August 2004 | Commentary | Risks and Rewards

Bracing for an End to Terrorism Insurance

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Q: What's the latest word on terrorism insurance? I keep hearing that this insurance might not be available soon. What does this mean to the transportation industry?

A: The terrorist attacks on Sept. 11, 2001, dealt a serious financial blow to the insurance industry. In the aftermath of the attacks, the industry retrenched itself by raising premiums and excluding cover—most notably for terrorism.

In response, the government passed the Terrorism Risk Insurance Act in 2002. This Act, known as TRIA, allows for federal assistance to the property and casualty insurance industry in the event of a catastrophic attack. The assistance covers claims beyond a certain deductible—now at 10 percent and rising to 15 percent next year—based on individual insurers' prior year's direct earned premiums for covered commercial lines.

The Act was established as a backstop to stabilize the insurance market in the wake of the terrorist attacks. But with the impending termination of TRIA in 2005 looming in the distance, both insurers and their customers are bracing for yet another round of exclusions and rate increases for terrorism insurance. Industry leaders recently requested a two-year extension of the Act, but this effort is still in its early stages.

Recent news reports document the continued use of legitimate modes of transportation to further illicit ends. In one recent case, customs officials in Hong Kong seized 2,850 illegal machine guns from two containers that were eventually destined for Oakland, Calif. In another case, Italian customs officials in Gioia Tauro revealed that more than 8,000 weapons had been discovered in three containers bound for New York. Officials have now characterized the threat of a terrorist attack somewhere in the western hemisphere as "inevitable."

These reports leave us with the grim reality that we must prepare for a calamity of the worst possible magnitude, without knowing when or where it will take place.

With the threat of a terrorist incident now seen as an eventuality, a new and previously unsuspected factor has been put into the insurer's risk equation.

The cost for assuming these risks will rise or fall in line with the level of risk that the insurer assumes and the ability of the insurer to obtain its own reinsurance. All this will have an impact on the insurance that operators will be able to obtain.

While the insurance industry continues to seek a resolution to this problem, some officials see the transportation industry itself as part of the solution. Today, perhaps more than ever, the industry will be required to rely on risk management and loss prevention efforts as part of an effective insurance management program.

You, as a shipper, transporter or cargo handler, must be mindful of the impact that these risks, and the risks associated with the actions of others—even unknown persons—will have on your operations. You will need to maintain a greater vigilance over your operation and a greater awareness of your relationships with others.

Insurers distancing themselves from losses that they perceive to be too risky, or operators becoming immobilized from addressing the underlying problem itself, are perhaps the greatest risks of all.

Do you have a question about cargo insurance or liability? Ask the expert. Send your question to Dan Negron at Dan.negron@thomasmiller.com

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