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Demand for terrorism coverage surges as debate over TRIA renewal continues

Policyholders hedging against TRIA expiration

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Demand for terrorism coverage surges as debate over TRIA renewal continues

As the debate intensifies over whether to renew the federal terrorism insurance backstop, the private terrorism coverage market is seeing increased activity as policyholders seek alternatives should Congress substantially change the government program or refuse to extend it.

There are billions of dollars in private insurance capacity available, and certain insurers have boosted policy limits because of the spike in demand for stand-alone terrorism coverage as a hedge against expiration of the federal program.

The outlook for that government backstop, created by the Terrorism Risk Insurance Act of 2002 and since reauthorized twice, remains cloudy. The Senate Banking, Housing, and Urban Affairs Committee last week held its first hearing on the matter and heard several people ask Congress to make the program permanent rather than extend it again before it expires on Dec. 31.

“We would like to see a permanent program,” said Carolyn M. Snow, president of the Risk & Insurance Management Society Inc.

Senate banking committee leaders recommended extending it, but stopped short of supporting suggestions that it be made permanent. The last extension, provided by Terrorism Risk Insurance Program Reauthorization Act of 2007, renewed the program for seven years.

Meanwhile, there is between $3 billion and $4 billion of per-risk capacity available in the U.S. private terrorism insurance market, industry sources say. That amount drops sharply for higher-risk cities such as New York, San Francisco and Chicago. In San Francisco and Chicago, there's likely up to a $1 billion per-risk limit, while parts of Manhattan could see limits as low as $100 million.

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“There has definitely been more activity and more interest in the stand-alone market just because of the uncertainty” with the federal program, said New York-based Sharon Herbert, executive vice president for Global Excess Partners L.L.C., a specialty lines broker. Since October 2013, she estimates there has been about a 20% increase in the purchase of stand-alone terrorism insurance.

“I would say we’ve seen a 20% to 25% increase in U.S.-originated inquiries since the beginning of 2014,” said Julian Barker, senior underwriter of Impetus, the terrorism unit of Aqua Underwriting Ltd., a London-based specialty managing general agency that underwrites on behalf of 13 Lloyd's syndicates and one international carrier and is owned by RKH Holdings.

Policy submissions are up about 25% over last year at Hiscox, and the Bermuda-based company's bind ratio is some 20% higher, said Jennifer Rubin, a vice president and underwriting leader of war, terrorism and political violence coverage for Hiscox USA. “Insureds want to have an alternative program in place'' in case Congress scraps the federal terrorism insurance backstop, Ms. Rubin said.

Responding to market demand, Hiscox on Jan. 1 raised its terrorism policy per-risk limit to $125 million from $100 million, in order to capitalize on increased market activity, Ms. Rubin said.

London-based Steven Tebbutt, a terrorism underwriter for Talbot Underwriting Ltd., which operates in the Lloyd's market and is owned by Pembroke, Bermuda-based Validus Holdings Ltd., also sees the increased interest in private terrorism coverage.

“Especially in the last three to four months, culminating in the past six weeks, we've seen a dramatic upturn in inquiries,” Mr. Tebbutt said.

“Historically, we always wrote a lot of business from the U.S., and that's just increasing and increasing as there is this uncertainty,'' he said. “I think buyers have come to market to try to ease that position.”

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Immediately after the Sept. 11, 2001, terrorist attacks in New York and elsewhere, Talbot was one of the original five syndicates to write terrorism policies at Lloyd's, with approximately $100 million of total capacity at the time, Mr. Tebbutt said. Now there are almost 40 syndicates writing terrorism coverage with aggregate limits over $2 billion, he said.

“At the moment, you will definitely see an uptick, probably going back about six months,” as people realize they are drawing closer to Dec. 31, said Timothy Press, head of specialty risks at Miller Insurance Services L.L.P., a London-based partnership that writes terrorism coverage.

“There has been a huge upswing in submissions for stand-alone terrorism coverage,” said Radnor, Pa.-based Wendy Peters, senior vice president of Willis North America's terrorism practice group. Another reason for this increased activity can be a client's contractual or shareholder obligations.

Such restrictions can come in the form of “sunset provisions” written into a policyholder's terrorism coverage, said New York-based Tarique Nageer, senior vice president and head of terrorism placement and advisory for Marsh L.L.C.

Many insurers put so-called sunset provisions or sunset clauses in these policies, saying in effect if the federal terrorism backstop expires or is substantially changed, they reserve the right to cancel the private terrorism coverage outright or change the terms and conditions of policies and coverage that they offered, Mr. Nageer said.

Also, the private terrorism insurance market offers coverages and flexibility not available within the government program.

While the federal program only covers U.S. risks, the stand-alone market offers coverage for companies with foreign exposures, such as hotel chains and entertainment and transportation companies, said Aaron Davis, managing director of operations for Aon Property Broking's Northeast region.

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“The stand-alone market helps the global client deal with the whole bucket of risks including foreign exposures,” Mr. Davis said.

Another advantage of stand-alone terrorism coverage is that the private market does not rely on government certification of a terrorism act, in order for claims to move forward, Ms. Herbert of Global Excess said.

For example, the federal government has not certified the bombings at last year's Boston Marathon as terrorist acts. However, claims from the Boston bombings made under stand-alone terrorism coverage already have been paid, said Mary Pat Thurston, a partner with Global Excess.

The fate of the federal terrorism coverage backstop also would likely have implications for the reinsurance markets, said Emil Metropoulos, senior vice president of the terrorism specialty practice at Guy Carpenter & Co.

If Congress does not extend the federal program or increases retentions, “that would create displacement in the market and increase the demand both for traditional property and workers compensation coverage that could include terrorism, and that could increase the activity for private market reinsurance,” Mr. Metropoulos said.