Demand for terrorism coverage remains strong: Marsh

Marsh has recommended that United States Congress reauthorize the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in light of ongoing strong demand for terrorism risk insurance and the possibility that opting not to reauthorize the program could lead to price increases.

If TRIPRA, commonly known as TRIA, is allowed to expire or is substantially changed, terrorism insurance capacity may be difficult to acquire at reasonable costs for insureds, especially those with significant exposures in a central business district or major city, notes Marsh’s 2013 Terrorism Risk Insurance Report, released Tuesday. Almost 2,600 companies were surveyed, notes Marsh, a global leader in insurance broking and risk management.

“Although there is private market capacity for terrorism insurance, it may not be enough to meet the demand in the marketplace should TRIA not be reauthorized,” the report states. “In that case, despite an ongoing exposure to terrorism events, insureds may be unable to secure adequate capacity to insure their risks, or may be unable to do so at commercially viable prices. It is likely that many would be left to self-insure at least some portion of their terrorism risk.”

Set to expire at the end of 2014, TRIPRA has been reauthorized with modifications twice – in December 2005 and in December 2007 – since being enacted in November 2002 following the September 11, 2001 terrorist events, which created a severe market shortage for terrorism insurance. The act provides reinsurance coverage to insurers in the event of a certified terrorist act.

Marsh’s benchmarking data indicates the terrorism insurance take-up rate has remained fairly constant since 2005, and has been in the low 60% range since 2009, as insurers underwrite the risk backed by TRIPRA. In addition, premium rates have remained generally steady for coverage, the report adds.

Marsh points out that companies with total insured value (TIV) of less than $100 million paid a median of $49 per million of TIV in both 2011 and 2012, while the median rate paid by companies with more than $1 billion in TIV was $19 per $1 million TIV in 2012, down from $21 per $1 million in 2011.

Read more: P&C insurers must understand “evolving” terrorism risk: report

“Clearly the demand for terrorism risk insurance remains strong and the existence of the federal program plays a major part in the availability and affordability of the coverage,” Dan Glaser, president and CEO of Marsh & McLennan Companies, notes in a press release.

“The take-up rate for companies with TIV higher than $100 million was nearly 66% in 2012,” states the report. “This may be due to a perception that larger companies are more susceptible to an attack or because smaller companies typically have lower insurance budgets with which to purchase insurance.”

Take-up rates by sector in 2012 are as follows: media, 81%; education, 75%; financial institutions, 75%; health care, 72%; public entities and non-profits, 71%; tech/telecom, 69%; real estate, 69%; transportation, 66%; power and utilities, 65%; hospitality and gaming, 60%; life sciences, 59%; construction, 56%; retail/wholesale, 55%; food and beverage, 50%; manufacturing, 48%; energy and mining, 43%; and chemicals, 42%.

The Marsh press release notes key findings in the report include the following:

• larger companies are more likely to purchase property terrorism insurance, and also to see the lowest cost as a percentage of overall property premiums;
• construction companies paid the most of any sector for terrorism insurance;
• 77% of surveyed companies in the Northeast purchased property terrorism insurance, more than any other region, while just 53% in the West bought the insurance, the lowest take-up rate in 2012; and
• companies in the Midwest paid the lowest rates on average for property terrorism insurance in 2012, followed closely by companies in the West.

Although the recent Boston Marathon bombing has not yet been classified as an act of terrorism under federal law, it has raised the ever-present possibility of mass violence. “How and whether the event impacts the insurance markets remains to be seen. Regardless of the event being certified under TRIPRA or not, coverage for losses arising from the event will depend on clients’ specific insurance contract language,” the report notes.

“Global unrest has begun to affect the terror reinsurance market, not only with regard to supply and demand, but in terms of how risks and coverage are defined,” Marsh states. “The scale and damage caused by the recent global unrest has prompted a number of insureds in several countries and regions to broaden the coverage they purchase in an effort to mitigate any potential gaps.”