“Weve seen a substantial amount of submissions from the United States,” said Simon Thurgood, account executive for Willis Group Ltd. in London.

“Its a classic case of supply and demand,” added John Eltham, director of Miller Insurance Group, a London market broker.

Some buyers have found the pricing commercially unacceptable and have decided not to buy the coverage, noted Mr. Eltham, “but having said that, the uptake on the coverage is very high.” He added that “the key to successfully writing terrorism is to control the aggregation.”

Although some London market underwriters might choose to limit their exposures for buildings in city centers in high-risk cities such as New York and Los Angeles, he said, coverage is usually available for a price.

Indeed, a broker at Marsh in London who did not want to be identified said he has seen some underwriters reducing their lines as a result of capacity aggregation. “Some syndicates at Lloyds are writing on a net-line basis, so their capacity in the major cities is restricted. Since the market has bound quite a few policies with major cities exposures, the capacity is shrinking,” he said.

The pricing is being driven by the demand for the very limited capacity available at this time, said Mr. Thurgood, although he noted that new capacity is developing as underwriters see the opportunities in this business.

“As a higher population of risks accumulate, as rates become more aligned to what is commercially acceptable to the client, as the insureds themselves get used to the idea of having to purchase terrorism [coverage] separately, a proper market with much higher capacities could develop in the future,” Mr. Thurgood predicted.

Mr. Eltham explained that London, for many years, has had an established market for stand-alone terrorism coverage. As a result, once reinsurers began excluding terrorism after Sept. 11, London market underwriters were able to meet the initial demand just from their existing reinsurance programs because they had specific reinsurance for their terrorism book, he continued.

To place the limits that clients are looking for, the business is being written by a variety of Lloyds syndicates as well as the London company market, according to the brokers interviewed.

The coverage is available in the United States as well, so the two markets are competing with each other but also working together if its a matter of generating sufficient capacity on a subscription basis to cover a risk, Mr. Eltham explained.

Stand-alone terrorism coverage is available from American International Group and Berkshire Hathaway in the United States, while Factory Mutual Global has written some coverage on the back of its property business, according to the broker with Marsh.

On the treaty reinsurance side, Chris Hills, managing director at Guy Carpenter in London, said the issue of stand-alone terrorism coverage is currently “a moving target.” He explained that more reinsurers might provide the coverage as capacity is freed up.

For example, if Client A has coverage that will expire on July 1, for the time being the reinsurers providing the coverage are fully exposed to potential terrorism losses, he noted. “At the first of July, that will run off, which also clears their ability to be able to write more specific terrorism coverage at that time,” Mr. Hills said. Some reinsurers in London might decide to write a lower line now, but will increase it in a few months once they “start washing out [their] existing run-off liabilities,” he added.

He said Guy Carpenter has placed several treaty deals in London, and “all of our clients are looking at how they deal with the exposure that theyve got on the books,” he said.

“There is a minimum pricing issue that means if youre going to pay for terrorism cover and you have your original cat[astrophe] business, its quite an increased combined [premium] over what you were paying last year, which I think is causing some indigestion in the ability to pay for it,” he said.

In the treaty area, Mr. Hills said he cant get the markets to give him the same lines on terrorism coverage that he can get on regular catastrophe coverage because “its just all cumulative as far as theyre concerned in the same event.”

“In providing terrorism coverage, in the main for catastrophe programs, we have found underwriters very flexible in providing the personal lines write-back, subject to bio-chemical and nuclear exclusion,” he said. In other words, if there is a terrorist event, the insurers personal lines book is covered but its commercial lines book will not be, he explained.

Mr. Hills predicted that terrorism coverage will be a growth market, subject to whether the U.S. government makes provisions for a federal reinsurance mechanism. “I think well get asked to do more business,” he said. As reinsurers get used to watching their aggregates and balancing accumulations with other nationwide and catastrophe programs, “I would expect them to become more proactive in writing the business,” he added.

Bermuda has been disappointing in that it hasnt moved in to provide coverage for this kind of business, according to Mr. Hills. “It doesnt fit into their models and patterns and the natural hazards coverage they want to write,” he said.

He said he knows of only one Bermuda company that has looked at some terrorism coverage for individual insurance buyers as distinct from insurance companies. “From a treaty point of view, they really havent stuck their noses over the parapet very much,” Mr. Hills added.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 21, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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