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Terrorism Insurance

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					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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