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Terrorism Risk Receiving Greater Scrutiny

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Terrorism risk, which has altered many aspects of underwriting life insurance, is being recognized by top rating agencies and included in company analyses.

The issue of terrorism risk continues to be analyzed. Most recently, the President’s Working Group on Financial Markets issued a report addressing the relationship between TRIA coverage and insurance.

Life (re)insurers can now expect questions from both AM Best and Moody’s relating to terrorism exposures. AM Best has added a Terrorism Risk Assessment section to its 2005 Life/Health Supplemental Rating Questionnaire. Although the new information is currently not included in Best’s Capital Adequacy Ratio (BCAR), it may be a factor in the future. Moody’s also has added questions regarding exposures to terrorism risk to its assessment form and S&P has added a terrorism survey as part of its assessment.

The information required by A.M. Best involves the knowledge of street-level detail and exposure on insured employer/employee groups residing in the top 11 U.S. metropolitan statistical areas. Companies will be asked to quantify the total percentage of insureds geocoded within the 11 metropolitan city areas and identify their 5 largest exposures with specific details on each insured location. In addition to identifying exposure data, carriers are asked to describe any catastrophe reinsurance coverage that has been purchased to offset their concentration exposures. S&P is considering in its updated capital adequacy model a credit for catastrophe reinsurance of up to 20% of the base charge.

The terrorism risk, which translates into a “concentration-of-risk” issue, has affected Group Life, COLI and Worksite writers. These types of Life & Accidental Death & Dismemberment policies often cover employees of a company who spend most of their work day in a common location causing a sizeable aggregate exposure.

Insurance carriers may want to take this opportunity to evaluate their systems and available data resources to prepare for future rating agency requests. Discussions with information technology, underwriting and sales divisions can help determine how the required information can be obtained and identify potential improvements to current data warehouse capabilities.

Having such data should lead to improved pricing accuracy for both direct and reinsurance terms and allow carriers to perform mortality studies with better data. Likewise, being able to analyze exposure to terrorism by risk mapping liabilities geographically will result in better overall risk management and provide sales divisions more insight about their risk appetite.