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Since 9/11, no other single event has had such a profound and resonant effect on our expectation of national security. Prior to these attacks 10 years ago, the thought of terrorism didn’t loom large in our nation’s collective psyche or our business decisions; since then, however, it has become a constant factor. Just last month, the initial reaction of many of who experienced the earthquake in the eastern United States thought that they were experiencing the effects of a new wave of terrorist activity. It’s an understandable response given the way terrorism has now become such a real and present threat.
Changing Everything
In the immediate wake of 9/11 – and faced with financial losses of between $30 and $40 billion – one of the insurance industry’s most pressing concerns was the issue of limited capacity. Lexington Insurance Co. was one of the few carriers able to extend stand-alone terrorism coverage at that time.
The passing of the Terrorism Risk Insurance Act of 2002, along with its two extensions, served to effectively increase market capacity. Over the past several years, there has been a significant increase in capacity in the stand-alone market with the current penetration of terrorism insurance hovering around 60 percent.
Another hindrance to designing effective terrorism coverage was that with terrorism exposures – unlike natural catastrophe disasters, which have abundant historical data and sophisticated modeling to rely on – there was little to use as a baseline for underwriting the coverage.
In the past 10 years, however, the industry has developed stronger modeling to help build effective terrorism risk underwriting tools. Additionally, insurers are forging relationships with partners such as the Stimson Center and the Rand Institute to assist in creating better loss scenarios and practical ways of lessening terrorism exposures. As a result, insurers have introduced higher limits and wider coverages to include biological, chemical, and cyber terrorism threats – coverages that weren’t even a consideration just a few years ago.
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