Although pricing has stabilized, some underwriters are reaching their aggregate capacity levels in a handful of major U.S. cities such as New York, they say.

“My observation would be that, in seven months post 9/11 the insurance market has done pretty well” with regards to providing capacity, said Stephen Ashwell, war, terrorism and political violence underwriter at Syndicate 33, which is managed by Hiscox plc, a Lloyds managing agency.

For a fairly innocuous risk, a buyer could get between $500 million and $1 billion of standalone terrorism coverage placed in the global insurance marketplace, he said, although he emphasized there are clearly aggregation issues.

“The worldwide capacity probably now is approaching $1 billion [for one risk],” said Tom Bartleet, executive director in global property-casualty for Willis Ltd. in London. “Its theoretically possible,” to put together a program with $1 billion of coverage, although the ability to do so “relies on the industry, the location, the accumulations around it and the price youre prepared to pay.”

In the seven months following Sept. 11, the market has stabilized, more capacity has become available, and prices have dropped, sources agree.

“The market has settled down and is obviously more comfortable with the type of risk that its seeing, the cover thats being offered, and the pricing,” said Simon Low, divisional underwriter for the war and political risk department at Wellington Underwriting, a Lloyds managing agency.

“The wide variety of prices that we were seeing has now plateaued and youre seeing more of a consistent approach from the private market,” he said.

“Obviously there was a knee-jerk reaction last year, said Mr. Low. “I think the actual pricing has stabilized and become far more affordable.”

Ben Garston, underwriting partner at MAP, a Lloyds managing agency, agreed that the standalone terrorism market has stabilized. He runs MAPs war, terrorism and political risk department.

“I think the market is probably underwriting more intelligently in terms of how it distinguishes high risk from low risk, in the United States especially,” he said. “So for many buyers, it should be a much easier and, probably, a slightly more predictable process.”

He does not expect that rates will fall too much “because this is a net market; in most cases there is very little reinsurance for this”a situation which isnt likely to change in the foreseeable future, he said.

Reinsurance availability historically has had a strong downward effect on pricing in most classes, he said. Where net lines of any kind are written, people tend to stick to the price they have in mind, he added.

While some new players have entered the market, he said he doesnt expect that much more capacity to enter the standalone terrorism market.

“I dont for the moment expect reinsurers to start removing exclusions for terrorism from their policies, particularly not in a hardening market when they can sell an ordinary property cover for higher rates,” he said.

He said he expects a slight expansion in the specialist terrorism market, but not a massive one.

Further, he said, the risk is extremely genuine and the risk of terrorism is far from over. “So I dont think the rates are likely to fall very much.”

“If the cost is in the range of .05-.10 percent of your building and your whole business relies upon it, then maybe its not such a great price to pay for the protection, for the peace of mind,” he said.

Mr. Ashwell said he expected more terrorism capacity to become available as insurers buy reinsurance from companies that “are coming into the market now.”

“If more reinsurance capacity becomes available, one can assume more insurers will be attracted to the business,” he said.

“In the first year, there isnt going to be very much capacity around for this type of cover,” he said. “But in future years, as the market develops, I think there should be a commercial response available.”

In the short-term, however, all those interviewed agreed that aggregation is beginning to be a key issue, especially in central Manhattan.

“I dont know of anyone who has not found cover, but its becoming an issue rapidlyover the last few weeks, in fact,” said Simon Thurgood, account executive for Willis Group Ltd. in London.

Mr. Bartleet at Willis said coverage has been available up to nowat a price. Its a question of affordability rather than capacity, he said.

“Essentially, if capacity is more limited in certain areas, then obviously people will have to pay more to secure that capacity,” he said.

Lloyds and American International Group have very little capacity left in Manhattan, affirmed Julian Taylor, vice president for Marsh Inc. in London, where he is in charge of the terrorism team.

There are always exceptions, he said. “Underwriters always find ways to increase their aggregate.”

On the other hand, he said that Berkshire Hathaway and Axis still seem to have capacity available for New York.

“As things stand, there is still capacity out there for terrorism; its just as time goes by, you become more and more obliged to go to one or two carriers, rather than six or seven,” he said.

“In some areasManhattan certainly is quite difficult and parts of Chicago are quite difficult, but in most areas we still have plenty of capacity,” said Mr. Garston.

“I dont have any enormous aggregation problems in 99 percent of the world,” he said. “I think this might happen eventually, possibly in some of the city areas, but I think the market still has plenty of capacity in most areas.”

“If the amount that were prepared to run on a net basis is exceeded, we will then say were full up in that area, but that wouldnt be city-wide or district-wide,” said Mr. Low at Wellington. “It would be for a specific location [in a city].”

“But we havent reached that point anywhere in the world, at the moment, for our aggregates,” he said.

Mr. Low said a chicken farmer in Wisconsin is always going to be preferable to a trophy tower in the middle of Manhattan. “But we will assess each risk on its own merits.”

A lot of these trophy targets have the security around them to make them insurable writes, but obviously, writing them “is something that youd be cautious about. So the rates and the line size youd put on [a trophy risk] would probably be different [from] the line size youd put on the chicken farmer.”

He said there are trophy risks that have come into the Lloyds market and received quotes.

“I know for a fact that a few of them have actually been placed as well,” Mr. Low said.

“For the kind of premium theyre being quoted, some of them dont believe its worthwhile, but thats a decision they have to [m]ake, with regards to [their assessment of the risk],” he said.

“Were finding that people are coming in and are prepared to actually self-retain a larger deductible,” Mr. Low said. “When people retain a larger deductible, thats the best way of reducing the premium level on the risk.”

Where buyers previously were looking at deductibles of $250,000 or $500,000, many are now prepared to take a $1 million or even a $5 million deductible, “which has a huge effect on the premium,” he added.

(Next week: A comparison of the basic features of terrorism policies that have come on the market since 9/11.)

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, May 6, 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.