The withdrawal from the market will spread beyond property and aviation insurance to include other risks, such as employees' workers' compensation coverage rather than assume terror risks implicitly.
Though it hasn't yet, Congress may pass legislation that would help to cap losses to the industry caused by terrorism, says Don Watson, a managing director with Standard & Poor's Insurance Ratings group. But many insurers will not want to provide significant coverage for terror losses, regardless of government action.
By their nature, terror losses are difficult to price, and the potential concentration within an insurer's portfolio are such that it would be imprudent for insurers to write coverage without effective reinsurance. And right now, most reinsurers are not willing to provide large policy limits, much less uncapped coverage for terror risk. So some are thinking it's better just to opt out of terrorism coverage altogether, he went on to say.
For the insurance industry, some relief from terror exposure has been provided in 47 states, which have agreed to allow some exclusions for terror losses; although in three states, New York, California and Connecticut, insurance commissioners have not publicly followed the National Association of Insurance Commissioners' recommendation to allow some exclusions on terror covers. The concern for insurers writing property/casualty covers is that these states could mandate insurers operating in their jurisdiction tocover acts of terrorism potentially resulting in unacceptable accumulations of risk for insurers.
But until Congress acts, or the states mandate coverage, the gap in coverage shifts risk back to the corporate, industrial, and real estate markets exposed to the risk. With many insurers opting not to renew policies that would cover acts of terror to buildings and properties, the businesses previously holding those policies would now have to cover any costs incurred from acts of terror.
The ratings implications for corporates are likely to be very limited and selective, notes Sol Samson, a managing director with Standard & Poor's Corporate Ratings group. The additional risk may emanate from lack of coverage or much greater expense to obtain coverage. But the impact would be material only in situations where the perceived specific risk of a terrorist incident was high -- just as lack of earthquake insurance isn't a problem in regions that don't face much risk of such natural events.
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