As American business leaders continue to be concerned about the risks associated with terrorism, growing numbers of firms across every industry sector and geographic region are purchasing insurance to protect against the financial consequences of this exposure. Through 2007, U.S. insurers are backed by the commitment of the United States government to provide reinsurance relief to help them manage the ongoing risk of terrorism.
Among large and mid-sized businesses headquartered in Boston, the purchase of property terrorism insurance is relatively widespread. Eighty percent of firms located here purchased this coverage in 2005, an increase of 10 percent from the prior year. Large and mid-sized companies in Boston continue to be more likely than their counterparts in other major U.S. cities to purchase insurance to cover property terrorism risks. About half of smaller companies (those with total insured values less than $100 million) have property terrorism insurance as well.
Within specific industry sectors across the United States, financial institutions, real-estate firms, and health-care facilities were the most likely to purchase terrorism coverage – each exceeding 75 percent – while those companies in media, hospitality, transportation, technology and telecommunications, and educational institutions all had take-up rates (the percentage of companies buying coverage) above 60 percent.
What Is Terrorism Insurance?
Prior to Sept. 11, 2001, damage from a terrorist act was covered under a company’s traditional insurance policies. Immediately following the events of that day, insurers realized the magnitude of catastrophic loss they could face. As a result, it became necessary for businesses to elect – and pay for – terrorism insurance.
To help make this coverage available and to ease the burden on the economy, the Terrorism Risk Insurance Act (TRIA) was signed into law by President Bush in 2002. TRIA is a short-term solution designed to provide a federal backstop for the insurance industry in the event of a ‘certified’ act of terrorism. It contains a mandatory make-available provision, which means insurers must make terrorism coverage available to their clients. Although it is mandatory for insurers to offer terrorism coverage, businesses may choose to purchase the coverage. The cost of the coverage has decreased significantly over three years as the period without a terrorist attack in the United States has lengthened. The median rate in 2005 was 25 percent lower than the 2004 rate.
TRIA states that the U.S. government will act as reinsurer to insurance companies once a large deductible has been paid by the insurer should there be a certified act of terrorism. An act of terrorism that does not meet the requirements for the certification is called a ‘non-certified act’. Attacks by U.S. groups or individuals are considered as such. At present, coverage for non-certified acts of terrorism is available and is competitively priced. According to Marsh’s report, more than 75 percent of companies that purchased property terrorism insurance in 2005 bought a combination of TRIA and non-certified coverage.
TRIA was scheduled to expire in December 2005, but an extension was passed and signed into law. The Terrorism Risk Insurance Extension essentially follows the original in both its objectives and its structure. However, there are some modifications in the Extension, including the exclusion of automobile liability and professional liability, as well as increased deductibles. It is now set to expire on Dec. 31, 2007.
Why Boston and Why Financials?
Why have more companies here purchased terrorism property coverage than their counterparts in New York City or Washington, D.C.? In Boston, a combination of factors – including relatively lower insurance premium rates, a high concentration of financial institutions, real estate firms, and healthcare organizations, and an increased awareness of this risk – may have contributed to the relatively high take-up rates here.
For example, the average rate for property terrorism insurance in Boston was $39 per $1 million of insured value in 2005. Among all other cities, the corresponding rates were highest in New York ($97), followed by Washington, D.C. ($93). Note that these rates are averages; some companies will have higher rates, and some lower depending on their risk profile.
While there are no specific findings in Marsh’s report about why financial institutions purchase property terrorism insurance at a rate equal to the real estate and health care segments, one can make some observations related to the industry’s risk profile. Financial institutions may have single or a limited number of large locations where they process much of their business transactions. They rely heavily on real-time transactions, which makes any interruption or downtime a true loss of revenue and, possibly, market share. They naturally want to protect these locations so they typically purchase the most complete coverage available, which means they purchase certified and non-certified terrorism insurance to bring their coverage back to pre-9/11 levels. Financial institutions want to cover as much as possible for a reasonable cost, which is a very prudent act.
Financial institutions also are a major source of funds to the real estate market, and almost always mandate that the other party purchase terrorism insurance as part of the transaction to protect the asset. This close association with the use of terrorism insurance for protecting assets flows back into their individual risk management philosophy toward their own assets.
Across the country, there is an increasing awareness of terrorism among businesses in all sectors. Clearly, U.S. businesses and their leadership recognize that this exposure is likely to be with us for some time. Insurance can help them address some of the financial consequences of this risk.
What Does the Future Hold?
Beyond 2007 the availability of TRIA coverage is unclear. As the Marsh report makes clear, the availability and purchase of terrorism coverage continues to be a national issue in the United States. The exposure to potential future terrorist attacks is felt in central business districts and in areas that present ‘soft’ targets. This exposure picture lies at the root of the need for a national terrorism insurance solution, with involvement from both the federal government and private industry.
Today, businesses can purchase coverage under TRIA or buy “non-certified” coverage. In addition, 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. In fact, a growing number of businesses are choosing to cover at least part of their terrorism exposure in the standalone marketplace. 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.
The potentially adverse economic ramifications associated with the unavailability of terrorism insurance should drive the insurers as well as the insureds to fully explore all possible options with Congress. The TRIA Extension calls for the “President’s Working Group on Financial Markets,” which falls under the oversight of the US Treasury Department, to consult with the National Association of Insurance Commissioners (NAIC), representatives of the insurance and security industries, and policyholders to analyze the long-term availability and affordability of terrorism insurance. This group is to report to Congress by Sept.30, 2006. All constituents must get actively involved if an acceptable solution is to be created and implemented.
