Mitigating Terrorism Risk: Standalone or Embedded Coverage?
Last month’s attacks in France, Kuwait, and Tunisia illustrate the growing risk for global organizations of a terrorist attack. The number of terrorist attacks increased by more than a third in 2014, while the number of deaths they caused nearly doubled, according to a new report from the US Department of State. The trend clearly points to the need for companies to maintain plans for managing terrorism risk, including the use of appropriate risk transfer to mitigate the financial implications.
Companies Turned to Standalone Terrorism Coverage
In the US, the take-up rate of terrorism coverage embedded in property insurance programs slid from 62% in 2012 and 2013 to 59% in 2014, according to Marsh’s 2015 Terrorism Risk Insurance Report. The decline was driven, at least in part, by uncertainty at year’s end over the future of the federal terrorism backstop. (Congress actually let the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) expire on December 31, 2014, before enacting a new version in early January.)
So how have companies that elected not to purchase embedded terrorism coverage approach terrorism risk transfer?
Many organizations turned to the standalone terrorism insurance marketplace, which is often more competitive than the embedded coverage reinsured by the federal government through TRIPRA. In fact, in 2014, the number of companies purchasing standalone terrorism coverage increased by about 50%.
Standalone coverage tends to be more uniform than embedded TRIPRA policies. Compared to embedded TRIPRA coverage, standalone insurance can offer:
- Competitive rates. Downward pricing is expected to continue, barring a significant change in circumstances.
- Broader coverage terms. Standalone policies often do not contain certain requirements present in TRIPRA coverage, including that an act of terrorism be certified by Congress.
- High limits. Companies without exposures in locations where insurers have aggregation issues — such as New York City — can often secure US$750 million to US$2 billion in standalone capacity per risk. Additional capacity may be available at a higher cost.
- Long-term contracts. Unlike embedded TRIPRA coverage, which is typically renewed annually, standalone coverage can be obtained for up to three years.
Take-up rates for embedded TRIPRA coverage will likely increase now that TRIPRA has been reauthorized. Before your next insurance renewal, talk to your risk advisors about whether standalone or embedded coverage would be best for your organization.