Property Insurers to Exclude Acts of Terrorism, and to Price Premiums for Larger Maximum Losses Oct

October 22, 2001

Property and Casualty insurers, already wary of terrorism before the September 11 attack, are very likely to begin pricing “terrorist attack risk” separately from other coverages, according to a new forecast from Conning & Company.

This and a reassessment of what constitutes Maximum Probable Loss in a claim are two of the key enduring changes that are expected to sweep the P&C industry in the wake of the World Trade Center disaster. Another expected change related to the inevitable increase in losses is escalating premiums in virtually all commercial insurance lines.

“Pricing for acts of terrorism may look a lot more like pricing for other catastrophic events, like earthquakes,” said Clint Harris, vice president and author of the Conning Property Casualty Forecast and Analysis, third quarter edition. “This horrific event not only affects us all emotionally, but it also is likely to effect substantial and enduring changes in the P&C insurance industry.” One of the expected key changes is the separation of terrorism exposure for coverage and pricing. This should help facilitate better tracking of the losses and more precise pricing of the risk. “This is very similar to how earthquake insurance is separately underwritten and priced, and often separately reinsured,” Harris said. “The principal differences are that more is known about where earthquakes are likely to occur and how to control the damage.”

Another of the expected key changes is the recalculation of probable maximum loss (PML) estimates, which are likely to increase the price and lower the net retention of risk for any one exposure. The recalculation of PML may have a multiplier effect on prices. Insurers and reinsurers, faced with larger PML estimates, are likely to seek more reinsurance and retrocession support for their risks. This is a process that simultaneously increases demand as it decreases supply. As reinsurance capacity is consumed, prices will inevitably go up unless additional capacity is added.

“Before September 11, commercial property prices were increasing, but there was evidence that the rate of increase was beginning to slow,” Harris said. “However, this is the sector most affected by losses and reevaluation of the loss estimate and pricing structures. Virtually all commercial lines are going to be affected with an inevitable strain on capacity.” Also, both primary insurers and reinsurers are revisiting coverage offerings and reconsidering and redefining catastrophe insurance and loss triggers.

A complete listing of all Conning Strategic Studies and Forecasts can also be found by visiting the company’s website at

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