Northeast leads in businesses buying property terrorism coverage

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Nearly six in 10 large and mid-sized U.S. businesses obtained insurance to cover property terrorism risks during 2005, a dramatic increase from the 2003 average of 27 percent and up from 50 percent in 2004.

A report from insurance firm Marsh Inc. found the purchase of property terrorism insurance in 2005 varied considerably, depending on a company’s location, total insured values and industry sector.

Take-up rates — the percentage of companies buying the coverage — varied considerably by region: about 67 percent of firms in the U.S. Northeast and 58 percent of Midwest firms purchased property terrorism insurance in 2005, compared with 53 percent in the West, and 50 percent in the South. Take-up rates increased most dramatically in the West — to 53 percent from 34 percent in 2004 — and in the Northeast, where the take-up rates rose to 67 percent in 2005 from 53 percent a year earlier.

Meanwhile, the cost of property terrorism insurance in 2005 was 25 percent lower than in 2004.

The report is based on data compiled from 1,623 businesses and government entities that purchased or renewed property insurance policies in 2005.

“There’s an increasing awareness of terrorism among businesses across the country,” said Robert Blumber, a managing director in Marsh’s North America Property Practice.

Within industry sectors, financial institutions, real-estate firms, and health care facilities had the highest take-up rates, each exceeding 75 percent. In addition, media companies, those in hospitality, transportation, food and beverage, technology and telecommunications, and educational institutions all had rates above 60 percent.

Take-up rates also varied dramatically by businesses based on their insured property values. Firms with total insured values of $500 million to $1 billion had the highest take-up rate, 67 percent, up from 57 percent in 2004. Next were firms with total insured values of $1 billion or more (63 percent), followed by those with $100 million to $500 million (63 percent, up from 50 percent the prior year). About 47 percent of the firms with total insured values under $100 million purchased property terrorism insurance in 2005, up from 35 percent in 2004.

Alternatives to TRIA

The Terrorism Insurance Act requires insurers to offer coverage for certain acts of terrorism in the U.S. that are “certified” by the government. The amounts, terms and conditions must match their other policies. As a complement to certified TRIA coverage, insurers are continuing to offer “non-certified” coverage.

As a third alternative, businesses can purchase “stand-alone” terrorism policies that do not require government certification.

“A growing number of businesses are choosing to cover at least part of their terrorism exposure in the stand-alone marketplace, particularly those with coastal windstorm or earthquake risks that face a difficult property insurance renewal,” Blumber noted. “However, if TRIA is not renewed beyond 2007 or if there is no permanent solution in place by then, the stand-alone insurance market is unlikely to have sufficient capacity to meet demand.”

According to Marsh, capacity in the stand-alone terrorism insurance market is relatively stable, though limited. The amount available for a specific risk can vary significantly, depending on the risk’s location, an insurer’s accumulated exposure, and the concentration of exposures in a given area.