However, the tension runs higher for carriers serving metropolitan areas. For these insurers, the two lines of business that present the greatest challenges are commercial property and workers' compensation.

For workers' comp, terrorism can't be excluded because it's statutory coverageinsurers have to be willing to take the entire risk, including terrorism, or not write the account at all.

“For workers comp, we will see carriers reconfigure where they want to do business, because you cannot exclude [terrorism] on a workers' comp contract. If insurers are not comfortable with the concentration of the people and location, they will retire from that risk, so we are anticipating as we move through 2005 a contraction in industry capacity in target areas,” said Richard Thomas, chief underwriting officer of the AIG Domestic Brokerage Group in New York.

For commercial property, insurers are now preparing for the possible expiration of TRIA in several ways. One is to add into policies issued between now and the end of 2005 a “conditional endorsement” from the Insurance Services Office in Jersey City, N.J., which says that if TRIA is not extended, the portion of the policy that continues past Dec. 31 won't have terrorism coverage.

This endorsement has been filed and approved in most states. (However, it hasn't been approved in Florida and Georgia, as well as New York, the epicenter of 9/11 and perhaps the region with the longest list of target properties. In these three states, terrorism exclusions would not be permitted post-TRIA.)

Another way insurers might deal with TRIAs expiration is to offer to cover terrorism risk with provisional sub-limits and deductibles. For instance, FM Globalthe Johnston, R.I.-based mono-line insurer offering commercial property insurance in metropolitan areashas developed a set of provisional policy conditions.

“Because there is no robust private terrorism reinsurance, if TRIA is allowed to sunset we will revert to sub-limited coverage for terrorism,” said Randall Schreitmueller, vice president of client services at FM Global.

Insurers serving metropolitan areas are also expected to raise premiums for commercial property as well as workers comp as TRIA lapses. However, carriers probably won't be able to increase rates as much as they want partly because of state regulatory constraints. At any rate, raising premiums can't be the sole answer when dealing with terrorism risk with inadequate and expensive private reinsurance capacity, market participants contend.

“Companies that offer terrorism coverage will need to charge a significant amount of premium because of the exposure. We would have to price it differently, but one limitation is that rates have to be approved by the insurance department,” said Warren Heck, chief executive of The Greater New York Mutual Insurance Company, the largest writer of co-op apartment houses in New York City and the fourth-largest writer of commercial multi-peril in the New York State.

The Chubb Corp. in Warren, N.J.another big commercial writer in large citiesalso foresees some terrorism rate hikes but believes the increases wont be nearly enough.

“Under current regulatory structures, states have plenty of ways to ensure that carriers cannot charge what they would consider to be high premiums for terrorism after TRIA goes away,” said Matt Campbell, vice president and general counsel at Chubb Commercial Insurance, a major insurance provider to urban real estate companies. “And states are unwilling to approve anything more than minimal rate increases for workers comp.”

Both Chubb, as well as American International Group Inc. in New York, indicated that they will largely continue to offer terrorism coverage as before because TRIAwhile offering a measure of protectionhad very high retention levels.

However, AIG Domestic Brokerage Group's Mr. Thomas said that for large commercial property and workers comp portfolios, while his company will continue to offer coverage without exclusion even if TRIA expires, they are subject to aggregate capping if the exposure is within one of the 20 target areas identified. “If we reach the cap, we will no longer offer insurance coverage for anyone who has exposure within that target zone.”

The Greater New York Mutual Insurance Company's Mr. Heck agreed that his company would also have to tighten up on the concentration of exposures.

This capping of exposures in cities like New York will make for a much tighter market, and some businesses in metropolitan areas may not find all the terrorism coverage they need, AIG Domestic Brokerage Group's Mr. Thomas forecast.

Reproduced from National Underwriter Edition, January 20, 2005. Copyright 2005 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.