Federal measure shifts more costs to insurers
A two-year extension of the federal Terrorism Risk Insurance Act of 2002 (TRIA) has ensured that for the immediate future, businesses will continue to have access to terrorism coverage with affordable premiums, carriers, brokers and experts say.
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But TRIA 2005, approved by Congress on Dec. 17, two weeks before the original law was set to expire, does raise the bar for covered events and shift more costs to insurers – to the point that they’d pay out more for an event like the World Trade Center bombing than they did the Sept. 11, 2001, attacks, analysts say.
How that will affect insurance buyers remains to be seen.
Congress first approved TRIA as a short-term measure to help insurers cope with the perceived heightened risk of terrorism-related losses after Sept. 11. Shocked by the scope of those events, reinsurers didn’t want to risk covering future terrorism losses. So the federal government stepped in, assuming the role of a reinsurer while the industry recovered.
TRIA required all commercial insurers to make terrorism coverage available to their clients, for a surcharge. In the event of a foreign terrorist attack – as certified by federal officials – with total insured losses greater than $5 million, the government would pay for 90 percent of the losses, after a deductible equal to 15 percent of each insurer’s premiums for the previous year.
With these protections, insurers made terrorism coverage available at relatively low prices – from 2.7 percent of total property premiums for construction companies, the global brokerage Marsh found in a survey of its clients, to 7.9 percent for energy firms.
Rhode Island-based companies cite even lower premiums: Wesley C. Cotter, spokesman for the Gilbane Co., a Providence construction and property development company, said its premiums were roughly 1 percent of total insurance costs.
David V. Devault, executive vice president and chief financial officer for The Washington Trust Co. in Westerly, said for the bank it amounted to about 1 percent of the total cost of a commercial general liability policy, making it an easy purchase.
Had TRIA expired on Dec. 31, as many feared, it’s unclear what would have happened with coverage. Just in case, the federal Insurance Services Office (ISO) had drafted a series of conditional endorsements to commercial policies to shield insurers if TRIA protections were removed. And as recently as Dec. 19, the A.M. Best Co., which rates insurance agencies, had warned that without TRIA, companies writing commercial lines could be subject to “a number of downgrades” in their financial strength ratings, because terror coverage was “too risky.”
Many in the industry had predicted that some companies would stop covering terrorism altogether, and those that remained would jack up premiums substantially.
William K. Austin, a partner in Austin & Stanovich Risk Managers in Providence, said for local clients, the impact would likely not have been anywhere as significant as for, say, someone in Manhattan or Washington, D.C.
“In Rhode Island … terrorism coverage [costs] really an insignificant amount, because even though we’re close to Boston and New York, we aren’t really thought to be a hotbed of terrorism,” he said.
John W. Kurkulonis Jr., division vice president for underwriting at The Protector Group, a Worcester insurance agency, said most of his clients (as well as the company itself) haven’t bought terrorism insurance at all, except under workers’ compensation, where insurers mandated it.
But bigger entities are likelier to buy terrorism insurance, Kurkulonis, Austin and others agreed. The Lifespan hospital family carries it, for example, a spokeswoman there said.
“Certainly New England has led the nation” in terrorism insurance, said Lester Hayward, managing director of Marsh in Boston and a TRIA expert, “so the fact that we have TRIA for another two years is a win.”
Local clients “should see very little, if any, impact,” Hayward added, although TRIA 2005 sets a much higher bar for events to trigger the federal backstop.
Effective March 31, only certified terrorism acts with insured losses exceeding $50 million will be covered by TRIA, and next year the trigger point will be $100 million. That means a smaller attack wouldn’t be covered, though Hayward noted that because of the deductibles even under the old law, insurers wouldn’t get any help until their losses were quite high.
The updated law raises the deductibles to 17.5 percent of premiums in 2006 and 20 percent in 2007. An analysis by AIR Worldwide Corp., a Boston-based risk modeling company, showed a typical mid-sized, multi-line insurer with $2 billion in total annual premiums would now not get any help in the event of an attack with about $12 billion in total losses, and it would be on the hook for more than two-fifths of its losses in a 2006 event similar to the World Trade Center attack, with $40 billion in total insured losses for all carriers.
The changes – and the potential end of TRIA protection after 2007 – make it “essential that insurers re-evaluate their own terrorism risk assessment strategies with respect to industry best practices,” AIR Senior Manager Jack Seaquist advised.
The TRIA extension provides for a presidential commission to work with insurers on a more permanent way to deal with terrorism coverage. Industry leaders say they’re eager to do that; the Property Casualty Insurers Association of America, for example, which represents more than 1,000 insurers, issued a statement saying it wants to find “long-term, market-based solutions.”
“I think it was a very satisfactory ending, a very successful resolution,” said Hayward.
