The Act is requiring a lot of rethinking of how to measure and manage risk, agreed all those interviewed.

“Our clients dont yet have enough information,” said James Bryce, president and CEO of IPC Re in Bermuda. “Right now, [primary insurers] are trying to figure out how much premium is available, whats going to be the take-up [of policies], and where are their exposures.”

Some insurers, which are heavily reliant on reinsurance, are finding they suddenly have dramatically increased exposures, he said. For example, they could write 100 percent of a building and reinsure 95 percent of it, “so they only would have 5 percent net for all perils except terrorism, where they have 100 percent,” he said.

(Under the Act, after a $5 million industry loss, the government starts paying 90 cents on the dollar after each company exceeds a deductible threshold, based on 7 percent of its gross direct earned premiums in 2002, 10 percent in 2004 and 15 percent in 2005.)

“You have a much greater gross exposure because of the gross premium calculations,” said Mr. Bryce. “That may cause an insurance company to rethink its risk management, risk analysis and say, I dont want to take these gross lines; Ill take 5 percent gross-net, because I dont get credit for the reinsurance.”

He explained, if an insurer had been putting up $1 million on a risk and reinsuring it down to $50,000, the insurer might now decide to put up only $50,000, so its gross line would be $50,000, and its net line would be $50,000. “The broker has to go out and find a co-insurance market to fill in the other $950,000.”

Further, he said, not all companies may be in a position to take the 7 percent premium deductible.

Don Griffin, assistant vice president-business and personal lines, with the National Association of Independent Insurers, Des Plaines, Ill., acknowledged that the deductible thresholds may have been set too high.

If a company is writing at a one-to-one premium-to-surplus ratio, then the exposure, with the deductibles under the Act, are 7 percent, 10 percent and 15 percent for 2003, 2004 and 2005,” he said. “However, if youre writing at a two-to-one or a three-to-one premium-to-surplus ratio, you basically have to double or triple those percentages as being a portion of your capital and surplus thats exposed before the federal government pays.”

“So in the third year of the program, 45 percent, or somewhere thereabouts, of a companys capital and surplus could be exposed to a loss if it is writing at a three-to-one ratio, before the federal government program would kick in and pay 90 cents on the dollar above that,” Mr. Griffin said.

“If thats the case, that company is no longer likely to be in business,” he said. “As a result, there is a concern that the thresholds were too high, as far as what the industry has to retain,” he said.

Damian Testa, president of Kaye Insurance, a broker that is a member of Hub International in New York City, said the deductibles in the Act expose a regional subsidiary to the conglomerates deductible.

He said he knows of a regional New York City carrier that is struggling with the question of the deductible of its parent company, which is higher than the subsidiarys actual premium writings.

With the terrorism deductible calculated according to the gross premiums of the conglomerate, the regional carrier could be put out of business because “its the hook for the entire deductible of the parent, Mr. Testa said. As a result, this company is no longer writing new business until it figures out a solution, he added.

Paul Maynard, chairman of the market practice group in Global Risks for Aon Limited in London, said the large U.S. property insurers accept “theyve got to live with this legislation, will see it as an opportunity, and eventually it may drive competitive behavior.”

A quick sampling of policies that have entered the London market reveal the extra terrorism premiums appear to be in the 10-15 percent range, he said.

Mr. Maynard noted there is still no actuarial method of working out the terrorism premium, so insurers are charging between 10 and 15 percent of the original property premium for an average risk in an average place. “Its no more scientific than that.”

He speculated that most buyers will see a number less than 25 percent of the original premium, with the obvious exceptions being high rises in Manhattan and businesses with an above-average political or trophy profile.

By and large, the London market is providing coverage under the terms of the Act, he said. “Lloyds had to recognize that if it played hard ball now, the result could be losing its position at the next renewal, because there are already signs that the domestic U.S. market is now getting competitive again, just on the non-terrorism issues,” Mr. Maynard said.

“Some classes in London are much more difficult,” he said, citing “cancellation and abandonment” coverage (which relates to trip and event cancellation coverage of sporting events, concerns and the like). “I think that the London market is pretty unhappy with TRIA in this area, and its pricing would suggest that it doesnt want people to buy the terrorism cover.”

“The majority of risks that were insured in the London market as a surplus lines market have now had their notices,” indicating that the coverage is available and how much it will cost, he said. “On the global side, where weve got U.K. corporations being covered under global programs with U.S. risks, were waiting for some of the majors [insurance buyers] to actually come down from the mountain, telling us exactly what they want to do,” he said.

He questioned what will happen if the Act turns out to be a failure–if buyers decide that the product is simply not worth buying due to the expense, an especially relevant question for Manhattan. This question cannot yet be ascertained because “we havent yet got any reliable numbers on take-up yet.”

Mr. Maynard noted that some insurers additional premiums seem to be “quite ludicrous, if you look at the theoretical exposures of some of the risks theyre insuring.”

U.S. regulators will start looking at the pricing being quoted, and there may be some regulatory intervention later in the year as to what is a fair and reasonable terrorism surcharge, he said.

Next Week: Reinsurers have said they are considering providing coverage for primary insurers deductibles exposures, but at what cost?

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, January 27, 2003. Copyright 2003 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.