Aon Corporation, a leading global provider of risk management, insurance and reinsurance brokerage services and human capital solutions, has responded to the President’s Working Group on Financial Markets’ request for comment on the long-term availability and affordability of terrorism risk insurance, reiterating the vital importance of a federal backstop or a viable substitute to protect individual companies as well as the global economy in the face of a catastrophic terrorist attack. The President’s Working Group is part of the U.S. Department of the Treasury.
As a result of enacting the original Terrorism Risk Insurance Act of 2002 and the most recent Terrorism Risk Insurance Program Reauthorization Act of 2007, global businesses with U.S. exposures have seen:
• Increased terrorism insurance capacity,
• Inclusion of domestic acts of terrorism into the backstop,
• Continued drop in terrorism coverage pricing and
• Evolution of a global standalone terrorism market.
This progress notwithstanding, the majority of the commercial insurance market has made it clear that it will revert to its pre-TRIA stance upon TRIPRA’s expiration at the end of 2014, and exclude terrorism risks from coverage due to continued limitations on modeling and restrictions on establishing a viable reinsurance market for this risk.
The $500 million of estimated insured Thailand loss flowing from recent political violence events is illustrative of the challenges facing the property terrorism insurance market. This loss alone represents a sizable portion of the premium generated annually by the global standalone terrorism marketplace.
“The loss events in Thailand demonstrate that terrorism remains a global risk with the potential to impact available capacity for U.S. risks, and we hope the U.S. Treasury and all parties interested appreciate the vital role TRIA plays in sustaining affordable terrorism insurance coverage,” said Aaron Davis, managing director of Aon Risk Solutions’ national property practice. “While outstanding progress has been made in the private sector, individual companies and our economy as a whole will not survive a catastrophic terrorism event without a reliable backstop in place.”
Paul Bassett, chief executive officer of Aon Risk Solutions’ global crisis management practice, which produces Aon’s annual Terrorism Threat Map, noted: “We remain concerned that terrorists will seek to achieve mass casualties as groups continue to become more innovative. The recent political violence events in Thailand alone caused the first major loss to standalone terrorism insurers, and will test the commitment of many markets to this business.”
Despite the nearly 70 percent growth since 2006 of standalone terrorism market per-risk capacity for standard commercial all-risk property markets, a gap of nearly $10 billion remains in the amount of per-risk capacity when compared to the all-risk property coverage available. Standalone terrorism coverage remains an important solution for businesses, but does not represent a means for replacing TRIA’s $100 billion of annual aggregate capacity.
“The commitment of commercial insurance carriers to terrorism coverage in the U.S. is directly correlated to the existence of TRIA and its mandatory coverage,” added Davis. “When large losses occur, we expect markets to shy away, translating to a drop in the available capacity of terrorism coverage as its price skyrockets. If TRIA disappears, $100 billion of terrorism capacity will not emerge from the private markets to replace it.”
“Terrorism risk insurance coverage pricing remains higher for domestic versus foreign risks, due to the continued perception that the U.S. remains a target for both single-interest domestic and global terrorist groups,” Davis continued. “TRIA’s success rests largely on the lack of terrorism-related losses in the U.S. and the continued requirement that carriers offer terrorism risk coverage for most commercial property and casualty exposures in the U.S.”