On 9/11, in a matter of minutes, CFOs and their risk managers came smack up against a risk that until then seemed minor: terrorism. The problem, however, was that the insurers that covered the exposure had a similar encounter.
Traditionally, companies bought terrorism coverage for both domestic and foreign assets from property insurers. Responding to the attacks, and griping about the lack of a federal law that would cap their future losses, however, those carriers have almost universally excluded terrorism coverage on recently renewed policies. That’s left many companies bare of insurance for a risk without apparent limits.
“The amount of property that was insured for terrorism coverage under property and casualty policies before the exclusions were made was in the trillions of dollars,” estimates Ken Horne, senior vice president in the political risk insurance practice at insurance broker Marsh.
But there may be an antidote for insurance-generated panic attacks: Some observers believe that political risk insurers could fill at least a small part of the void. While the political risk market is not nearly big enough to close the coverage gap, it might provide some much-needed relief, says Horne.
Indeed, the private political risk insurance market, particularly Lloyd’s, is already offering stand-alone terrorism coverage. Lloyd’s coverage is going for rates of between 1 percent and 5 percent of insured limits, for both domestic and foreign assets. The policies cover physical damage or business interruption caused by terrorist acts. AIG is also providing stand-alone terrorism coverage, but sold out of the insurer’s property and casualty shop.
Horne says that the stand-alone coverage provides similar protection to that previously provided under property policies. “There won’t be any gaps between the two types of coverage,” he notes. “In fact, we’ve been trying to manuscript the wording in the new policies to match the exclusion under the property policy.”
Raiding the Package Store
Another choice is to buy terror coverage as part of an overall political risk package. Political risk insurers already underwrite terrorism perils in that context, usually as a component of political-violence policies. Those policies also cover losses associated with sabotage, war, civil conflict, and revolutions.
The catch is that political risk insurance packages cover only overseas assets against terrorist attacks, leaving domestic assets uncovered. But the packages remain “a particularly good option for those companies that are now more concerned about increased political risks in the places they do business,” says John Minor, an insurance broker at Aon Trade Credit in Chicago.
Apparently, the concern is mounting to a crescendo. “We are seeing companies looking to get all the coverage they can afford right now,” says Daniel Riordan, a managing director at Zurich North America. “Some banks, for instance, are not just getting currency inconvertibility coverage, but also political violence and expropriation, even in markets where we wouldn’t see a pressing risk.”
Unfortunately for buyers, the surge in demand has teamed up with a retreat by reinsurers to spawn high prices and scant capacity. And insurers are as edgy about global perils as their clients are. At the end of 2001, capacity in the political risk insurance market declined in a big way.