Terrorism Program Renewed
Time to again consider the risk and insurance implications
A crisis has just been averted with the January 08 renewal of the federal terrorism law. The terrorism law, [TRIA (the Terrorism Risk and Insurance Act) in its original form], has just been renewed for seven years, to expire now at the end of 2014. The law requires insurers to include an offer of terrorism coverage with any policy they issue (with some exceptions). The law does not however control what they can charge for premium. One change effective with this extension is the inclusion of domestic terrorism in the program.
This is an opportune time to reconsider the coverage. Undue complacency may have taken hold in the years since the World Trade Center attack. Consider that another event (or two) will result in a chaotic environment in which the coverage will be impossible to obtain. Think strategically rather than impulsively on this subject.
“Let us not look back in anger or forward in fear, but around in awareness.” – James Thurber
Insurance is not the cure for every risk, and risk management is more than just insurance. However terrorism has the characteristics for which insurance is ideally suited: high severity and low frequency. This combination serves the make the coverage necessary, and should serve to make the premium reasonable. In some cases, though, unreasonable premiums are being and have been quoted. This problem can be managed.
Determining the Risk
We need to have a feel for the risk in order to evaluate the premium. The insurance industry trade organization Insurance Services Office (ISO) has established guidelines for its members that evaluate exposure geographically and by target class:
Geographic Risk Categories:
Tier 1 (High Hazard)
- New York City
- San Francisco County, CA
- Washington D.C
- Cook County, Ill (Chicago Area)
Tier 2 (Moderate Hazard)
- Boston, MA
- Seattle, Washington
- Los Angeles, CA
- Houston, TX
- Philadelphia, PA
Tier 3 (Low Hazard)
- Remainder of the U.S.
“Primary Target Types” are listed as follows:
“Airport, Amusement Center, Bus Terminal, Capitol Building, Church, Clinic, Electric Power Facility, Event Stadium or Arena, Federal Building, Forbes 500 Corporate Headquarters, Foreign Embassy, Higher Education Institution, Hospital, Lower Education Institution, Marine Terminal, Medical Center, Natural Gas Facility, Oilfield, Post Office, Prominent Building, Railway Bridge, Religious Institution Excluding Church, Shopping Center or Major Retail Center, Train Station.”
Additionally, there are certain specific “trophy targets” which are famous buildings or facilities that have some special high profile. Proximity to any of these creates exposure as well, of course.
The Need to Review Pricing
The law allows the market to establish pricing, but not without some oversight. State insurance departments do have the right to determine whether rates are “excessive” and therefore against public policy, and to enforce a lowering of those rates. There has been little or no enforcement action to date and many insurers may have abused the situation; with the current market softening, this problem has in many cases disappeared
What’s a reasonable premium? The insurers’ trade group originally (after 9/11) offered the following guidelines to its members (since 9/11 has faded into the past, and the market is softening overall, rates should be lower now):
Rates are per $100 of property value insured, and are only “loss costs.” Insurers will add their overhead and profit factors and miscellaneous charges:
Tier Building Contents
1 .108 .078
2 .018 .012
3 .001 .001
These rates must be adjusted for characteristics of individual risks.
According to the above, the loss cost (subject to the adjustments mentioned) for $10 million of building coverage in Boston would be $1800. The full premium could be around $2800. Outside of Boston, the loss cost would be only $100! This is a basis on which to have a rational discussion with an underwriter.
Liability terrorism premiums are expressed as a percentage of the basic general liability premium that a company would pay without the terrorism coverage. The exposure is high for companies in the security business, for owners of high exposure buildings who are responsible for the security function, and for other special situations. For others, the premium should be affordable. For example a Boston company in an “average exposure class” should pay a premium equal to 3 1/2 % of its general liability premium. In Massachusetts outside of Boston, the percentage would be only 8 tenths of one percent.
The costs for “above average exposure classes” will be considerably higher. Insurers are not all following the suggestions of ISO, as previously stated. However, ultimately insurers with an excessive price and a “take it or leave it” attitude may come to regret that posture.
In risk management a short attention span is hazardous. We look to protect against the severe events. Because they happen only infrequently, this doesn’t give us license to ignore them. Such large events seem almost predestined when looking at them in hindsight.
Feb 01, 2008