New York, August 25, 2010
Discontinuation of a government-mandated terrorism backstop would have an adverse effect on the long-term availability and affordability of terrorism insurance, according to a letter submitted by Marsh to the President’s Working Group on Financial Markets.
Marsh, along with Guy Carpenter, submitted the comments earlier this month in response to a request for industry opinion on the availability and affordability of terrorism insurance. Marsh and Guy Carpenter are operating companies of Marsh & McLennan Companies Inc.
In the event that the Terrorism Risk Insurance Act (TRIA) is discontinued and not replaced by a similar government-sponsored program, Marsh anticipates that the availability of terrorism insurance would be greatly reduced in high-risk areas, such as business districts within major metropolitan areas. Marsh also anticipates that pricing for terrorism insurance would dramatically increase in these high-risk areas. This would have a profoundly negative impact on those businesses with the greatest need for protection against terrorism risks.
"Terrorism, in all its forms, remains a significant risk that will need to be insured again over the long-term,” said Ben Tucker, leader of Marsh’s Property Specialized Risk Group. “Marsh would expect significant and adverse market impact in the absence of the TRIA backstop, as insurers do not have sufficient capacity to meet the terrorism risk needs of policyholders.”
The findings of The Marsh Report: Terrorism Risk Insurance 2010, Marsh’s recently published annual report on terrorism, indicate that the long-term availability of an affordable terrorism risk transfer mechanism is critical to U.S. businesses and foreign businesses operating in the United States. TRIA has provided such a mechanism since it was enacted in 2002. According to Marsh’s report:
- Sixty-one percent of firms surveyed purchased property terrorism insurance in 2009, an increase from 57 percent in 2008 and representing a steady climb from 27 percent in 2003.
- Median premium rates declined from $37 per million of total insured value in 2008 to $25 per million in 2009, owing largely to the protection afforded by TRIA.
On occasions when TRIA coverage has been unavailable, Marsh clients have used terrorism policies provided by insurance companies on a standalone basis to manage and transfer their terrorism risk adequately. However, a significant increase in either natural catastrophes or man-made events—such as terrorism—would likely result in a market hardening, which in turn would have an adverse impact on the affordability of terrorism risk insurance in the future, Marsh said. This effect would be exacerbated in the absence of a mandated terrorism risk insurance mechanism.