“You want to have a spread [of risk], because if you don't have that spread, you'll have a high concentration of risk among relatively few buyers with the most exposure,” he explained. “It's in the best interest of the industry to cover everybody so you spread the risk around. Therefore, you can't charge so much that you'll drive everybody but the most desperate buyers away.”

He said that “if the risk is reasonably priced, buyers will take the coverage. And our feeling is that it will be reasonably priced, because it's what's best not only for the buyer, but for the seller in the long run.”

Mr. Duperreault was equally skeptical about warnings that insurers might be tempted to “throw in” terrorism coverage at unsound rates to secure a larger piece of business.

“There are market forces that will mitigate against that,” he said. “Rating agency pressure and state regulatory pressure will work against insurers not collecting premium for terrorism exposure because of solvency concerns. That doesn't mean there won't be people who will try to give it away for nothing to get an account, but common sense, fear of the exposure, and oversight from outsiders should discourage anything widespread.”

It will take time for the industry to come to grips with the demands of the Terrorism Risk Insurance Act, which mandates that commercial property-casualty carriers offer the coverage and itemize the premium for that specific exposure, but which does not mandate that policyholders buy the insurance.

There will be wide variations in individual pricing of terrorism risks, Mr. Duperreault noted. “One has to recognize that not all insureds are created equal,” he said. “While the vast majority have a very low exposure, no one has no exposure, and some have a very concentrated exposure.”

He added that “there are no experts on this. We're all still sorting this out.”

However, he said he believes that the establishment of a federal reinsurance backup, by limiting a primary carrier's maximum probable loss to a set percentage of their book of business, will draw the private reinsurance market to cushion the blow of any potential terrorism strike.

“There will be a reinsurance market that will open up for terrorism, even though reinsurers don't have to do anything [under the new federal law],” he added. “There will be an emerging reinsurance market that will look at the size of deductibles [primary carriers will retain under the law], and will step in and help cut that back.”

Evan Greenberg, vice chairman of ACE Ltd., as well as CEO of ACE Tempest Re and ACE Overseas General, added that “reinsurers are looking at this [exposure] in a new light, and my belief is that there will be a terrorism reinsurance market, but capacity and pricing are unclear. There are feelers going out as to what carriers might be willing to offer.”

Mr. Greenberg added that “Tempest Re is in the cat business. If we can define the exposure, clearly structure the coverage so we know what the impact on our balance sheet might be, and can get a price to make it worth taking the risk, we will be a player in this business.”

As for the general property-casualty market, there are no factors at work that would discourage further price hikes or undermine underwriting discipline, according to Mr. Duperreault.

“There is still a huge amount of pressure on rates, pushing them higher and higher,” he said, citing a low-interest-rate environment and an unreliable stock market as key factors. Without a sustained turnaround in investment returns, insurers have no choice but to write insurance at a net gain, and a substantial one at that, he said.

“If you're trying to raise capital in this market and Wall Street has turned its back on you, you have no alternative but to boost underwriting profits,” he said, adding that he expects 2003 “to continue to be a very hard market” for buyers.

However, he noted, “whether that translates into a reasonable return on equity is still a big question,” defining a “reasonable” return as somewhere around 15 percent–a big jump for an industry turning in single-digit ROEs.

“Insurers need to write at a 91 or 92 combined ratio to get that 15 percent ROE, and that's assuming everything else is perfect, and we don't live in a perfect world,” he said. “We have old losses still emerging, reserves being boosted, and a poor investment climate all depressing the rate of return.”

He added that with “the industry's combined ratio running around 105, there is still a lot of room to go to reach that crossover point to earn a reasonable return.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 16, 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.