A glass half full: as the Terrorism Risk Insurance Act approaches its first anniversary, demand for terrorism insurance is low, but industry experts say the backstop is bringing capacity and stability to the marketplace.

Terrorism insurance may not yet be a popular product, but the fact it's available at all is a sign that the Terrorism Risk Insurance Act of 2002 has been successful, industry experts said, although they are still concerned that the act is just a temporary fix. It is scheduled to expire in 2005.

The market for insurance protection for terrorism, coverage rarely considered by either insurance buyers of sellers before Sept. 11, 2001, is still somewhat in flux, although less chaotic than a year ago. Industry estimates indicate that the take-up rate for commercial property and liability lines is as low as one in five businesses, though some individual carriers report much higher rates depending on business class. Prices vary widely as well, although industry watchers said the market is beginning to stabilize, prices are coming down, and the overall take-up rate will increase with time.

Even trophy properties in urban areas, such as the Empire State Building in New York and the Sears Tower in Chicago, were able to buy terrorism coverage after TRIA was adopted, which shows the act is not only working--it was needed.

A Stabilizing Force

Terrorism insurance is more available in the market today than it was six months ago, according to 85% of the brokers surveyed by the Council of Insurance Agents & Brokers. The CIAB released its Commercial Market Index Survey in July.

But 72% of brokers said their customers were not buying terrorism insurance.

Earlier this year, broker Aon estimated that just 20% of its clients are purchasing the coverage.

"The question remains, is the glass half empty or half full?" said Joel Wood, senior vice president of government affairs for CIAB. "I tend to think it's half full." He said unlike last year, when terrorism insurance wasn't available, there does seem to be adequate capacity today.

"It is very expensive, but is relatively easy to find as long as you are willing to pay," agreed John C. Bowman, principal and senior vice president at Towers Perrin's Consultative Placement division, the retail brokerage arm of Towers Perrin Reinsurance.

Large property risks devote a higher percentage of their overall premiums to terrorism insurance. About 11% of small businesses reported terrorism insurance cost between 11% and 20% of annual property/casualty premiums, compared with 20% of medium-sized businesses and 24% of large businesses. But brokers also reported some clients were seeing prices as high as 81% to 100% of premium.

"We'd like to see a higher take-up rate," said Wood. "We'd like to see the rates level off even more, but over time, we think they will. We think Congress did the right thing and the program is working. Terrorism coverage is available, but remains a difficult product for certain trophy properties and urban and metropolitan regions."

High Risk Areas

Terrorism insurance may be a difficult sell in some areas, but insureds with high-profile buildings and/or locations in high-risk metropolitan areas have been buying the coverage.

Even the Empire State Building, now the tallest building in New York, has been able to purchase terrorism insurance, Aon, the broker on the transaction, confirmed. Aon declined to disclose details of the policy.

Trizec Properties Inc., a real estate investment trust which manages of owns 59 commercial real estate properties--including the Sears Tower in Chicago and One New York Plaza, home of Prudential Securities and Goldman Sachs in New York City--was able to purchase terrorism insurance, said Rick Matthews, a spokesman for Trizec.

He credited the passage of TRIA with helping the company to secure the coverage. Trizec's three-year policy with Allianz was set to expire at year-end 2002, and "we were finding we were having problems getting finalization of various coverage options until [TRIA] passed," Matthews said. "A lot of that was simply because carriers were waiting to see what would come out so they could price appropriately."

The insurance policies were in place within weeks after President Bush signed the bill into law in November 2002, Matthews said. Instead of a single three-year policy, Trizec had to purchase several one-year policies and buy the coverage through several carriers. One policy covered all risk except for terrorism for the entire portfolio; one policy covered terrorism for the Sears Tower alone; and the third policy covered terrorism for the rest of Trizec's portfolio, Matthews said. He declined to give additional policy details.

"TRIA is working in doing what it was intended to do," said Jacques Dubois, chief executive officer and president of Swiss Re American Holding Corp. "In protecting the industry from a severe loss from a subsequent terrorist attack, it protects the industry's capital for normal uses: tires, hurricanes and windstorms. We've heard of take-up rates of 20% to 25% ... maybe that's not enough, but on the other hand, there is product being offered, and parties have to decide if they are exposed sufficiently to pay the price that they are being asked. The person who lives next to the river is more concerned about flood insurance than people on a hill."

In New York, businesses tend to refuse the coverage if they are above 60th or 70th street in Manhattan, said Damian R. Testa, president of Kaye Insurance Associates, a broker. However, the coverage is popular in lower Manhattan and midtown, an area dotted with landmark or high-profile buildings, including the Empire State Building.

"TRIA has worked very well in New York," Testa said. "Since the beginning of the year, we have seen a steady decline in property rates." The cost of terrorism insurance is about 20% of property premiums now, having fallen dramatically from a year ago, when it was almost equal to the property premium, Testa said.

Many buildings are required to buy the coverage due to agreements with banks and lenders, Testa said. "Below 60th Street, people still buy it even if the lender doesn't require it. We may be unique in the country in that," he said.

Also, businesses have been able to buy as much terrorism coverage as they like, he said. Before TRIA was passed, "you could put together $100 million in cover, but that was stretching it. Today, that doesn't seem to be an issue. It's no more of an issue for terrorism than it is for normal property limits. If you need to put together $1 billion, it's doable, but takes a lot to do it."

TRIA has had a psychological impact on the insurance market in New York, Testa said. "It seems to have created a comfort level. Chubb and AIG stepped up to the plate last year and offered terrorism coverage, and this year, they're providing bigger limits. When you have two leaders doing it, the rest of the industry will follow."

The Price is Right?

More than 90% of those surveyed by CIAB said their customers eschewed terrorism cover because they didn't think they needed it. But others said the price is too high.

"The high-risk companies aren't buying it because the prices are too high, and the low-risk companies aren't buying it because they are at low risk," said Samir Shah, managing consultant at Tillinghast-Towers Perrin.

How much insurers will charge a company for terrorism coverage varies widely, he said. Being a block away or in a different ZIP code can result in a huge price increase of decrease for a building due to the way terrorism models work. Modelers have identified potential terrorism targets, such as high-profile sites with significant concentrations of people. Then they model the extent of damage at the target and its immediate surroundings due to various types of attacks, such as explosions or a biochemical release. For an explosion, which may be one of the more common perils, the modelers predict the footprint of damage, which can be as small as 1/8th of a mile radius around the target. So if a company happens to be located near a potential target, it can have much higher terrorism insurance rates than a company located a few blocks away, Shah said.

"Although the modelers have done a tremendous job going from nothing to something reasonable, there are still people who think that this risk is not like other cat risks because it involves modeling human behavior. This is too new for everyone to be comfortable with," Shah said.

While companies ate required to offer terrorism coverage, they don't have to make it affordable. Some may be quoting very high rates because "they don't want to be in the business," Shah said.

Reinsurers Respond

While TRIA wasn't designed specifically with the reinsurance market in mind, it allows the reinsurance world to create new products, said Darren Huxol, global marketing and product developer leader for Employers Reinsurance Corporation Group.

ERC is offering a stand-alone terrorism reinsurance product that allows primary writers to purchase coverage for up to half of their deductible under TRIA. It also can include the coverage in traditional reinsurance treaties.

Because the owners of high-value properties often go to several different insurers to build enough capacity to cover a valuable property, it can be a complicated question to figure out what terrorism cover is available and how much will it cost in each layer of cover, not to mention what the ultimate exposure will be. For instance, more than 20 companies participated in the treaty for the World Trade Center's $3.5 billion property policy.

So some primary writers are opting to decline coverage from their traditional reinsurers to seek out a standalone policy that covers the entire property, Huxol said.

For instance, with a 7% deductible under TRIA, a primary writer could purchase reinsurance coverage up to 3.5%, which is much more transparent than having to calculate dozens of individual contracts through a program treaty, Huxol said.

ERC offers the product on a quota-share basis and bases the limits of the terrorism reinsurance coverage on the amount of total reinsurance purchased. Insureds can have limits up to 50% of their total coverage--$5 million terrorism reinsurance coverage if they've bought $10 million of total reinsurance, for example. "TRIA had multiple goals, Huxol said. "One was to allow the industry enough time to develop an industry solution. We take that responsibility seriously, and we think this is a potential solution, although not the only solution."

Swiss Re is writing a limited amount of terrorism reinsurance for good clients, said Swiss Re's Dubois.

Kevin Campion, executive rice president of the reinsurance brokerage Benfield Group, said the demand and price for terrorism reinsurance coverage vary.

"The price depends on whether you are nationwide and how low somebody wants to buy," Campion said. "We've seen coverages from the 10% to 20% range for national covers. For some regional or single-state insurers, we've seen it as low as 5%," Campion said. "Some are buying, some are not buying. Those that aren't buying are not purchasing due to cost."

He said the market's current capacity for a cover that includes nuclear, biological and chemical attacks is $500 million per program. "The capacity is abundant and available. Cost seems to be the biggest issue," Campion said.

Richard Thomas, senior vice president and chief underwriting officer of American International Group, said the company--the nation's largest commercial insurer--hasn't found attractive reinsurance pricing for terrorism coverage. "Mostly they are quoting prices at which we'd be willing to underwrite the coverage for ourselves. There's not a lot of risk transfer in most of those deals," Thomas said.

For smaller, regional Meadowbrook Insurance Group, which specializes in workers' compensation, buying terrorism reinsurance wasn't difficult, said Arthur C. Pletz, senior vice president of corporate underwriting. "We write national, but we don't have significant exposure in any one place," he said. "We were able to obtain protection." Pletz said the reinsurance treaties have a recovery clause that stipulates if TRIA is triggered and Meadowbrook receives money from the government, then Meadowbrook would have to reimburse its reinsurers.

Terrorism Bonds

Like catastrophe insurance, terrorism reinsurance could one day be securitized, and investors could buy terrorism bonds the way they buy cat bonds today. "If we can provide that same kind of transparency around terrorism risk--transparency to exposure and price--that we provide to catastrophe exposure and premium, maybe there would be a potential to syndicate of securitize terrorism insurance some time in the future," Huxol said.

Huxol said the hitch in that scenario is the lack of historical data to chart terrorism attacks. "But if we have more transparency around exposure and premium, probably reinsurers will be willing to offer more capacity for the product, even if it doesn't go down the securitization route," Huxol said.

Captive Impact

Because TRIA also applies to domestic captives, many Fortune 500 companies are creating new captives or reengineering existing captives to write property risk, including terrorism risk, said Gail Norstrom, managing director of Aon Risk Services.

Captives can be used to front a company's property insurance, with the company's former primary insurers becoming reinsurers, Norstrom said.

"It gives large companies that can afford to invest in this technology more control in how they choose to place this coverage," Norstrom said. "Most Fortune 500 companies could consider it"

Unsolved Issues

While TRIA has brought stability to the marketplace, it has also raised some unanswered questions. "We were all hoping TRIA would be the magic pill that would solve everything overnight, and that hasn't happened," said Suzanne Douglass, managing director of Willis Risk Solutions' North American Property Practice.

One issue still haunting insurers is whether they'd have to cover damages from a terrorist attack even if the insured declined the coverage. Several states have laws that required insurers to cover fire losses no matter what the cause. So even if an insured declined terrorism coverage, insurers writing business in those areas must be prepared to pay for a fire loss that results from a terrorist attack.

For instance, in Georgia, not only are insurers forced to cover fires from terrorist attacks, but they are also not allowed to limit the losses.

"This is a very messy situation, especially for clients that have multistate risk," said Douglass. "They can wake up one day and find out they have protection in one state but not the other"

Earlier this year, as many as 28 states and the U.S.-Virgin Islands said fire must be covered no matter what the loss. By June, several states, including Michigan, Minnesota, Nebraska, New Hampshire and Virginia, had overturned the provision, and several others are currently considering it, Douglass said.

Some businesses may have declined terrorism insurance, assuming they'd be covered for fire with or without the additional coverage. "If you made your decision on this, in these states, that's no longer an option" Douglass said.

Another state issue is how much control state regulators have over rates. Under TRIA, state regulators have the right to examine rates and determine if they are too high, said Douglass. "They have the right to do that under the act, but I haven't seen anyone do that," she said.

While TRIA allows companies to file and use terrorism rates--not wait for state approval--many companies are waiting for state approval anyway because they don't want to start to use rates that might be later ruled invalid, said Stef Zielezienski, associate general counsel for the American insurance Association.

"This regulatory delay is hindering the effectiveness of TRIA," Zielezienski said. "The delay caused by a front-end regulatory system defeats the whole point of the competitive system, which is to get the price out there and allow companies to compete to keep the price well within what the market will bear."

Workers' comp is another area of concern. Because businesses are required to buy workers' compensation insurance, and aren't allowed to exclude terrorism, some insurers are considering forming a voluntary workers' comp terrorism pool.

Led by the American Insurance Association and Richard Palczynski, retiring chief actuary of the Hartford, 14 insurers who write 40% of the workers' compensation market have funded a study to investigate the feasibility of launching such a pool. The goal of the pool would be to operate in an equitable, competitively neutral fashion to complement the federal backstop.

"Each insurer would retain some risk, which they could reinsure through the commercial reinsurance market, and would cede losses above some attachment point to this pool. Ceded losses net of what is covered by TRIA would be covered by the pool premiums paid by all participating insurers" said Shah of Tillinghast, which is working on the feasibility study.

Voluntary risk-sharing pools--unlike residual market pools, which are mandatory for all writers--can be difficult to launch. "The issues around pool design, cost, and risk sharing are many and are quite complex ... there can be no assurance that the initiative will move forward," the AIA said in a statement.

Sunset Looms

While AIG considers TRIA to be a success, the company said it's concerned with how individual companies could handle the deductible if a terrorist attack caused extensive damage. "Terrorism events are like catastrophes. They are paid out of capital, not reserves, because you can't reserve for a future cat loss that we don't know about," Thomas said. "So if you look at a company's retention under TRIA and compare that to their capital, you're going to find many insurance companies with $400-million retention and capital well under $10 billion."

If there's another terrorist event that impacts smaller companies the most, some of them may be at risk for insolvency, Thomas said. With total revenue of $67.48 billion and total assets of $561.23 billion, AIG is well positioned to pay its $1.2 billion retention if it had to, Thomas said.

"We think we have sufficient capital to take this risk with the TRIA retention, and the way we are pricing the product is generating sufficient revenue in an adequate return period to finance the exposure," Thomas said. "But to see whether TRIA is a success, you have to evaluate that issue. If a company is hit by a terrorist event and becomes insolvent, then TRIA fails them. You'll see some companies are at risk and TRIA will hot save them."

AIG is planning to lobby lawmakers to extend TRIA beyond its expiration on Dec. 31, 2005, but declined to say what, if any, changes AIG would seek, Thomas said.

In addition to seeking greater exemptions from state regulatory control over terrorism rates, the industry is also concerned about the retentions under TRIA.

"We'd like to make the deductible more manageable," said Zielezienski of AIA. "Fifteen percent of the entire book of commercial property insurance premiums is a big number. If there's a series of smaller terrorism events that don't ever reach that number, [the losses] will be fully funded by the industry, and there is no backstop. We only get a 90/10 quota share when we go above the deductible."

Others in the industry are also concerned about that deadline. "If you are looking at any major construction project, particularly those in major cities, those projects are going to be multiyear and endure past the TRIA expiration," Douglass said. "We're trying to place coverage now, and the coverage has to include TRIA, but what happens if TRIA isn't renewed?"

Bowman of Towers Perrin Reinsurance echoed that concern.

"If you take a government backstop away, all bets are off, and the market probably reacts very quickly and perhaps dramatically," Bowman said. "The effect of a government reinsurance program is to give peace of mind to a bunch of insurers who still don't fully understand what their exposures are. It's still very difficult to model ... no one is really comfortable with these exposures. The federal program offers some stability or protection. If that goes away, I don't think the private market is ready to step in."

Three-Month Trend in Cost of Terrorism Insurance

In a survey of agents and brokers, 36% said premium rates for terrorism cover had stayed the same or dropped between April 1 and June 30, but 37% reported seeing increases in premiums charged for the cover.

[GRAPHIC OMITTED]

A Sample of Projected Terrorism Deductibles

Insurers' estimated deductible under the Terrorism Risk Insurance
Act is scheduled to grow from 7% of total commercial lines premium
in 2003 to 10% in 2004 and 15% in 2005.

($ Millions)

     Commercial   Company                         Estimated 2002
Marketing Share                                       Commercial
           Rank                                    Lines Premium

              1   American International Group           $12,751
              3   Travelers                                7,965
              5   Liberty Mutual                           5,948
              7   Hartford Financial                       4,936
             12   California State Workers'
                  Compensation Fund                        4,071
             21   Cincinnati Insurance                     2,148
             33   Allstate                                 1,018
             50   Utica National                             642

     Commercial
Marketing Share  Estimated Terrorism Deductible
           Rank      2003     2004     2005

              1      $893   $1,403   $2,209
              3       558      876    1,380
              5       416      654    1,030
              7       345      543      855
             12
                      285      448      705
             21       150      236      372
             33        71      112      176
             50        45       71      111

Note: Earned premiums are assumed to grow by 10% in 2003 and 5% in
2004.

Source: Tillinghast-Towers Perrin

RELATED ARTICLE: A TRIA primer.

Before the terrorist attacks of Sept. 11, 2001, most insurers included acts of terrorism in their commercial policies simply because they didn't specifically exclude them. After the attacks--which caused an estimated $40.2 billion in insured losses, according to the Insurance Information Institute--insurers said they'd honor claims from the attacks, but many began to seek policy exclusions from future terrorist attacks. This left many businesses and properties--including high-profile buildings, stadiums and utilities--without adequate coverage should terrorists strike again.

The federal government stepped in and created TRIA, the Terrorism Risk Insurance Act of 2002, which President Bush signed on Nov. 26, 2002. TRIA gives insurers a temporary federal backstop by setting up a system whereby the federal government shares the risk of future terrorist losses. Under TRIA, insurers must offer terrorism coverage generally for all commercial property and casualty lines, although insureds can reject the coverage if they don't want to pay for it. Workers' compensation insurance is already mandated by state law, and terrorism cannot be excluded. The act excludes federal crop and flood insurance, private mortgage or title insurance, monoline financial guaranty insurance, medical malpractice and health or life insurance, including group health, according to Tillinghast-Towers Perrin.

The act is triggered by events causing $5 million in damage and is scheduled to sunset after 2005 unless it is extended. TRIA limits coverage to attacks by foreign terrorists in the United States, so acts such as the bombing of the federal building in Oklahoma City would not be included.

Under TRIA, once an event is certified as an act of terrorism, the federal government would pay 90% of a company's losses above a set deductible or retention. The deductible was set at 1% of direct earned premiums from calendar year 2002 and then was scheduled to grow to 7% in 2003; 10% in 2004; and 15% in 2005.

If TRIA is triggered and the federal government pays for insured losses, the Treasury Department would be required to recoup the difference between the total insurance industry costs--the losses of individual carriers up to their deductibles, plus the industry's 10% share above the deductibles--and the following fixed dollar amounts per year: $10 billion in 2003; $12.5 billion in 2004; and $15 billion in 2005. The money would be recouped through a temporary federal surcharge on all policyholders that could not exceed more than 3% of the total premium paid for a policy--not just the terrorism insurance premium--in a given year.

Even with the backstop, insurers still have considerable risk. According to the Insurance Information Institute, if The baseline for the program was $125 million in commercial insurance, and the next terrorist attack caused $30 billion in losses, the total industry loss would be $11 billion in 2003: $14 billion in 2004 and $20 billion in 2005. Losses covered by the program are capped at $100 billion. For events with losses greater than that, Congress would determine the procedure and source for payments.

RELATED ARTICLE: Nuclear power plants benefit from TRIA.

Although nuclear power plants had included terrorism insurance coverage before Sept. 11, 2001, both American Nuclear Insurers, a joint underwriting association which provides liability coverage for all of the nuclear plants in the United States, and Nuclear Electric Insurance Ltd., a mutual company which provides property coverage for the industry, were forced to limit their coverage after the terrorist attacks.

However, the Terrorism Risk Insurance Act of 2002 opened the door for American Nuclear to raise its limits and has given Nuclear Electric much needed reinsurance.

American Nuclear Insurers writes the general liability insurance for the more than 100 nuclear power plants in the United States. About 12 private property/casualty companies are members of the association, including subsidiaries of American International Group, State Farm, Zurich America and XL Capital.

The nuclear industry is unique in that it's required to purchase financial protection under the Price-Anderson Act, first established in 1957. Price-Anderson provides a no-fault insurance for the public in the event of a nuclear power plant accident. American Nuclear provides the first layer of coverage, and then, ha the event of a nuclear accident, the power plants would be retroactively assessed up to $10 billion to cover damages. That second layer of the coverage is also administered by American Nuclear.

After Sept. 11, 2001, American Nuclear began to offer cover for both domestic and foreign acts of terrorism, but only up to a $300 million industry aggregate, said John Hoffman, director of underwriting for the association.

Thanks to TRIA, American Nuclear now offers coverage from foreign attacks up to $300 million per site, while continuing to offer up to a $300 million aggregate industry limit for domestic acts of terrorism.

"TRIA has helped to expand the coverage," Hoffman said.

Although no nuclear plant has approached American Nuclear to ask how much premium would be returned if it rejected the terrorism coverage, the terrorism portion of the premium is about 7%, Hoffman said.

American Nuclear buys quota-share reinsurance from similar pools around the world, he said.

Nuclear Electric also covered acts of terrorism before Sept. 11, 2001, and the coverage hasn't changed that much since then, said David Ripsom, vice president and counsel. The mutual company, which is based in Delaware, has had to place a maximum limit on the payments it will make within a 12-month period.

For any 12-month period, Nuclear Electric will pay $3.25 billion, plus any amount recovered through reinsurance or TRIA.

"Without TRIA and without reinsurance, our resources would be limited to $3.25 billion," Ripsom said.

Maximum policy limits are $3.25 billion per site, which includes $2.75 billion in property coverage per site, plus each power plant could buy an additional $474 million of business interruption for each unit on the property. Most sites have more than one unit, he said.

In 2000, the company was able to negotiate a three-year reinsurance policy for 2001, 2002 and 2003 that included terrorism risk. However, the company was not able to get the reinsurance coverage for 2004 or 2005.

"TRIA has very much provided a resource for nuclear exposure beyond what we could get in the reinsurance market right now. TRIA provides the only terrorism reinsurance mechanism for us," Ripsom said. "We would hope that at some point the commercial market would recover and provide us with that resource again."

There are 103 commercial nuclear power plants currently operating in the United States, and they provide the second largest source of electricity in the country, according to the Nuclear Energy Institute. The plants are on average 22 years old and are licensed to operate for 40 years with an option to renew for an additional 20 years.

The largest nuclear accident to occur in the United States was Three Mile Island, located outside of Harrisburg, Pa., in 1979. Damage was limited to inside the reactor, and no one was injured. About $70 million in insurance claims and legal costs have been paid to date in connection with the accident, including cash advances and reimbursements to cover lost wages and to pay for temporary housing for families who were evacuated. The $70 million also includes the settlement of a class-action lawsuit filed by people, living within 25 miles of the site, who sought economic damages. Some lawsuits filed in connection with the accident are still pending, the institute said.

RELATED ARTICLE: Reducing the risk.

Businesses can reduce their cost of terrorism insurance by taking actions to decrease their vulnerability, according to one expert.

"The average American business isn't the World Trade Center," said Hank Chase, head of vulnerability assessments practice for Engineering and Fire Investigations, a consulting group. "A four-story garden-style office park in Peoria is not threatened the same way ... Especially if they do something to mitigate their vulnerability, the real threat is low and therefore insurable."

Chase, a retired Navy commander who worked in the office of the Secretary of the Navy and developed anti-terrorism assessments for Navy and Marine Corp bases around the world, said businesses should follow the same recommendations that the military has used to reduce its exposure to terrorist attacks.

Companies should focus on two areas: access and architectural aspects, Chase said. Businesses need to limit access to their facilities and take steps to make the facilities themselves safer.

"Parking is the easiest thing you can do. If you allow people to park right next to your building or under your building--which is common in America, still--you are highly vulnerable," Chase said. Moving parking away from a building helps to minimize the risk of a car or truck bomb.

It may not be practical to prohibit delivery trucks from driving up to the door, but companies can still take steps to improve their security by tracking expected deliveries; making sure delivery trucks are expected; having the drivers call to confirm they are arriving; and looking at trucks to make sure they match the deliveries expected.

"There are things that don't impede commerce but give you some checks," Chase said.

To make buildings structurally less vulnerable, businesses can place large planters around any outside columns. To protect workers from flying glass (that can be caused by an explosion), companies should cover glass windows with a coating to prevent them from shattering and move filing cabinets and cubicle partitions to shield workers from the windows.

"It doesn't cost a lot of money, but does afford some protection against a potential attack," Chase said.

Chase also recommends that businesses improve communications with their local law enforcement officers and the local FBI office. FBI Chapters run monthly meetings called "infra-chapters," which are "like the Jaycees for anti-terrorism; Chase said. "Under supervision of FBI special agents, business leaders in a community get together once a month. It's a clearinghouse for threat information."

FBI agents in about 35 cities offer the service now, Chase said. It's important for businesses and their risk managers to develop a good, standing relationship with law enforcement and to share threat information earlier.

"I hope the insurance industry can come to grips with this and understand threat and vulnerability better, because not all businesses and facilities have high vulnerability, and in most places, the vulnerability can be lessened," said Chase. "If companies dealt with the vulnerability and communicated with insurance companies, the cost of premiums would fall dramatically."

RELATED ARTICLE: AIG and FM Global actively sell terrorism insurance.

Two companies that want to be in the terrorism insurance business are insurance giant American International Group and commercial property writer FM Global.

"Early on, the chaotic market really frustrated the buyer and caused buyers not to be interested in purchasing the cover," said Richard Thomas, senior vice president and chief underwriting officer at AIG. "As the market continues to stabilize, you're going to see more people buy it."

AIG was one of the first of a few companies to offer a stand-alone terrorism insurance product immediately following Sept. 11, 2001. The policy offered up to $100 million in stand-alone terrorism cover. In the last two months, AIG has beefed up its standard coverage included in commercial policies by increasing limits from $25 million to $100 million in capacity for any one location. And the product is selling.

"We are selling less and less stand-alone and more property cover including terrorism," Thomas said.

The price is higher for a landmark or high-risk building, he said. AIG charges 5% to 15% of the limit for those properties, compared with 5% to 15% of the premium for a regular property. However, AIG is charging as little as 1% of premium to include terrorism insurance for small businesses, which have responded strongly to the offer. While large property risks have a take-up rate of about 15% for terrorism insurance, about 70% to 75% of AIG's small commercial book has purchased the coverage.

"We're looking to spread the cost of the coverage and trying to encourage everyone to buy," Thomas said. "If we priced the high-risk targets at really high premiums, only some would buy, and we'd end up having inadequate revenue for the exposures. If we elect to make our pricing more reasonable and encourage a broader spectrum of our portfolio to buy, we get better distribution or risk across our entire portfolio."

FM Global boasts a 70% take-up rate. "As a mutual organization, we need to meet our customers' needs," said Shivan S. Subramaniam, president and chief executive officer.

FM Global has been "extremely even-handed with the rating," said Suzanne Douglass, managing director of Willis Risk Solutions' North American Property Practice. "The majority of what they write is manufacturing, and some--chemical plants or utilities--could clearly be at risk. On a spectrum where 1 is the lowest exposure and 10 is the highest, most might be an average of 4. By selling it to everyone, they have the benefit of getting the premium even from those who have very little risk."

If only the businesses that are at risk buy the coverage, "you'll get adverse selection; Douglass said.

Both AIG and FM Global also offer coverage that goes beyond TRIA's definition of a terrorist attack. While TRIA defines terrorist acts as attacks in the United States by foreign interests, both AIG and FM Global extend their terrorism coverage to terrorist acts committed by domestic terrorists, such as the bombing of the federal building in Oklahoma City.

One factor that might work in FM Global's favor is that as a property-only writer, its entire commercial book is not as big as some of its competitors' books. That would result in it having a lower deductible under TRIA than some multiline companies.

But even AIG, the country's largest commercial writer, has been able to write the business because of TRIA, Thomas said. AIG's retention under TRIA in 2003 is $1.2 billion. AIG's gross loss from Sept. 11, 2001 was $1.8 billion, and net loss, pre-tax, after reinsurance, was about $850 million.

"The reinsurance that was available prior to 9/11 is no longer available," Thomas said. "The reinsurance that bore over 50% of the loss of 9/11 ... isn't available to us for terrorism on commercially viable terms. If 9/11 were to occur again today, AIG's net loss would be $1.2 billion before the federal program kicked in to pay 90% of losses over that. We are more at risk today than we were at 9/11/01. TRIA provides us with protection that is otherwise unavailable to us."