Mercator Advises Risk Managers to Prepare for World Without TRIEA
With the Terrorism Risk Insurance Extension Act (TRIEA) set to expire in December 2007, experts are speculating whether Congress will renew TRIEA as is, scale back its provisions or scrap it altogether. This widespread debate is already starting to have ripple effects on the economy, according to Mercator, an independent insurance wholesaler based in New York.
“TRIEA, which provides $100 billion in capacity, is now an economic security issue because the private insurance market cannot provide enough capacity to meet every insured’s needs,” said Ian Batsford, Mercator Risk Services’ terrorism and political violence specialist.
“The lack of capacity would drive the price of insurance higher than many businesses can actually afford.”
“Factors such as an uncertain global political climate, corporate governance requirements brought about by Sarbanes-Oxley, and lenders’ contractual requirements have made terrorism coverage a business imperative and a crucial part of a comprehensive risk management program. It’s a sign of the times,” he added.
If TRIEA is not renewed in some form, without involvement by the federal government, the stand-alone insurance market as it exists today will lack the capacity to provide enough affordable coverage for the largest clients in major city centers, according to Mercator, which predicts an increase of 20 percent to 30 percent in the price of coverage in small cities, and increases by as much as 100 percent in large cities.
Those numbers could increase further as the TRIEA’s expiration date approaches.
Public/Private Sectors Share the Risk
“We believe that the United States needs to continue its private/public partnership through some version of TRIEA to effectively address the terrorism risk,” said Batsford. “However, striking a balance between coverage and affordability presents tremendous challenges to both the insurance and reinsurance industries, as well as business.”
Mercator maintains that the government should have a high attachment point, and that the insurance industry should handle the first chunk of a major loss. “We believe there is adequate capacity and an adequate level of market sophistication because the stand-alone market is more able to step up than it was in 2005,” he added.
It remains unknown at what point the private market can actually cover. In rural non-aggregated areas, the private market can offer more than $1 billion of capacity, with most clients stopping below $500 million for cost reasons. But in the major cities, the private market would be challenged to provide more than $250 million of capacity and still keep coverage affordable. In heavily aggregated areas, such as midtown Manhattan, this figure would probably be $100 million to $150 million.
Mercator advices corporations need to prepare for a world without TRIEA since it is looking more likely that the government’s involvement in covering terrorism is going to be scaled back. Risk managers may seek out stand-alone coverage in the direct market or self-insurance, which would not satisfy the requirements of many lenders. For large clients, self-insurance could take the form of a captive or a mutual insurance company.
Other steps clients can take to better ensure coverage at competitive rates, according to Mercator include:
– Investigate options early in the renewal cycle. Clarify what level of insurance the business wants or what level their lenders and shareholders will insist they buy. Prices will increase as most companies look to the stand-alone market, so arranging for insurance before the TRIEA coverage expires would be a sound move.
– Investigate a capacity reservation product which allows the insured to book their capacity and fix pricing for a fee should they elect to buy stand-alone terrorism insurance through the private market when their current placements expire or they find themselves without coverage. This may be particularly relevant for clients with center city exposures who need to reserve their capacity in zones that are heavily aggregated.
– Submit a full schedule of locations with addresses and the
corresponding values. If you have a high-risk neighbor such as
government building a religious building, an iconic property such as the Empire State Building, or a trophy business such as Bank of America or McDonalds, tell the underwriters about it from the start because they will be checking.
– Establish security measures beyond the basic checking of ids, which may help underwriters, look more favorably upon the risk. These measures could include a detailed policy for security on delivery trucks or vehicles driving right up the building; full screening of bags; preparing meetings and visitors in advance, and closed circuit television monitored continuously.
Source: Mercator Risk Services, www.mercatorrisk.com