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The Marsh Report-Terrorism Risk Insurance 2010


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Despite an ever-changing terrorism risk insurance market, businesses from every industry sector continue to purchase coverage—more than 60 percent of organizations surveyed by Marsh bought coverage in 2009.

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The Marsh Report-Terrorism Risk Insurance 2010

  1. 1. The Marsh Report: Terrorism Risk Insurance 2010
  2. 2. The Marsh Report: Terrorism Risk Insurance 2010 Publisher Ben Tucker Marsh’s Property Practice Subject Experts Duncan Ellis Marsh’s Property Practice Will Eustace Marsh’s Casualty Practice Erick Gustafson MMC Government Relations John Hughes Marsh's Property Practice Dusan Jovanovic Marsh’s Global Benchmarking Team Paul Knutson Guy Carpenter Emil Metropoulos Guy Carpenter Tarique Nageer Marsh’s Property Practice Sandra Owusu-Fianko Marsh's Property Practice Chris Varin Marsh's Captive Management Practice Managing Editor Kate Byrnes Marsh’s U.S. Risk Practices Editor Tom Walsh Marsh’s National Sales & Marketing Team Designer Ian Law Marsh's Interactive Assets & Strategy
  3. 3. The Marsh Report: Terrorism Risk Insurance 2010
  4. 4. Table of Contents The Marsh Report: Terrorism Risk Insurance 2010 1. Introduction ............................................................ 1 . 2. Executive Summary ............................................... 3 . 3. n Overview of the Terrorism Risk A Insurance Extension Act (TRIA) ............................ 6 4. indings and Analysis: Property Terrorism F Purchasing in 2009 ............................................... 10 . 5. The Standalone Terrorism Marketplace ............ 17 . 6. orkers' Compensation and W Liability Coverages ................................................ 21 7. RIA, U.S. Terrorism, and International Terrorism: T Effect on the Insurance and Reinsurance Markets .................................... 24 8. aptives: Opportunities and Considerations .... 28 C . 9. nternational Terrorism and Political Violence I Insurance ............................................................... 31 10. Conclusion ............................................................. 33 The Marsh Report: Terrorism Risk Insurance 2010
  5. 5. The Marsh Report: Terrorism Risk Insurance 2010
  6. 6. 1 Introduction Despite an ever-changing terrorism risk insurance Since the original legislation in 2002, the standalone market, businesses from every industry sector terrorism market has grown and evolved and now continue to purchase coverage—more than 60 percent offers a number of viable program solutions for of organizations surveyed by Marsh bought coverage companies in the United States and abroad to in 2009. mitigate their terrorism risks. Terrorism insurance and associated risk On February 1, 2010, the Obama Administration management strategies are dynamic and complex released its proposed 2011 budget, which would reduce issues, with many interdependent factors federal support for TRIPRA beginning in 2011 and contributing to managing the risk. Foreign relations, again in 2013. This was originally presented by the the effectiveness of homeland defense, and the U.S. Office of Management and Budget in its report ambiguous nature of the risk make terrorism losses "Terminations, Reductions, and Savings, Budget of the extremely challenging to predict and quantify. It is U.S. Government, Fiscal Year 2010." difficult for insurers to effectively price and reserve capacity for their potential exposure to catastrophic The 2011 budget generally proposes reduced federal terrorism losses. intervention in TRIPRA, and specifically identifies: U.S. insurers are backed by the commitment of the increasing the deductible to be paid by insurers;  United States federal government to provide increasing the insurer co-participation;  reinsurance relief to help them manage the ongoing risk of terrorism. In 2007, President Bush signed the increasing the event trigger;  Terrorism Risk Insurance Program Reauthorization removing coverage for acts of domestic  Act of 2007 (TRIPRA)1, extending the program through terrorism; and December 31, 2014. The original legislation—the Terrorism Risk Insurance Act of 2002 (TRIA)—was a reducing the recoupment percentage from  direct response to the attacks of September 11, 2001, 133 percent to 100 percent. and part of a concerted effort to keep the American Although this proposal simply reasserts the position economy strong. detailed in the first report of efforts by the Obama Administration to reduce government spending, it Like the original legislation, the two extensions were holds few specifics on how changing TRIPRA would do intended as short-term solutions. Congress passed so. Marsh’s terrorism experts have had discussions with TRIPRA in part because the insurance industry had not policymakers who have indicated there is very little amassed enough capital to insure catastrophic appetite for these changes to be enacted by Congress. terrorism losses without a federal backstop. 1. his report refers to the Terrorism Risk Insurance Act of 2002, the Terrorism Risk Insurance Extension Act of 2005, and the T Terrorism Risk Insurance Program Reauthorization Act as “TRIA,” "TRIPRA, or "the Act." In instances where it is necessary to distinguish between the three, the accompanying text will do so. The Marsh Report: Terrorism Risk Insurance 2010 | 1
  7. 7. Marsh’s Property Specialized Risk Group will keep our clients informed of further developments and their potential impact on terrorism insurance programs. This publication, Marsh’s annual terrorism risk report, is designed to help companies address terrorism risk issues, despite the uncertainties. It is part of Marsh’s ongoing effort to inform clients of notable developments in the terrorism insurance marketplace—including cost, demand, and gaps in coverage. The report looks at:  key issues under TRIA;  property terrorism insurance purchasing in 2009;  the standalone property terrorism insurance market;  terrorism issues in workers' compensation and liability insurance;  the effect of TRIA and international terrorism on the insurance and reinsurance markets;  insurance for terrorism exposures placed with captives; and  political violence, international terrorism insurance, and global terrorism pools/schemes. Through benchmarking and by staying aware of important developments, risk managers and other key executives can help their companies prepare strategies to manage the shifting realities of terrorism risk. Marsh remains committed to helping our clients develop robust, comprehensive strategies to manage this risk. 2 | The Marsh Report: Terrorism Risk Insurance 2010
  8. 8. 2 Executive Summary This report provides a snapshot of the major issues Construction, hospitality, utility, and real estate  and trends surrounding terrorism insurance in 2010. companies experienced the highest median Key issues and findings include: premium rates for terrorism insurance in 2009, exceeding $50 per million of TIV. An Overview of the Terrorism Risk Insurance Act When looking at terrorism insurance pricing as a  (TRIA) percentage of overall property premiums, financial institutions and transportation The Terrorism Risk Insurance Program  companies paid the largest share, allocating 24 Reauthorization Act (TRIPRA) was signed into percent and 17 percent of their total property law in December 2007, extending the TRIA federal programs, respectively. Hospitality firms saw backstop program through December 31, 2014. significant decreases in the percentage of property The definition of an "act of terrorism" has been  premium paid for terrorism, down from 13 percent revised to include acts of domestic terrorism, which in 2008 to 4 percent in 2009. were excluded in previous versions of TRIA. The issue of noncertified acts of terrorism remains  The Standalone Insurance Market an important consideration. Although coverage Capacity in the standalone terrorism insurance  through TRIPRA removes any exclusion to the market has grown considerably over the years; extent the act of terrorism is certified, some insurers now offer a theoretical maximum of $3.76 property insurers add exclusionary language billion in capacity. related to noncertified terrorism coverage. The standalone property terrorism insurance  The Standard Fire Policy (SFP)—mandated by  market offers coverage for both TRIA-certified and statutes in 29 states—may, in some circumstances, noncertified risks and enables companies to tailor provide coverage from losses if they arise from a capacity to their coverage needs. fire caused by a terrorist attack. Approximately $750 million to $2 billion per risk in  Property Terrorism Insurance Purchasing in 2009 standalone capacity is available to companies that do not have sizeable exposures in locations where Sixty-one percent of companies purchased  insurers have aggregation problems. Capacity property terrorism insurance in 2009. excess of $2 billion is available but is more Utility, real estate, health care, transportation,  expensive. financial institutions, and media companies For locations where markets have aggregation  purchased property terrorism insurance at higher issues the estimated market capacity is rates than other industry segments in 2009, with approximately $1 billion; additional capacity can take-up rates exceeding 70 percent in these be accessed at significantly higher rates. sectors. The median premium rate for terrorism insurance  was down from $37 per million (0.0037 percent) in 2008 to $25 per million (0.0025 percent) in 2009. The Marsh Report: Terrorism Risk Insurance 2010 | 3
  9. 9. Workers' Compensation and Liability Most reinsurers have identified a limited portion of  Coverages their risk capital to make available to cover terrorism exposures and typically prefer to Insurers and qualified self-insured employers  manage terror risk by offering terrorism coverage cannot exclude coverage for acts of terrorism from in a standalone contract rather than offering workers’ compensation policies. coverage within a normal “all-risk” catastrophe treaty, especially for insurers writing a national Because workers’ compensation provides lifetime  portfolio. medical care for on-the-job injuries, some computer models project that the “worst-case” cost An estimated $700 million of per-occurrence  of a terrorism incident could exceed $90 billion. In coverage is available. For certain programs, contrast, some experts put the total workers’ notably workers’ compensation programs where compensation capacity for the entire insurance the terrorism exposure is limited to a single state, marketplace at $30 billion. it is feasible to secure more than $1 billion of capacity. The National Council on Compensation Insurance  (NCCI) approved the “Domestic Terrorism, Compared to natural perils such as hurricane or  Earthquakes, and Catastrophic Industrial Accidents earthquake, terrorism modeling is still young and Premium Endorsement (DTEC)” for workers’ untested. Quantifying the economic and human compensation, which took effect January 1, 2005. losses from an act of terrorism continues to pose It provides funding for some catastrophic losses, major challenges for insurers and reinsurers. including acts of terrorism specifically excluded by TRIA, but not for TRIA-certified acts of terrorism. Captives: Opportunities and Considerations In 2009, the percentage of clients that purchased  Captive insurers that issue direct policies and  TRIA general liability (GL) coverage appears to have otherwise meet the definition of a “qualified dipped to just above 50 percent. The actual rate— insurer” must make available coverage for insured charged as a percentage of premium for the overall losses resulting from an act of terrorism as defined coverage—held steady at about 1 percent. under TRIA. TRIA, U.S. Terrorism, and International Using a captive to insure an organization’s  Terrorism: Effect on the Insurance and exposures against acts of terrorism can be a viable, Reinsurance Markets cost-efficient alternative to traditional property programs including terrorism. Commercial insurers continue to avoid  There are several key areas of opportunity to  accumulating high-profile urban exposures due to enhance TRIA coverage via use of a captive. Because the residual risk for terror events retained by property policies typically exclude these coverages insurers below the triggers and retentions levels set or because costs of insuring such risks are generally by TRIPRA, coupled with the relatively high cost of prohibitive, using a captive to provide the coverages reinsurance in key exposure zones. can be particularly beneficial. The Act’s design results in a number of gaps in  reinsurance protection for insurers, including International Terrorism and Political Violence personal lines insurance; the deductible, co-pay Insurance share, and event trigger for TRIA-certified events; and nuclear, chemical, biological, and The standalone terrorism insurance market can  radiological (NCBR), depending on primary policy offer coverage for assets in countries where the coverage (many traditional property policies insured’s risks are located (subject to certain exclude the nuclear and radiation risks). country limitations), “high-risk” countries, and/or countries where terrorism insurance is required by the lender or mortgagee. 4 | The Marsh Report: Terrorism Risk Insurance 2010
  10. 10. In situations where property insurance is extended  to include coverage in accordance with the local pool, any standalone terrorism policy will be on a difference in conditions (DIC) or difference in conditions and difference in limits (DIC/DIL) basis. Political violence policies are designed to respond  to a broader class of perils in developing countries than only terrorism. Standalone political violence program limits of  between US$100 million and US$500 million are commonplace. Within a terrorism insurance program, political violence sublimits ranging between US$50 million and US$200 million are becoming more common. The Marsh Report: Terrorism Risk Insurance 2010 | 5
  11. 11. 3 An Overview of the Terrorism Risk Insurance Act (TRIA) Term January 1, 2008—December 31, 2014 January 1, 2006— November 26, 2002— December 31, 2007 December 31, 2005 Official Legislative Terrorism Risk Insurance Program Reauthorization Terrorism Risk Insurance Terrorism Risk Insurance Act of Name Act of 2007 (TRIPRA). Extension Act of 2005 (TRIA). 2002 (TRIA). Coverage The extension eliminates the distinction between Acts committed by individual(s) Acts committed by individual(s) acts of foreign or domestic terrorism. acting on behalf of any foreign acting on behalf of any foreign person or interest to coerce the person or interest to coerce the civilian population of the U.S. civilian population of the U.S. or to influence the policy or or to influence the policy or affect the conduct of the U.S. affect the conduct of the U.S. government by coercion. government by coercion. Territory U.S. only. U.S. only. U.S. only. Certification $5 million $5 million $5 million Federal Backstop $100 million $50 million in 2006, $100 $5 million Trigger million in 2007 Insurer Retention 20%—applied against prior year direct earned 17.5% in 2006, 20% in 7% in 2003, 10% in 2004, premium. 2007—applied against prior 15% in 2005—applied against year direct earned premium. prior year direct earned premium. Government 85% 90% in 2006, 85% in 2007 90% Share-Excess of Retention Recoupment/ Formula will be calculated using several Included with much discretion Included with much discretion Pay-Go factors: the size of the total loss, the amount of on part of Secretary of on part of Secretary of the industry aggregate retention, the amount that Treasury—subject to maximum Treasury—subject to maximum the insurers actually retain, and the amount of the 3% per year applied to 3% per year applied to federal government reimbursement. There is no policyholders’ premiums. policyholders’ premiums. maximum on the amount that will be applied to future policyholders’ premiums. For events that occur before 2011, this amount must be collected by 9/30/2012. For events that occur after 1/1/2012, it must be collected by 9/30/2017. Congress and the Treasury Department will have some flexibility in how this is implemented. 6 | The Marsh Report: Terrorism Risk Insurance 2010
  12. 12. TRIA was first enacted on November 26, 2002, after the iv. to have been committed by an September 11, 2001, terrorist attacks created a severe individual or individuals, as part of an market shortage for terrorism insurance. It has since effort to coerce the civilian population of been extended two times, in December 2005 and again the United States or to influence the in December 2007 as the Terrorism Risk Insurance policy or affect the conduct of the U.S. Program Reauthorization Act of 2007 (TRIPRA). For the government by coercion. purposes of this report, TRIA may be referred to as TRIA, TRIPRA, or the Act. In instances where it is B. No act shall be certified by the Secretary as an necessary to distinguish between the three, the act of terrorism if: accompanying text will do so. i. the act is committed as part of the course of a war declared by the Congress, except TRIA contains a make-available provision, which that this clause shall not apply with means insurers—including captives licensed in the respect to any coverage for workers’ United States and surplus lines insurers approved as compensation; or nonadmitted insurers in any state—must make TRIA terrorism insurance coverage available to their clients. ii. property and casualty losses resulting from Although it is mandatory for insurers to offer terrorism the Act, in the aggregate, do not exceed the coverage, it is not mandatory for insureds to purchase $5 million threshold.” the coverage. The issue of noncertified acts of terrorism remains There have been some changes to the Act during its an important consideration. While coverage through two extensions, as illustrated on the previous page. TRIPRA removes any exclusion to the extent the act The most significant change in TRIPRA is that the of terrorism is certified, some property insurers add definition of an “act of terrorism” has been revised. exclusionary language related to noncertified The requirement that an act be committed by an terrorism coverage. individual on behalf of any foreign person or foreign interest in order for it to be certified as an “act of Noncertified terrorism coverage can provide terrorism” for purposes of reimbursement has been protection for: removed. In other words, TRIPRA covers domestic terrorism, which was excluded in previous versions events that are not intended to coerce the civilian  of TRIA. population or to influence the policy or affect the conduct of the U.S. government by coercion (for A distinction remains between acts that are certified example, animal rights attacks and/or where an and noncertified. The full definition of a certified act of individual or corporation is the target and not the terrorism is: public); A. “Certification – The term “act of terrorism” events that take place outside of large civilian  means any act that is certified by the Secretary centers where a very limited section of the public of the Treasury, the Secretary of State, and the may be the target—such as a group of employees— Attorney General of the United States: and not the civilian population in general; i. to be an act of terrorism; acts of terrorism with less than $5 million in insured  losses across all lines of insurance and from all ii. to be a violent act or an act that is dangerous to human life, property, or insurers; and infrastructure; events that are not certified by the Secretary of the  iii. to have resulted in damage within the Treasury, Secretary of State, and the Attorney General United States, or outside the United States of the United States. in the case of an air carrier or vessel (as described in the Act); or the premises of a United States mission; and The Marsh Report: Terrorism Risk Insurance 2010 | 7
  13. 13. The following are some other key issues under TRIA: Government recoupment: TRIA includes provisions for both mandatory and discretionary recoupment if Trigger and threshold: To clarify how the trigger and the government makes payments following a TRIA- the threshold work, the amount necessary for certified loss. For any program year beginning with certification of an act is $5 million, but any outlay of 2008 through 2014, the insurance marketplace federal funds is prohibited unless the event reaches aggregate retention amount is the lesser of $27.5 the trigger of $100 million. billion and the aggregate amount, for all insurers, of insured losses from program trigger events during Cost of coverage: The Act does not provide specific the program year. guidance on pricing; however, insurers may charge an additional premium for coverage provided under TRIA. Standard Fire Policy (SFP) Statutes TRIA preempts state regulations for prior approval of rates. Still, TRIA retains a state’s right to invalidate a The Standard Fire Policy (SFP) is mandated by statutes rate as excessive, inadequate, or unfairly in 29 states to cover direct losses from fire and discriminatory. lightning (see “SFP States”). It sets forth the conditions under which such a loss is deemed to have occurred. Terms and conditions: Insurers are required to make In some situations where terrorism is excluded under coverage for “certified acts” available to their a property policy covering the peril of fire, the issue policyholders on terms and conditions that do not is whether losses are covered if they arise from a fire materially differ from the policy’s other property and/ caused by a terrorist attack. or casualty coverages. Insurers are also required to offer the coverage at each renewal, even if the insured declined coverage previously. TRIA does not require Standard Fire Policy Exclusions insurers to offer specific terms and conditions SFPs generally exclude losses arising from a fire for required coverages. caused by:  enemy attack by armed forces, including military action Adequate disclosure: TRIA requires insurers to taken resisting such attack; provide their policyholders with “clear and  invasion or civil war; conspicuous” disclosure of both the premium being  insurrection, rebellion, revolution, or usurped power; charged for TRIA coverage and the share of reinsurance provided by the federal government. If the  the order of any civil authority; insured rejects an offer to purchase terrorism coverage,  neglect on the part of the insured to take reasonable the insurer may reinstate a terrorism exclusion. measures to save the property; and  theft. Government participation: The federal There are also several "conditions suspending or restricting government will cover 85 percent of certified losses insurance," which are similar to exclusions. These include once an insurer’s deductible is reached. An individual losses that occur: insurer’s deductible is a percentage of its direct earned  when the insured has increased the hazard; premium (DEP) for the prior year for the commercial lines of coverage subject to TRIA; the percentage is set  when the building is vacant; or at 20 percent.  as a result of riot or explosion, unless fire follows the explosion, in which case the loss caused by the fire, and TRIA caps the total liability of the program and of not the loss caused by the explosion, is covered. insurers—including the insurers’ participation and The SFP may be supplemented by endorsements extending deductibles—at $100 billion in any one program year. If coverage to additional perils, provided that such coverage is insured losses exceed $100 billion, then the not inconsistent with the provisions of the SFP. allocation of loss compensation to insurers within the $100 billion cap will be determined by Congress. Insurers would not be liable for certified losses in excess of this amount unless Congress were to pass legislation increasing the limit. 8 | The Marsh Report: Terrorism Risk Insurance 2010
  14. 14. Regulators would likely consider any attempt to waive the SFP’s substantive protections to be a violation of SFP States public policy, rendering them unenforceable. Any The Standard Fire Policy is mandated in the following states: diminution in coverage—specifically, any restriction in fire coverage—may be declared null and void by the Alaska (personal lines only) Nebraska* states. Arizona* New Hampshire* California New Jersey* These statutes provide for an only actual-cash-value Connecticut* New York recovery; there is no time-element protection. In effect, Georgia North Carolina if an insured’s policy contains an exclusion for Hawaii North Dakota* terrorism or if the insured decides not to purchase Idaho* Oklahoma* TRIA coverage, the SFP law for property in these 29 Illinois Oregon states may offer some protection to insureds, although Iowa Pennsylvania* 14 of these—Arizona, Connecticut, Idaho, Louisiana, Michigan, Minnesota, Nebraska, New Hampshire, New Louisiana* Rhode Island* Jersey, North Dakota, Oklahoma, Pennsylvania, Rhode Maine Virginia* Island, and Virginia—have passed legislation to exclude Massachusetts Washington acts of terrorism. An SFP state could compel the Michigan* West Virginia insurer to pay for the direct damage from a fire caused Minnesota* Wisconsin by an act of terrorism on an actual-cash-value basis, Missouri despite the presence of a terrorism exclusion in the *This state has passed legislation to exclude (or allow insuring agreement. insurers to exclude) acts of terrorism from SFP policies. Insurers argue that it is unfair for them to remain potentially liable under statues for so-called fire-following losses when policyholders can reject TRIA or other terrorism coverage and pay no premium for fire-following coverage. The Marsh Report: Terrorism Risk Insurance 2010 | 9
  15. 15. 4 Findings and Analysis: Property Terrorism Purchasing in 2009 The terrorism insurance market is robust and Companies with TIV between $100 million and  continues to support insureds’ risk transfer needs. $500 million tend to have no more than three The percentage of companies buying property insurers involved in their insurance programs. terrorism insurance—the terrorism insurance Companies with TIV less than $100 million  take-up rate—has generally increased since the generally entail a smaller spread of risk, have lower enactment of TRIA in 2002. In 2003 the take-up rate overall premiums, and work with a single insurer. was 27 percent; over the subsequent years the number of companies purchasing terrorism increased Chart 2: Terrorism Take-up Rates by TIV steadily to 61 percent in 2009 (see Chart 1). 2007 2008 2009 Chart 1: Terrorism Take-up Rates by Year 65% 61% 61% 63% 63% 61% 62% 62% 64% 2003 27% 55% 2004 49% 47% 49% 2005 58% 2006 59% 2007 59% 2008 57% 2009 61% <$100 m $100m - $500m $500m - $1b >$1b Take-up Rates by Company Size Changes in take-up rates analyzed by company size Marsh established four categories of total insured were marginal in the years 2007 through 2009. The value (TIV) as the measure of company size to aid in take-up rates for smaller companies—i.e., companies our analysis: with TIV under $100 million—continued to increase gradually from 47 percent in 2007 to 55 percent in 2009. Companies with TIV in excess of $1 billion are  This 2009 take-up rate is lower compared to larger major accounts for insurers, paying large companies: 62 percent to 64 percent of which purchase premiums. They typically work with several terrorism insurance. Take-up rates for companies with insurers. A number of these companies used their TIV between $100 million and $500 million increased existing captives or established new captive nominally, while companies with TIV in excess of $500 insurers to provide TRIA coverage. million fluctuated slightly during the same time period. % Companies with TIV between $500 million and $1  billion are large organizations that typically work with multiple insurers and have layered programs. 10 | The Marsh Report: Terrorism Risk Insurance 2010
  16. 16. Take-up Rates by Industry Conversely, take-up rates among energy and food and beverage companies have steadily declined during the According to Marsh’s analysis, utility companies three-year period 2007 to 2009. Only approximately purchased property terrorism insurance at a higher four out of every 10 companies in these sectors rate than any other industry segment in 2009: 80 purchased terrorism insurance in 2009. Manufacturing percent of companies did so. Analyzing the data by is the only industry whose take-up rate did not exceed industry segments, companies in the real estate, health 50 percent at all during the last three years care, transportation, financial institutions, and media (see Chart 3). sectors have take-up rates above 70 percent, the highest of the 15 segments surveyed. Industry Categories This report examines property terrorism insurance Chart 3: Terrorism Take-up Rates by Industry purchasing patterns for 15 industry groups. These industries were selected based on criteria that included sample 2007 2008 2009 population size, perceived exposures, take-up rates, and Utility premium rates. Other industry groups that are part of the 81% overall analysis—but are not reported on individually— 73% include agriculture, automotive, aviation, distribution, 80% Real Estate nonprofits, professional services, and general services. 80% 73% The industry groupings in this report included, but were not 76% Health Care limited to, the following lines of business: 71% 75%  Construction: contractors, homebuilders, and general 76% contractors Transportation 62%  Education: universities and school districts 64% 75%  Energy: oil, gas, and pipelines Financial Institutions 73% 68%  Financial institutions: banks, insurers, and securities 74% firms Media 64%  Food and beverage: manufacturers and distributors 71% 71%  Hospitality: hotels, casinos, sporting arenas, and Hospitality 69% performing arts centers 67% 68%  Health care: hospitals and managed-care facilities Education 71%  Manufacturing: all manufacturers, excluding 69% 65% aviation Technology/Telecom 63%  Media: print and electronic media 61% 61%  Public entity: city, county, and state entities Public Entity 61%  Real estate: real estate and property management 55% 61% companies Retail 58%  Retail: retail entities of all kinds, including restaurants 54% 60%  Technology/telecom: hardware and software Construction manufacturers and distributors, telephone companies, 47% 1.0 49% and Internet service providers 52% 0.8 Manufacturing  Transportation: trucking and bus companies 45% 0.6 43%  Utility: public and private gas, electric, and water utilities 47% 0.4 Food & Beverage 0.2 51% 53% 0.0 42% Energy 66% 62% 40% The Marsh Report: Terrorism Risk Insurance 2010 | 11
  17. 17. Take-up Rates by Region coverage and noncertified acts coverage. However, because the passing of TRIPRA in 2007 expanded the In 2009, property terrorism insurance take-up rates definition of covered acts to included domestic rose most significantly in the Northeast, increased terrorist events, many companies have elected not to slightly in South and West, and remained flat in the purchase noncertified terrorism insurance in addition Midwest. Interestingly, less than 50 percent of to purchasing TRIA as part of their property policies. companies in the West purchased terrorism insurance (see Chapter 3 for a discussion regarding noncertified over the past two years (2008 and 2009); the lowest acts under TRIPRA). take-up rates among the four U.S. zones analyzed (see Chart 4). More companies are securing terrorism insurance through their captives and are purchasing The Northeast still has the largest percent of reinsurance to cover their retention or liability under companies purchasing property terrorism insurance, TRIA. Typically, those captives that do purchase with nearly three out of every four companies reinsurance also often buy coverage for the buying coverage. noncertified terrorism exposures. The Cost of Terrorism Coverage Chart 4: Terrorism Take-up Rates by Region 2007 2008 2009 We measured the cost of terrorism coverage both as a premium rate—premium divided by TIV—and as a 71% 73% percentage of a company’s overall property premium. 66% Using premium rate allows companies to track what 58% 60% 60% 58% they paid in absolute terms; percentage of overall 55% 55% 51% premium shows how terrorism coverage affected a 47% 44% company’s overall property insurance budget. The cost of property terrorism insurance has fallen gradually over the years, with a more significant drop in 2009. The median premium rate for terrorism insurance was down from $37 per million (0.0037 percent) in 2008 to $25 per million (0.0025 percent) in 2009. Midwest Northeast South West Cost by Company Size Types of Coverage Companies Are Buying Property terrorism insurance rates typically decrease as the size of the company increases (see Chart 5). The vast majority of Marsh’s clients—approximately 90 Companies with TIV less than $100 million percent—purchased their terrorism insurance as part experienced moderate median rate decreases in price, of their property policies rather than as standalone from 0.0054 percent of TIV or $54 per million in 2008 placements. However, standalone policies are an to 0.0053 percent or $53 per million in 2009, and their important alternative and/or supplement to TRIA terrorism premium rates remained relatively higher coverage for some companies. The primary purchasers than those of larger companies. Companies with TIV of standalone policies have been hospitality between $100 million and $500 million saw median companies, large real estate firms, and financial rates decrease from $36 per million in 2008 to $32 per institutions. Retail companies, media entities, million in 2009. Businesses with TIV between $500 transportation, public entities, and utilities also million and $1 billion were the only segment to purchased standalone terrorism policies; however, in experience a median rate increase, albeit a small one: lesser amounts. premium rates in 2009 were $29 per million, up slightly from $27 per million in 2008. For the largest Prior to the last extension, when companies companies, those with TIV more than $1 billion, the purchased terrorism coverage as part of their property median rates remained flat at $27 per million. policies, they generally purchased both TRIA 12 | The Marsh Report: Terrorism Risk Insurance 2010
  18. 18. Cost by Industry Chart 5: Terrorism Pricing - Median Rates by TIV (Rates per Million) Compared to last year’s rates, 2009 property terrorism 2007 2008 2009 insurance premium rates by industry show median $63 rate decreases for 11 of the 15 industry categories: $54 $53 construction, utility, financial institutions, transportation, energy, media, public entity, food and $40 beverage, manufacturing, health care, and education. $36 Rates increased significantly for real estate companies, $32 $29 $27 $29 $28 $27 $27 moderately for hospitality and technology/ telecommunications firms, and remained flat for retail organizations (see Chart 7). Chart 7: Terrorism Pricing - <$100m $100m - $500m $500m - $1b >$1b Median Rates by Industry (Rates per Million) 2008 2009 When examining cost as a percentage of overall Construction property premiums (see Chart 6), 2009 saw increases $76 $65 for companies of all sizes, except those with TIV Hospitality between $100 million and $500 million. This $54 $55 indicates that the cost for terrorism coverage generally increased disproportionately with the Utility $59 overall property market rate changes experienced $51 $65 $76 during 2009. Companies with TIV less than $100 Real Estate $42 million experienced the largest increase, as $50 terrorism insurance represents a larger proportion Financial Institutions of their overall property programs than it does for $62 $47 $59 larger organizations. Also, terrorism insurance rates Transportation do not tend to have as wide a range as property rates $74 $46 and are less subject to credits for higher retentions Energy and loss-control efforts. Thus, terrorism insurance $50 $62 represented a larger share of the overall property $35 premium budget for the smaller companies. Media $74 $46 $30 Technology/Telecom Chart 6: Terrorism Pricing as Percentage of $24 Property Premium by TIV $29 2007 2008 2009 Retail $26 22% $26 Public Entity $30 16% $25 14% 11% Food & Beverage $36 8% 8% $24 6% 5% 6% 5% 7% 4% Manufacturing $29 $23 <$100m $100m - $500m $500m - $1b >$1b Health Care $25 $19 Education $23 $16 The Marsh Report: Terrorism Risk Insurance 2010 | 13
  19. 19. Construction, hospitality, utility, and real estate When looking at terrorism insurance pricing as a companies experienced the highest median premium percentage of overall property premiums, financial rates for terrorism insurance in 2009, exceeding $50 institutions and transportation companies paid the per million of TIV. Rates decreased most dramatically largest share, allocating 24 percent and 17 percent of for transportation, from $74 per million in 2008 to $46 their total property programs, respectively. This per million of TIV in 2009. Media and energy represents the largest increase as a percentage of total companies also experienced significant reductions in property cost among all industry groups. Retail and median rates, reductions greater than 30 percent over real estate companies also paid a larger 2008. percentage of their total premiums for terrorism at 10 percent each. Hospitality firms saw significant decreases in the percentage of property premium paid Chart 8: Terrorism Pricing as Percentage for terrorism, down from 13 percent in 2008 to 4 of Property Premium by Industry percent in 2009 (see Chart 8). 2008 2009 Financial Institutions Cost by Region 14% 24% The West region experienced the largest price Transportation 11% decreases in 2009, followed by the Midwest then the 17% Northeast. The South saw only marginal rate deceases Real Estate between 2008 and 2009. However, the overall rate 6% 2008 10% reduction for the period 2007 to 2009 was greater for Retail the Midwest than for any other region—premium 6% rates decreased from or $47 per million in 2007 to $21 10% per million in 2009. Terrorism insurance is the most Media expensive in the South and the Northeast, based on 2009 8% 8% premium rate (see Chart 9), although the variation by Public Entity region has narrowed. 5% 7% Manufacturing Chart 9: Terrorism Pricing - 6% 6% Median Rates by Region Technology/Telecom (Rates per Million) 6% 5% 2007 2008 2009 Education 2008 8% $47 $47 5% $44 $41 $42 $40 $38 $40 Health Care $36 4% 5% $28 $30 Utility $21 7% 5% Hospitality 2009 13% 4% Midwest Northeast South West Energy 2% 3% Construction 3% Terrorism pricing as a percentage of property 3% premium varies in the four U.S. zones are analyzed. Food & Beverage 4% Terrorism accounts for only an average of 3 percent of 2% total property premiums for companies in the Midwest and West, compared to 5 percent and 6 percent in the 14 | The Marsh Report: Terrorism Risk Insurance 2010
  20. 20. South and Northeast, respectively. Much of this can be It was expected that the economic downturn explained by the terrorism exposures faced by experienced in 2008 and 2009 would have affected how companies in these regions. Companies in major companies budget for their overall insurance metropolitan areas—New York, Washington, DC, and programs, and that terrorism insurance would likely Boston, for example—are likely to pay a higher be cut back in an effort to generate cost savings. premium for their terrorism coverage, which results in Surprisingly, this did not happen at the magnitude a larger percentage of their overall property insurance some had predicted. Despite a changing and uncertain costs dedicated to terrorism. marketplace, terrorism insurance take-up rates continued to climb during 2009 as companies of all Chart 10: Terrorism Pricing as Percentage of sizes and in all industries across the United States Property Premium by Region continued to purchase the coverage. Most companies 2007 2008 2009 that purchased terrorism insurance in the past continue to do so as markets continue to underwrite 6% 5% 5% 5% the risk, with the support of the TRIA federal backstop. 4% 4% 4% 4% 3% 3% 3% 3% The reauthorization of TRIA through 2014 has afforded needed capacity in the market for terrorism insurance. Property insurers are able to include Midwest Northeast South West terrorism insurance in their risk portfolios at nominal rates to insureds. Clearly, the demand for terrorism risk insurance remains. Conclusion In 2009, property terrorism insurance rates generally decreased across the board. The property insurance market remained virtually flat, due in large part to a lack of significant catastrophic losses in 2009. Premium rates did increase for certain risks, however, and some companies with significant exposures to those particular risks experienced similar increases in their terrorism insurance rates. First quarter 2010 premium rates for both property and terrorism insurance typically renewed with slight decreases. It is important to note, however, that a number of natural catastrophes occurred in the first few months of 2010—notably a series of significant earthquakes. Although much of the losses from these events were not insured—thus not affecting insurers’ surplus—it remains to be seen whether the events will put an upward pressure on property rates. If there are relatively few significant losses from natural catastrophe or terrorism events in the rest of 2010, the insurance market may moderate and keep property rates flat or near flat. The Marsh Report: Terrorism Risk Insurance 2010 | 15
  21. 21. Methodology This chapter relies on data from Marsh clients that purchased property terrorism insurance across the United States. Purchasing patterns are examined in the aggregate as well as on the basis of client characteristics such as size, industry, and region. The 2009 data come from property insurance placements incepting during calendar year 2009. To account for skews within the regional and total insured values (TIV) data sets, the national annual figures were weighted. The study population does not include placements in the United States for foreign-based multinationals or for small-firm placements made through package policies. The 2009 study was based on a sample of 1,382 firms with the following characteristics: Minimum Median Maximum TIV $75,000 $303 million $303 billion Property Premium $1,059 $295,755 $56 million Terrorism Premium $1 $9,541 $11 million Unless otherwise noted, the calculations include TRIA policies, noncertified policies, standalone policies, and placements made through captives. For some companies, insurers quoted only a nominal terrorism premium of $1. These $1 premiums were omitted from the calculations of the median terrorism premium rates. In respect to the calculation of terrorism premium as a percentage of property premiums, standalone terrorism premiums were omitted. Companies were assigned to regions based on the locations of the Marsh offices that served them. Generally, this was the Marsh office most closely located to a company’s headquarters. Many of our clients have multiple facilities across the country and around the world, meaning the potential risk for a terrorist attack may not be fully represented by where a company is headquartered. Having said that, the decision as to whether to purchase terrorism insurance is typically made at headquarters. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. It should be understood to be general risk management and insurance information only. 16 | The Marsh Report: Terrorism Risk Insurance 2010
  22. 22. 4 5 The Standalone Terrorism Marketplace After the attacks of September 11, 2001, and prior to Coverage for international locations: Standalone  the enactment of TRIA, the standalone terrorism coverage, unlike TRIA coverage, is available for insurance market was the main source of capacity for most locations worldwide. Companies with companies looking to obtain property terrorism overseas exposures often look to the standalone insurance. Mainstream property insurers were market to provide solutions not satisfied by local generally unwilling or unable to provide the coverage. government terrorism insurance schemes (see Chapter 9 for a list of worldwide pools). Today, the standalone insurance market continues to Reinsurance of U.S.-domiciled captives for  provide terrorism coverage, at times competing with “all risk” property insurers that provide TRIA TRIA-certified terrorism: Some of the standalone coverage and at other times complementing the insurance markets offer policies to reinsurance coverage provided by TRIA. Standalone insurance captives for the captive deductible—the 15 percent markets also serve companies whose needs are not of TRIA-certified losses that are not covered by met by the Act. For example, in situations where the the federal government once the captive insurer’s “all risk” program terrorism limits cannot be filled deductible is reached—and the liability resulting by “all risk” markets, then the standalone insurance from TRIPRA’s $100 million trigger. market may offer alternative capacity. Capacity in the Noncancelable coverage: Standalone policies that  standalone terrorism insurance market has grown cannot be canceled by either party—other than for considerably over the years; insurers now offer a nonpayment of premium—are available. theoretical maximum of $3.76 billion in capacity. The standalone property terrorism insurance market offers coverage for both TRIA-certified and noncertified risks and enables companies to tailor the capacity to their coverage needs. Other features of this insurance alternative include the following: Coverage for noncertified risks: Some companies  buy TRIA-certified terrorism coverage within their “all risk” property programs to cover U.S. locations and use a standalone policy for noncertified risks. Coverage for gaps in other policies: In situations  where the “all risk” program limits cannot be filled by “all risk” markets—typically, for noncertified risks—the standalone insurance market can be used to fill gaps in limits. The Marsh Report: Terrorism Risk Insurance 2010 | 17
  23. 23. Standalone Terrorism Global Market Capacity as of Q2 2010 The standalone property terrorism insurance market as of the second quarter of 2010 has a number of insurers as follows: Insurer (Company) S&P Rating A.M. BEST Rating Maximum Capacity (US$ millions)* ACE American Insurance Company A+ A+ p XV 25 Aspen Specialty Insurance Company - A g XV 30 AXIS Specialty Limited A+ A XV 150 Chartis A+ A p XV 250 - 1,000 Glacier Reinsurance AG - A- IX 40 Hiscox Insurance Company, Inc. - A VII 100 International Insurance Company of Hannover AA- A VIII 25 Lancashire Insurance Company Limited - A- XII 200 Lloyd's of London A+ A XV 900 Montpelier Reinsurance Limited A- A- XIII 50 National Fire & Marine Insurance Company AA+ A++ g u XV 1,000+ Transatlantic Reinsurance Company A+ A g XV 50 Validus Re - A- XIV 50 Western Re/Managers Inc. A+ A XV 100 Westport Insurance Company A+ A g XV 40 * as of April 1, 2010 Theoretical maximum: $3,760 Although a significant attack has not struck U.S. soil since September 11, 2001, terrorism remains a very real and present threat worldwide. A number of events and attempts have occurred in recent years, notably the following. 2009-2010:  Moscow, Russia – Metro subway system bombings (March 29, 2010)  Buenos Aires, Argentina – Bomb exploded at Banco Nación branch (March 17, 2010)  San Salvador, El Salvador – Bombing at offices of Rio Lempa Hydroelectric Power Plant Executive Commission (March 18, 2010)  Athens, Greece – Bombing of building housing ultra nationalist group Golden Dawn (March 19, 2010)  Jakarta, Indonesia – JW Marriott and Ritz-Carlton bombings (July 17, 2009)  Lahore, Pakistan – Sri Lanka cricket team bus attack (March 30, 2009) 2004-2008:  Mumbai, India – Attacks on eight different sites including hotels and train station (November 26-29, 2008)  Islamabad, Pakistan – Marriot Hotel bombing (September 20, 2008)  Amman, Jordan –– Bombs at Grand Hyatt hotel, Radisson SAS Hotel, and Days Inn (November 9, 2005)  Bali, Indonesia – Beach Resorts (October 1, 2005)  London, United Kingdom – Underground train and bus bombings (July 7, 2005)  Jakarta, Indonesia – Australian Embassy (September 9, 2004)  Madrid, Spain – Commuter train bombings (March 11, 2004)  Moscow, Russia – Metro subway bombing (February 6, 2004) There has also been a spate of unsuccessful attempts in recent years, including the failed Times Square bombing attempt in the spring of 2010, the attempted bombing of a Detroit-bound Delta flight on Christmas Day 2009, foiled plots to attack Heathrow and Glasgow airports, and plots to disrupt U.S. and European transportation systems. These attempts have helped to keep the threat of terrorism at the forefront of risk management decision-making. 18 | The Marsh Report: Terrorism Risk Insurance 2010
  24. 24. Market Underwriting Position Chartis/Lexington offers coverage for U.S. domestic  locations as well as foreign locations. Lexington Standalone rates can at times be more competitive has increased capacity for U.S. domestic terrorism than the pricing of embedded terrorism in property insurance, up to a theoretical policy limit of $1 programs. In the standalone property terrorism billion, which is available on a case-by-case basis. market, capacity—the limit of coverage that is ACE continues to restrict its standalone terrorism  available for a single risk—is relatively stable, but it capacity to accounts in which it has a significant can vary considerably, primarily due to: property position. Their position is to support the ACE Global Property branches for foreign exposures Location of risk: The demand for coverage in major  only. metropolitan areas has a substantial effect on the available capacity. Monitoring of aggregates is a priority for all  insurers. Capacity in top-tier cities is priced Insurer’s accumulation of exposure: Insurers have  accordingly. aggregate limits on the risks they can take. Capacity Marsh is able to secure manuscript contingent  can be limited in certain locations, particularly in business interruption cover including first and major metropolitan areas such as New York City, third party assets with extensions for port where some underwriters currently have severe blockage, rail infrastructure, and power supply. aggregation issues. Concentration of exposure: Terrorists attack  Coverage Issues targets of opportunity. Although it is certainly possible that an attack could occur anywhere— All standalone markets use the T3/T3A policy forms. including a remote town or shopping mall— Some markets will support a Marsh enhanced T4/ demand for coverage will likely be higher in T4A form. A manuscript terrorism form from Marsh metropolitan areas simply because there is a is available from some markets. The chart on page 20 greater concentration of exposures. compares some of the characteristics of standalone coverage and TRIA coverage. (Marsh would have to Market Capacity:  undertake a complete review of any form issued to – apacity has increased significantly for C provide a detailed comparison of coverage.) exposures outside central business districts (CBD). Product Enhancements – Approximately $750 million to $2 billion per The following are among those developed by risk in standalone capacity is available to standalone property terrorism insurers: companies that do not have sizeable exposures in locations where insurers have Chartis/Lexington's BioChem ShieldSM can offer a  aggregation problems. Capacity excess of $2 sublimit of up to $25 million aggregate for billion is available, but is more expensive. biological/chemical terrorism; this excludes nuclear or radiological terrorism. It is offered as an – For locations where markets have aggregation endorsement to a standalone terrorism policy or to issues—particularly New York City—the a company’s “all-risk” program. estimated market capacity is approximately $1 billion: additional capacity can be accessed at Chartis/Lexington's Op ShieldSM covers business  significantly higher rates. interruption and extra expense losses triggered by a civil or military authority order to evacuate that Bowring Marsh operates a Worldwide Terrorism  arises from either a terrorist act or a threat of Facility with 13 Lloyd’s syndicates that provides up terrorism. It is offered as an endorsement to a to $250 million of capacity for worldwide standalone terrorism policy or to an insured’s terrorism property damage and business “all-risk” program. Lexington can offer a sublimit of interruption coverage. The facility is designed to up to $25 million aggregate. There is a 72-hour accept terrorism risks for metropolitan waiting period and the indemnity period is limited to city centers. 30 days. The Marsh Report: Terrorism Risk Insurance 2010 | 19
  25. 25. Hiscox at Lloyd's Liability Terrorism Insurance  The state-specific solution offers coverage for covers damages and claims expenses that the losses incurred due to an NCBR terrorist event in insured is liable to pay due to any claim or claims a specific state so long as the event is deemed to for bodily injury and/or property damage. The have originated in the named state. policy includes defense cost expenses. The limit available is between $50 million and $100 million This NCBR solution is offered for several aggregate. This is a claims made and reported insurance lines—including property damage, policy. The reporting provision is as soon as business interruption losses, and workers’ reasonably possible and in no event longer than 90 compensation—and pricing is based on the days after the expiry of the policy. A 72-hour product covered as well as the perceived occurrence clause applies. probability in the specific ZIP code or state. Lloyd's of London's Riots, Strikes, Civil  Commotions, and Malicious Damage covers insured property damage or business interruption losses caused by an act or series of acts of riots and/or strikes and/or civil commotions and/or malicious damage. A 72-hour occurrence clause applies. Catlin Bermuda Worldwide NCBR Terrorism Cover  provides nuclear, chemical, biological, and radiological (NCBR) coverage for individual locations or a specific state. For individual locations, the specific ZIP code of the property and a radius around this ZIP code is required. This product is available to individual commercial purchasers or by insurers desiring to remove peak risks. Comparison of Typical Standalone Coverage and TRIA Coverage Standalone Property Terrorism TRIA as Part of "All-Risk" Property Covers acts of certified and noncertified acts of terrorism and can be Covers certified foreign and domestic acts of terrorism. extended to cover political violence perils. Can cover locations inside and outside the United States. Covers only U.S. locations. Limits are typically aggregated or with one reinstatement; Per-occurrence limits that match property policy limits. occurrence limits may be available. Account- and terrorism-specific deductibles. Deductibles match property policy deductibles. Location- and schedule-specific. Coverage for all locations, including unscheduled, depending on terms of property policy. Non-cancelable policy available. Cancelable terms follow property policy. Long-term policies up to three years available. Policies typically written for one year. Select insurance markets. All markets that meet insurer definition under TRIA. 20 | The Marsh Report: Terrorism Risk Insurance 2010
  26. 26. 6 Workers' Compensation and Liability Coverages Workers' Compensation Historically, rate makers included a small, undifferentiated charge for potential catastrophic Largely because it is controlled by the states, which losses in their overall rates. have not allowed exclusions for terrorism losses, workers’ compensation presents unique challenges Pursuing a more explicit approach, the National to insurers, brokers, and risk managers. Insurers and Council on Compensation Insurance (NCCI) qualified self-insured employers cannot exclude approved the “Domestic Terrorism, Earthquakes, coverage for acts of terrorism from workers’ and Catastrophic Industrial Accidents Premium compensation policies as they can with other Endorsement (DTEC)” for workers’ compensation, insurance lines. Nearly all states require employers which took effect January 1, 2005. The endorsement or insurers to pay medical costs and wage simply reflects the revised definition of terrorism to replacement without limits or exclusions for include domestic events and the disclosure of the workers injured on the job. Workers’ compensation $100 billion cap. It provides funding for some provides lifetime medical care for on-the-job catastrophic losses, including acts of terrorism injuries, leading some computer models to project specifically excluded by TRIA, but not for that the “worst-case” cost of a terrorism incident TRIA-certified acts of terrorism. could exceed $90 billion. In contrast, some experts put the total workers’ compensation capacity for the The endorsement defines a $50 million loss entire insurance marketplace at $30 billion. aggregate threshold for workers’ compensation for: Risk managers should be aware that insurers all acts of terrorism outside the scope of TRIA;  carefully calculate and try to limit their exposures earthquake—defined as a single event involving  to high concentrations of risk. Multiline insurers are underground movement along a fault plane—or particularly sensitive to site-specific accumulations volcanic activity; and of risk. As a result, care should be taken to obtain insurance-market alternatives for workers’ catastrophic industrial accident, which qualifies if  compensation programs that are likely to be affected a single event results in the losses. should a terror event occur. Even where the insurer The premium for this endorsement is calculated as renews, insureds should be wary of larger retentions, rate multiplied by payroll and is applied after the accompanied by increasing amounts of collateral to standard premium. It is not, however, subject to any support those retentions. other modifications such as premium discount, experience rating, schedule rating, or retrospective TRIA’s limitation to certified acts of terrorism has rating. prompted state regulators and insurers to pay more attention to finding premium mechanisms for noncertified acts of terrorism. Despite improved modeling, the frequency and severity of terrorism risk remains difficult to adequately assess, especially when compared to other potential catastrophic losses (i.e., windstorm or earthquake). The Marsh Report: Terrorism Risk Insurance 2010 | 21