Report: Market Improving for Terrorism Risk Insurance

The market for terrorism risk insurance provided by the private sector is seeing some improvements, according to a report prepared by the President’s Working Group on Financial Markets.

The group, created by the law that extended the federal government’s terrorism insurance backstop through 2014, is required to present periodic reports on the state of terrorism insurance market to Congress. This summer, the group obtained comments from a variety of stakeholders, including members of the Risk & Insurance Management Society Inc., and compiled them in the report.

The result is “Market Conditions for Terrorism Risk Insurance 2010,” which was posted on the Treasury Department’s website late last week.

The program provides some incentives for insurers and reinsurers that might not otherwise underwrite terrorism coverage at current capacity or at current prices without federal support or state mandates, according to comments obtained for the report.

“However, policymakers should review aspects of the program in order to encourage further development by the private sector,” notes the report.

Take-up rates among commercial insurance policyholders reached approximately 60% in 2006, but have remained roughly flat since then. Among those commercial insurance policyholders taking up terrorism risk insurance, there is some indication that more coverage, as measured by policy limits, may be being purchased.

“The industry better understands aggregate risk, and the increased capacity and competition have resulted in decreases in price generally,” the working group found.

Yet market participants (policyholders, insurers, and reinsurers) remain uncertain about the ability of models to predict the frequency and severity of terrorist attacks. Such views influence policyholder perception of risk and purchase decisions, as well as insurer and reinsurer capacity allocations, the report concludes.

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