U.S. insurers remain steadfast on terrorism exclusions

More than 40 U.S. state insurance regulators have now a approved the terrorism risk exclusions wordings that had been drafted by the Insurance Services Office (ISO) and released just prior to the yearend deadline when most reinsurance covers for this particular peril expired, says Robert Hartwig, chief economist at the Insurance Information Institute (III).

There are still no signs that Congress will pass legislation enabling the creation of a federal government-backed reinsurance facility. As such, insurers have applied terrorism exclusions across personal and commercial lines where permitted, Hartwig notes. The states of New York and California number among a small group of regulators who have rejected the exclusions, despite approval late last year from the National Association of Insurance Commissioners (NAIC). New York and California represent a “large slice of the insurance pie” Hartwig concedes. Furthermore, U.S. market sources suggest that around 45 state insurance regulators have rejected terrorism exclusions on personal lines covers.

The New York insurance regulator’s rejection of the terrorism exclusion wordings on standard policies will, however, have limited impact on insurers, Hartwig notes. The main risks within New York City are high-rise landmarks, such as the Sears Building and the Empire State Building. Such risks are insured under customized policies, he adds, which means that when the covers come up for renewal, the terms will not be subject to regulatory approval. A number of insurers have already walked away from insuring high-rise condominium developments in the downtown core, Hartwig says, with insurance capacity within the city likely to drop off.

The prime concern U.S. insurers face is terrorism loss exposure through workers’ compensation, Hartwig points out. Following the expected US$3.5 billion loss incurred through workers’ compensation as a result of the September 11 attacks, he says a number of companies have filed for surcharge rate increases. “As you can imagine, this has gone over like a lead balloon with the regulators, however, due to the losses suffered, it should be easy to justify the increases.”

U.S. insurers also face an added terrorism exposure, similar to Canadian insurers, through “fire following” losses, depending on state regulations. However, the potential losses are minimal when compared with workers’ compensation, Hartwig notes. Notably, he adds, if insurers had applied terrorism exclusions after the first bombing of the World Trade Center (WTC) in 1993 (at an insured loss of US$510 million), then the September 11 insured loss would have been in the region of US$5 billion, “instead of a US$50 billion hole in the ground”.

On the Canadian front, insurers are still in negotiation with the federal Finance Ministry to establish a form of government-backed reinsurance facility, confirms the Insurance Bureau of Canada’s (IBC) vice president of regional operations, Stan Griffin. At this stage, the government still appears to be holding back until gaining direction from U.S. developments, he adds.