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Opinions, theories differ in terror rate setting.

At the root of American International Group Inc.'s ongoing dispute with state regulators over terrorism pricing is the company's dislike for how the Insurance Services Office and the National Council on Compensation Insurance set rates last year for use with the Terrorism Risk Insurance Act.

Commercial property and workers' compensation are the No. 1 and No. 2 biggest risks for terrorism as AIG sees it, said Richard Thomas, senior vice president and chief underwriting officer at AIG.

The ISO premise for pricing terrorism coverage for commercial property was to rate it all at 1% of property value, except for five major urban areas, which were rated at 150%, he said.

"We really don't believe the headquarters for the American Red Cross or the Daughters of the American Revolution, or any of the lobbying firms are really on al Qaeda's hit list," Thomas said. "So why charge commercial property owners in the district 150% when right across the river in Virginia, adjacent to the Pentagon, you have ... high-rise buildings, and they're only being charged 1% under the ISO methodology? It just doesn't make sense."

Not everyone has to buy commercial property coverage that is at 150%, and there are very few buyers, Thomas said. Regulators in large urban areas were outraged by the ISO filing, vigorously opposing it, and subsequently approving substantially lower rates, he said.

With NCCI's filings for workers' comp, the problem is different, he said. Terrorism cannot be excluded, and customers don't even have the choice of buying workers' romp without terrorism coverage.

NCCI's approach is based on a frequency rate of one terrorist attack per year, and priced it so the aggregate amount of premium generated on a nationwide, all-carrier basis would be sufficient to fund the average TRIA retention for one event a year, he said.

"The concept of trying to generate an adequate price on an average, across-the-country basis doesn't work for individual carriers," Thomas said.

NCCI's terrorism filing is based on a modeling approach. "The methodology is actuarially sound and we believe that it results in an adequate average terrorism provision in each of the states," said Jeff Eddinger, an NCCI actuary who oversees all of NCCI's rate filings, including the terrorism filing.
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Title Annotation:Companies
Comment:Opinions, theories differ in terror rate setting.(Companies)
Publication:Best's Review
Geographic Code:1USA
Date:May 1, 2004
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