Problems Underwriting Terrorism Outlined

By Mark E. Ruquet

NU Online News Service, May 1, 11:11 a.m. EST?Traditional primary insurers must discover a new way ofunderwriting to cope with the unpredictable nature of terrorismrisk, a group of insurance leaders advised an industryconclave.

The executives, from insurance segments concerned withregulation, evaluation and underwriting, spoke at the Alliance ofAmerican Insurers 80^th annual convention in Hamilton,Bermuda, this week.

Their discussion was titled "Responding to Terrorism, the P-CLandscape in the Wake of 9/11."

Terri Vaughan, president of the National Association ofInsurance Commissioners and Iowa's Insurance Commissioner, outlinedchallenges ahead for insurers.

She said the traditional way companies have been writinginsurance, by increasing premium until the insured improves therisk, cannot be applied to terrorism.

Questions need to be answered over the type of risk that isbeing written and if a private risk is to be underwrittendifferently from a public one. She questioned how insurers willdefine a "trophy" property in underwriting terms, and how thatwould be priced.

Alice D. Schroeder, managing director with Morgan Stanley, said,"I don't think terror can be underwritten." Unlike a naturaldisaster, which insurers are experienced in underwriting, terrorcan not be geographically zoned for the purpose of underwriting.She also asked what the definition is for a "trophy" property.

"The purpose of terrorism is to provoke fear and to do this in apredictable manner does not provoke fear," Ms. Schroederobserved.

John Andre, vice president for A.M. Best, and Mark Puccia,managing director at Standard & Poor's, both observed thatmodeling is only as good as the information put into it, and due tothe unpredictable nature of terrorism, the industry is in aquandary to figure out how to write it.

The panel of executives ranged the eventual loss from the WorldTrade Center attack at anywhere from $28 to $40 billion.

Ken A. Crerar, president of the Council of Insurance Agents andBrokers, told the meeting that some terrorism cover is available,but it is expensive and a number of clients are simply doingwithout. Those who are getting it are obtaining a minimal amount tosatisfy financiers, he said.

He also told the group that they should be concerned over thefuture direction this is putting clients in as more and more turnto the excess and surplus market or set-up captives.

Mr. Crerar observed that when clients move to the captive marketit is very hard to get that business back to the traditionalmarket.