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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.
Other Articles:
COMPUTER SECURITY IS NOT A BLACK HOLE -Winter 2003
"LET'S BE CAREFUL OUT THERE" -Fall 2002
WHAT
WARREN BUFFET KNOWS ABOUT
INSURANCE COMPANY FINANCIALS-Spring/Summer 2002
OPPORTUNITIES
ABOUND IN DEVELOPMENT
OF CONTAMINATED PROPERTIES -Spring 2002
"YOU
CAN'T PAY US THIS MONTH?
WHAT DO YOU MEAN 'NEW DEVELOPMENTS?" Winter 2001
WORLD
TRADE TERRORISM --
REPERCUSSIONS FOR INSURANCE MARKET-Fall 2001
ENERGY
AVAILABILITY: CURRENT REALITY OR FOND MEMORY?
-Summer 2001
"HOLD THAT BALLOT UP TO THE LIGHT" -Spring 2001
