Terrorism insurance being required

Premiums rise up to 25% to cover extra cost


LOS ANGELES - Terrorism insurance is no longer an option for many businesses. It's a requirement.

Lenders are asking companies, especially real estate investment firms, for proof of terrorism coverage. Though the insurance is not legally required, companies are still forced to spend up to 25 percent more in annual premiums.

While insurance brokers say the cost of terrorism insurance is going down, many companies are struggling to pay for the risk of a potential terrorist attack.

"There are a lot of square-peg, round-hole things going on right now," said Stacy Stevens, a senior vice president of Lowe Enterprises Inc. "Much of the industry has been driven by the lending community, and I'm not sure lenders know what exactly they're requiring of us."

Lowe Enterprises is a national real estate developer with properties throughout Los Angeles. The company's product is the building itself, requiring some form of property insurance. But after Sept. 11, property insurance no longer included acts of terrorism, and carriers began offering separate terrorism insurance policies using the federal government's Terrorism Risk Insurance Act, or TRIA, as a template.

Stevens said the act had been helpful in providing subsidies for companies in need of terrorism insurance.

Among its drawbacks: The federal government will only provide financial backing for foreign-related acts of terrorism. That means the Oklahoma City bombing would not be covered under the government's program. Meanwhile, the government's program is likely to expire in the next year or so.

"This is a significant issue," Stevens said. "TRIA has already been extended, and I think it is the Band-Aid holding back the water in the dam. The issue could get lost with the upcoming election."

Many firms are purchasing "stand-alone" policies, which cost more but don't require U.S. government certification. "I think the pricing is still a bit higher than it should be," Stevens said. "And there doesn't seem to be any uniformity either. Across the board, some carriers charge more than others."

Regardless, several insurance carriers are far from banking on terrorism. Instead, they are grappling with risk assessment, attempting to use decades of experience analyzing natural disasters to understand the implications of a car bomb exploding in a major metropolitan area.

Jack Roberts, editor in chief of Risk & Insurance, said terrorism is among the 10 greatest risks based on the probability of actual damage occurring.

For example, in a hypothetical situation, two truck bombs exploding in downtown Chicago could cost $24 billion, of which $14 billion is covered by insurance, Roberts said. "But the question isn't can we afford to sustain a terrorist act? The real issue is, what happens if there is a second one in a year? The private sector could only afford a single loss in one year," Roberts said.

Risks aside, the underwriters of terrorism insurance will likely see the business continue to grow. Carriers such as AIG, often looked upon as a pioneer in the field, are poised to become more influential with federal subsidies drying up. Among the industries being targeted are energy, media, hospitality, real estate and health care.

Marsh Inc., the world's leading risk and insurance services firm, said in the first quarter of 2004 there was a spike in terrorism insurance policies. The company attributed the increase to a decline in pricing for other lines of insurance.

"I believe the market has now identified how catastrophic a terrorist act can be," said Amber Martin, a vice president of Marsh in Los Angeles. "But the pricing will continue to vary depending on a company's needs."

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