More U.S. Firms Buying Terrorism Insurance; Prices Decline: Marsh

June 24, 2010

U.S. terrorism insurance purchase rates continued to climb in 2009 as companies of all sizes and across all industries continued to buy terrorism coverage, according to a report by global broker Marsh.

Sixty-one percent of firms surveyed by Marsh purchased property terrorism insurance in 2009, an increase from 57 percent in 2008 and representing a steady climb from 27 percent in 2003, according to The Marsh Report: Terrorism Risk Insurance 2010.

Median premium rates declined from $37 per million of total insured value (TIV) in 2008 to $25 per million in 2009, according to the report.

The report indicates several differences by industry, region, and company size:

  • Utility, real estate, health care, transportation, financial institutions, and media companies purchased property terrorism insurance at the highest rates of the 15 industry segments reviewed, with take-up rates in each sector exceeding 70 percent.
  • Construction, hospitality, utility, and real estate companies experienced the highest median premium rates, exceeding $50 per million of TIV.
  • Take-up rates rose most significantly in the Northeast, increased slightly in the South and the West, and remained flat in the Midwest.
  • As a percentage of total property premiums, financial institutions (24 percent) and transportation companies (17 percent) paid the largest share; hospitality firms saw the greatest decrease in this area (from 13 percent to 4 percent).
  • Smaller companies—with TIV below $100 million—spent 22 percent of total property premiums on terrorism coverage in 2009. By contrast, relative spending was significantly lower for companies between $100 million and $500 million in TIV (5 percent), $500 million to $1 billion (7 percent), and $1 billion or more (11 percent).

“Terrorism risk remains a critical concern for global companies,” said Ben Tucker, a senior vice president in Marsh’s Property Practice and a lead author of the report. “Recent attempted attacks in New York’s Times Square and on a Detroit-bound flight on Christmas day 2009 remind companies of the importance of securing adequate financial protection against the possible catastrophic impact of terrorist events.”

Capacity in the standalone terrorism insurance market, which has served as an important alternative or supplement to coverage made available through the Terrorism Risk Insurance Act (TRIA), has grown considerably in recent years, to a theoretical maximum of $3.76 billion, according to Marsh. Primary purchasers in 2009 included hospitality companies, large real estate firms, and financial institutions.

Exposure to Terrorism Risk Persists

According to Marsh, commercial insurers continue to avoid accumulating high-profile urban exposures due to the residual risk for terror events retained by insurers below the triggers and retention levels set by TRIA, coupled with the relatively high cost of reinsurance in key exposure zones.

Other findings:

  • In 2009, the percentage of business that purchased general liability coverage through TRIA appears to have dipped to just above 50 percent. Rates, charged as a percentage of premium for overall coverage, held steady at about 1 percent.
  • Several U.S.-based multinational companies have reexamined the adequacy of their property and terrorism insurance in countries with uncertain political environments; political violence coverage for such events as war and civil war in developing countries is of key concern.
  • Using a U.S.-domiciled captive to access TRIA coverage to insure an organization’s exposures against acts of terrorism can be a viable, cost-efficient insurance alternative to traditional property programs.

A recent Aon study found that while there has been progress worldwide in curbing major terrorism attacks, there are still networks around the world and the U.S. itself remains a target.

TRIA was originally enacted in December 2002 as a response to the attacks of September 11, 2001; the program has been extended twice and is now set to expire December 31, 2014. According to Marsh, should the federal backstop lapse, a market dislocation could occur due to the obligatory nature of terrorism coverage for certain lines, such as workers’ compensation.

“Terrorism remains a real and present risk, notably in major metropolitan areas,” said Tucker. “There is a real potential for an economic downturn should terrorism insurance not be readily available. The insurance industry should fully explore all possible options to maintain a viable market, regardless of the level of federal participation beyond 2014.”

Marsh’s analysis was based on property insurance placements incepting during calendar year 2009 for a sample of 1,382 Marsh clients. The study population does not include placements in the United States for foreign-based multinationals or for small-firm placements made through package policies. TIV for the sample ranged between $75,000 and $303 billion, with a median of $303 million. Companies with nominal terrorism premiums of $1 were omitted from the calculations of median terrorism premium rates. Standalone terrorism premiums were omitted from the calculation of terrorism premium as a percentage of property premiums.

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