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LEAVING TERRORISM COVERAGE ON THE TABLE
Many Are Rejecting the Coverage --
Is this a Wise Move?


More companies than not are declining the mandatory offer of terrorism insurance under the federal Terrorism Risk Insurance Act. This may be due to complacency that has taken hold in the year and a half 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 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 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 .

SOME INSURERS NEED TO BE HELD TO TASK

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 enforcement action to date and many insurers are abusing the situation; they may be forced at a later date to disgorge excessive premiums. Insurers may need to be reminded of this in the negotiation process.

What's a reasonable premium? The insurers' trade group has offered the following guidelines to its members (many insurers are exceeding these guidelines):

PROPERTY

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

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 event. 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.


Given the inevitability of losses, you'll be judged not by whether you were the victim of an event, but by how well you planned for it.

(C) 2003 Licata Kelleher Risk and Insurance Advisers, Inc. Permission granted for distribution as is (with full attribution).

Contact us for risk management strategy and implementation.

Licata Kelleher is a risk management and insurance advisory firm. The firm does not sell insurance, but does counsel clients on the effectiveness of insurance, on reducing the cost of insurance and on the risk management process.

The above is intended to be general information, and should not be construed as specific recommendations.

For more information, contact Debora Wu, at DWU@LicataRisk.com

News & Reports Archives

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February 1, 2008 TERRORISM PROGRAM RENEWED

November 27, 2007 GLOBAL WARMING PANEL IN BOSTON RAISES KEY ISSUES

October 19, 2007 GLOBAL WARMING SYMPOSIUM

August 29, 2007 HURRICANE DEAN AN OMEN?

April 25, 2007 WHO'S LIABLE FOR PET FOOD CONTAMINATION-THE RISK OF PRODUCT LIABILITY

Reports

Fall 2005 INTERNATIONAL RISK MANAGEMENT
 
Spring 2004 EMPLOYMENT LAW MORPHS INTO A MONSTER

Fall 2004 INSURANCE BROKER SUED BY NEW YORK ATTORNEY GENERAL

Summer 2004 UNDERSTANDING THE DYNAMICS OF THE INSURANCE MARKET

Winter 2004 WORLD TRADE CASE UNVEILS INNER WORKINGS OF INSURANCE BROKER

 Fall 2003 A RISK MANAGEMENT APPROACH CFOs (AND THEIR ACCOUNTANTS) CAN LOVE

Summer 2003 PRESERVING COVERAGE FOR INNOCENT INSUREDS

Spring 2003 LEAVING TERRORISM COVERAGE ON THE TABLE

Winter 2003 COMPUTER SECURITY IS NOT A BLACK HOLE

Fall 2002 "LET'S BE CAREFUL OUT THERE

Spring/Summer 2002 WHAT WARREN BUFFET KNOWS ABOUT INSURANCE COMPANY FINANCIALS

Spring 2002 OPPORTUNITIES ABOUND IN DEVELOPMENT OF CONTAMINATED PROPERTIES

Winter 2001 "YOU CAN'T PAY US THIS MONTH? WHAT DO YOU MEAN 'NEW DEVELOPMENTS?"

Fall 2001 WORLD TRADE TERRORISM -- REPERCUSSIONS FOR INSURANCE MARKET

Summer 2001 ENERGY AVAILABILITY: CURRENT REALITY OR FOND MEMORY?

Spring 2001 "HOLD THAT BALLOT UP TO THE LIGHT"