The first smattering of prices on the Congressionally mandated terrorism coverage is trickling out of the insurance industry, and they are–as supporters of the bill predicted–lower than standalone terrorism coverage, to the extent that such coverage was available before the legislation passed. But are the new prices low enough?
Before Congress and the White House decided to fix the problem, the insurance being offered to companies covered all kinds of terrorist acts–those committed in the U.S. or abroad or by foreign or domestic terrorists. Under the new law, insurers are only required to offer coverage on what is deemed "certified terrorism," which is defined as attacks within the U.S. by individuals acting on behalf of foreign interests. Of the losses generated by this very specific brand of terror, the government has agreed to pick up 90%.
Yet, some companies are being quoted quite high prices. According to Suzanne Douglass, managing director of Willis Risk Solutions' property practice, the few prices she has seen so far are "all over the lot," with some as low as 3% to 5% and others as high as "75% to maybe 100%" of the property premium. "Some has to do with the location and occupancy," Douglass says. "On more benign things, we're seeing the lower of the pricing."
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Chris Mandel, the president of the Risk and Insurance Management Society, has heard a similar range, all the way from "a nominal 1% of the property premium" up to 100%, with the low-end prices "correlated with low-profile, low-risk properties." Mandel finds the low end of the range encouraging given some comments by insurers after the law was passed that the mandated coverage ought to be priced in line with the standalone coverage. Given the government's loss coverage, Mandel says risk managers expect insurers "to respond on a more reasonable basis when it comes to the pricing of risk and availability of coverage."
Randy Schreitmueller, vice president of operation sales and client service at FM Global, a big property insurer, wouldn't comment specifically on rates but says FM is considering three things when pricing its coverage: the geographic location, what kind of business the customer does at that location and whether more than one client occupies the location.
There are also a few examples of quotes for the coverage dictated by the legislation that came in dramatically lower than that for a standalone terrorism policy. Douglass notes a real estate business that is a customer of Willis' Chicago office that was quoted a price of about $400,000 in the wake of the terrorism legislation, versus the $1.5 million premium it was quoted for standalone terrorism coverage prior to the legislation. The price "came down a lot," she says, but notes that the $400,000 again covers only certified terrorism. Douglass and other brokers say they expect some underwriters will start to provide customers with prices for coverage for domestic terrorism as well as for certified terrorism.
Elizabeth Francy Demaret, managing director of the international retailing sector at insurance brokerage Arthur J. Gallagher & Co., has a similar story about several companies that were quoted coverage for certified terrorism for $30,000 to $50,000. Each of the companies has about $1 billion worth of property covered, about half of which is located in the U.S., and is considered an unlikely terrorist target. She says a customer with similar specifications that was trying to price standalone terrorism coverage last year got a series of quotes that, after some "discounts" from the insurer, came in at a low of $156,000 with a $10 million limit.
Demaret notes, however, that quotes she has seen for terrorism coverage in the wake of the legislation have varied by as much as 15% to 40% for what seemed to her to be similar risks. "We've yet to see a clear rating pattern," she says, but adds that she expects the pricing to improve with time and as insurers hammer out their agreements with their reinsurers.
All this has made it difficult for brokers to cut deals. Jill Dalton, North American property practice leader at Marsh & McLennan Cos., says logistics may limit, at least in the early months, the amount of bargaining that goes on. "I think initially the markets will not be that flexible with their terms, and they also don't have the resources to negotiate every deal," she says. Ultimately, though, the consensus among brokers: Over the long haul, the prices will drop.
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