VIEWS: 12 PAGES: 13 POSTED ON: 1/19/2011
Our World Post 9/11 and the effect on the Insurance Industry TERRORISM INSURANCE What is Terrorism Insurance? An Introduction of Terms Insurance purchased by property owners for losses and liabilities that may potentially occur due to an act of terrorism “act of terrorism” = any act certified by the Secretary of Treasury, in concurrence with the Secretary of State and Attorney General, to be an act that is dangerous to human life, property, or infrastructure and to have resulted in damage within the U.S. or on the premises of a U.S. mission (Wikipedia) Homeland security: “the concerted effort to prevent attacks, reduce America’s vulnerability to terrorism, and minimize the damage and recover from attacks that do occur.” (White House) "Terrorism Insurance." Web. <www.wikipedia.com>. Mega Terrorism: A New Extreme 20 years ago, terrorism consisted of local activities Recent years: extremist, religious based terrorism Fewer attacks but much more serious Many “near misses” Different type of target Federal business Potential to destabilize entire nations Need specific response techniques (Michel-Kerjan, and Pedell 61-76) 9/11 : The Effects on the Insurance Industry 3,000 fatalities from over 90 countries Total losses = $31.6 billion ($39.5 billion in 2008) 2/3 of losses paid for by reinsurers Capital base severely hit stopped covering this risk Both sides surprised Companies were covered 150 Insurers and Reinsurers were financially responsible Insurance claims included: commercial property – business interruption – workers’ compensation – life – general liability Most of these reinsurers were European Financially, a European crisis (Kunreuther, and Michel-Kerjan 201-214 9/11: Terrorism Insurance Pre-9/11 Post-9/11 Reinsurers reduce or eliminate terrorism offerings 1993: WTC attack Terrorism insurance that was offered became much more expensive 1995: Oklahoma City bombing Report: National Bureau of Economic Research 2003: the effect on Chicago’s O’Hare airport Terrorism losses small, uncorrelated Amount of Annual Insurance Premium Before 9/11 $750 million $125,000 Coverage offered to businesses After 9/11 $150 million $6.9 million free included in most standard all-risk Insurance Services Office takes action commercial and homeowners’ policies (Kunreuther, and Michel-Kerjan 201-214 A Temporary Solution: TRIA (Terrorism Risk Insurance Act) Private sector groups called for federal intervention Construction and Real Estate industries being held back Passed by Congress, signed into law by President Bush Insurers obligated to provide an insurance policy against terrorism carried out by foreign people or interests Federal government: 90% Insurer: 10% *up to $100 billion "Terrorism Insurance." Web. <www.wikipedia.com>. A TRIA Timeline November 26, 2002 first signed Set to expire December 31, 2005 Extended: new expiry date December 31, 2007 Terrorism Risk Insurance Program Reauthorization Act Second extension: expires December 31, 2014 Differences in Extensions Original (2002) Extension 1 (2005) Extension 2 (2007) Triggering event $5 million $50 million $100 million Deductible 15% 17.5% 20% Copayments 90% federal/10% insurer 90% federal/10% insurer 85% federal/15% insurer Insurance marketplace $15 billion $25 billion $27.5 billion aggregate retention Will TRIA be renewed again? Some alternatives… Market Approach Private market for terrorism insurance allowed Recurring cycle Mutual Insurance Pools Like co-insurance, group of companies provide reinsurance to each other Spreads the risk 2004 Towers Perrin assessment Public-Private Partnerships Through continuing TRIA, or creating a similar program Wouldn’t want a government only program Required Insurance Similar to requiring fire insurance 5 states required before TRIA Linking Mitigation with Insurance Social programs to reduce the occurrence of terrorism Regulations, standards, incentive programs (Kunreuther, and Michel-Kerjan 44-51) Terrorism Insurance Around the World Australia 2003: terrorism exclusions in commercial policies invalidated during terrorist incident Covers chemical, biological, NOT nuclear France 1986: law that terrorism must be covered 2002: Reinsurance pool Germany 2002: private insurers cede commercial insurance coverage above certain limit to a pool Spain 1941: government-sponsored, privately-managed pool UK Reinsurance pool; government the reinsurer of last resort "Terrorism Risk and Insurance." N.p., n.d. Web. 28 Nov 2010. <www.iii.org/media/hottopics/insurance/terrorism/>. Terrorism Insurance: Demand Data from Insurance broker Marsh 800 businesses and government entities Renewed property insurance policies 45% also bought terrorism insurance in each of first 3 quarters of 2004 Aon’s findings 57% of 500 commercial accounts that renewed between 10/1/03 – 9/30/04 purchased terrorism insurance 20-30% demand increase for coverage early in 2003 Lower prices More terrorist alerts (Kunreuther, and Michel-Kerjan 44-51) (Michel-Kerjan, and Pedell 61-76) Terrorism Insurance: Challenges & Difficulties Traditional insurable risks 1. able to identify and quantify chance of event occurring and extent of losses likely 2. ability to set premiums for each potential customer(s) Terrorism risks challenge both of these qualifications Catastrophic loss potential Dynamic uncertainty Ambiguity Interdependence (Kunreuther, and Michel-Kerjan 44-51) Works Cited Kunreuther, Howard, and Erwann Michel-Kerjan. "Policy Watch: Challenges for Terrorism Risk Insurance in the United States." Journal of Economic Perspectives 18.4 (2004): 201-214. Web. 28 Nov 2010. Kunreuther, Howard, and Erwann Michel-Kerjan. "Terrorism Insurance 2005." Insurance: Where do we go from here? (2005): 44-51. Web. 28 Nov 2010. Michel-Kerjan, Erwann, and Burkhard Pedell. "How Does the Corporate World Cope with Mega-Terrorism? Puzzling Evidence from Terrorism Insurance Markets." Journal of Applied Corporate Finance, A Morgan Stanley Publication 18.4 (2006): 61-76. Web. 28 Nov 2010. "Terrorism Insurance." Web. <www.wikipedia.com>. "Terrorism Risk and Insurance." N.p., n.d. Web. 28 Nov 2010. <www.iii.org/media/hottopics/insurance/terrorism/>.
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