorism insurance in 2005, up from 35 percent in 2004. Notably, the costs of property terrorism insurance for these companies decreased a dramatic 56 percent from 2004 to 2005, the sharpest pricing decline of the four segments as defined by insured property values._
In the aftermath of September 11, 2001, insurance companies excluded terrorism risks from their commercial policies. The Terrorism Insurance Act, or TRIA, signed into law by President Bush in November 2002, requires insurance companies to offer insurance for certain acts of terrorism in the U.S. that are “certified” by the Secretary of the U.S. Treasury Department, the Secretary of State and the U.S. Attorney General. The terrorism coverage offered to insurance buyers under TRIA must be in amounts and have terms and conditions that do not differ materially from their other policies. On December 22, 2005, TRIA was extended with some modifications until December 31, 2007.
As a complement to certified TRIA coverage, insurers are continuing to offer “non-certified” coverage, for terrorism losses in the U.S. arising from indigenous acts.
As a third alternative, businesses can purchase separate, “standalone” terrorism insurance policies that are outside of their property insurance programs and do not require U.S. government certification.
“A growing number of businesses are choosing to cover at least part of their terrorism exposure in the standalone marketplace, particularly those with coastal windstorm or earthquake risks that face a difficult property insurance renewal,” Blumber noted. “However, if TRIA is not renewed beyond 2007 or if there is no permanent solution in place by then, the standalone insurance market is unlikely to have sufficient capacity to meet demand.”
According to Marsh’s report, capacity in the stand-alone property terrorism insurance market is relatively stable, though limited. The amount available for a specific risk can vary significantly, depending on the risk’s location, an insurer’s accumulated exposure, and the concentration of exposures in a given area.
Source: Marsh Inc.