AON proposes terrorism insurance pool

Aon Re, a unit of Aon Corporation (NYSE: AOC), recently called for the implementation of some form of a privately funded, federally mandated “facility” and bonding process that would support insurers’ in their ability provide adequate and affordable terrorism coverage and help cover catastrophic terrorism losses.
Aon Re’s proposal centers on a mandatory terrorism reinsurance facility with several key features, according to Bryon Ehrhart, president Aon Re Services.
Ehrhart explained that many of the proposal’s key requirements entail significant federal government legislative action.
The proposal requires that the facility is structured to fund up to two US$40 billion events and that the U.S. Government attaches in excess of US$40 billion up to US$100 billion, with losses above US$100 billion to be reviewed by congress. Losses of up to US$40 billion in excess of cash accumulated in the facility will however be funded through issuance of tax-exempt bonds and the facility itself will be tax exempt. The proposal is also structured to allow the facility to provide 95% quota-share reinsurance coverage on covered losses up to a total industry loss of US$40 billion. Losses covered by the Facility will be above a reasonable industry and company level threshold from a foreign or domestic terrorism event.
All commercial and all personal lines of insurance will be covered by the Pool, which is meant to be a long-term solution. Features of this plan could however be adopted in the TRIA debate as to a “reformed” backstop.
The Terrorism Risk Insurance Act of 2002 (TRIA) has, according to Aon provided the terrorism insurance market with tremendous benefits in terms of increasing capacity and decreasing the price of terrorism coverage.
“Indirectly or directly, the federal government will end up funding for a terrorism loss, particularly if a majority of it is uninsured,” Aaron Davis, vice president, Aon Property Syndication, says, “This scenario is unacceptable in light of the continuing and escalating risk of terrorism. The public/private partnership that has emerged following 9/11 should continue in the absence of a realistic private solution.”
Davis reports that recently Aon noticed an up-take in commercial clients opting for terrorism cover in their property insurance policies, as well as a substantial increase in pricing.
Without TRIA mandating that carriers offer set levels of terrorism cover, a number of markets simply will no longer carry terrorism risks. As with any supply/demand scenario, the finite amount of terrorism insurance capacity will force prices to increase.
“Companies that can find terrorism cover will also find significant increase in price,” Davis says. “Due to limited capacity, there will be many commercial interests that won’t be able to secure any terrorism coverage at all. In this situation, any public/private backstop solution is welcomed when faced with the prospect of a terrorism insurance market in the U.S. without a catastrophic safety net in place.”