SECTION: INSURANCE

LENGTH: 1063 words

HEADLINE: Insurance lifeline for port authorities;
Terrorism-insurance program offers coverage, but it's not a panacea

BYLINE: BY VIVIAN SCHLESINGER

BODY:
A radioactive "dirty bomb" slips through security at the Port of Los Angeles. An identical device is unloaded in Minneapolis after being trucked into the country from Canada. The same day, three suspected terrorists are arrested in Savannah on suspicion of attempted cargo theft. That scenario, presented to 80 government and private industry participants in a recent "war game" organized by Booz Allen Hamilton and the Conference Board, produced estimated losses to the economy of $86 billion. (Insurance industry losses stemming from the World Trade Center were about $40 million.) Fortunately, it was just a fictional exercise. If those events had been real, the cost to ports would have been devastating. In the aftermath of Sept. 11, many ports have been operating without insurance against terrorism risks.

Terrorism coverage for ports has traditionally been covered under clauses for "Strikes, Riots and Commotions." After the Sept. 11 attacks, most underwriters amended policies to omit coverage for terrorism, or at least exclude chemical, biological or nuclear threats. Ports and terminal operators and insurance spokesmen say passage of the Terrorism Insurance Act on Nov. 26, which provides up to $100 billion in government support for terrorism insurance costs during the next three years, will help, but it isn't a panacea.

"It does not suspend the laws of economics for the vast majority of risks insurance companies face today," said Robert Hartwig, chief economist for the Insurance Information Institute. "In an event like Sept. 11, or nuclear or biological nightmare scenarios, the federal backstop provides up to $100 billion, but that's after very significant retention from underwriters."

The law commits the government to sharing underwriters' risks of terrorism losses during the next three years. But purchasers of insurance will still bear the primary burden. After deductibles, the government will pay 90 percent of losses up to $100 billion.

That still leaves underwriters with a large share of the risk. The Insurance Information Institute estimates that a $30 billion terrorist attack would cost underwriters $11 billion through 2003. In subsequent years the cost of such an attack would be would be higher - $14 billion in 2004 and $20 billion in 2005.

The law requires underwriters to offer terrorism coverage within 90 days. Insurance buyers can accept, negotiate or reject coverage, but if they don't buy it, they are not insured for terrorism risks. An interesting twist: Commercial property owners are automatically insured until they receive their terrorism policies. Underwriters are expected to compensate for that brief period of free coverage with higher premiums later.

Ports and terminals are only one of many entities covered by the terrorism-insurance law, but have followed the issue closely. Ports are considered especially vulnerable to terrorist risks. A terrorist attack at a major port could halt U.S. trade.

Port officials say the Terrorism Insurance Act offers a possible lifeline. "We'd like to see some stability and softening in the markets," said David Solis, risk assessment manager for the Port of Corpus Christi, Texas. "We're hoping in the next few months we'll start seeing positive things happening in the markets."Port officials say the Terrorism Insurance Act offers a possible lifeline. "We'd like to see some stability and softening in the markets," said David Solis, risk assessment manager for the Port of Corpus Christi, Texas. "We're hoping in the next few months we'll start seeing positive things happening in the markets."

Corpus Christi's property insurance premiums jumped 48 percent this year, even with the exclusion of terrorism coverage, which was dropped in January 2002 when reinsurance treaties renewed for the first time after Sept. 11. "Every large entity, public or private, cities and counties, went through the same ordeal," Solis said.

Thirty-one percent of all holders of commercial property policies saw increases of 30 to 50 percent in premiums as of the second quarter of 2002, according to the Council of Insurance Agents and Brokers. Thirteen percent had increases of 50 to 60 percent, the council said.

After losing its terrorism coverage, Corpus Christi shopped for a new policy but was able to find only limited coverage with premiums of $10 million to $25 million for a $100 million facility. "What's the point?" Solis said.

The Port of Corpus Christi insures its own channel, public docks, cargo sheds and office buildings as well as some cranes, and will seriously consider the terrorism insurance once its policy arrives.

Few, if any, terrorism policies have gone out to ports since passage of the new law. Underwriters and government officials are still interpreting the finer details of the legislation, according to insurance specialists at the Maritime Administration.

Bill Rowland, vice president of XL Insurance Services, said ports should be contacting their insurance brokers and asking when they can expect their policies and what the costs will be. They should scrutinize the policies closely to determine if the coverage will be sufficient, he said.

Ports that handle large volumes of containers or are near rail operations or airports should expect higher rates. But Rowland said ports can help themselves by strictly following new federal port-security rules covering identification cards and gate systems.

Marty Depoy, spokesman for the Coalition to Insure Against Terrorism, said that to deter underwriters from gouging, the law requires them to report their premiums to the Treasury Department and to Congress for review.

Depoy, whose organization represents 65 organizations from various industries, said the terrorism-insurance law should help, but that it won't be a cure-all.

Long-term solutions remain elusive. Booz Allen's Starr said ports should continue to work closely with each other and with federal and local authorities and other links in the supply chain to reduce terrorism risks.

"If you had plans and security measures that were adequate, you could justify the premiums and you could save companies a lot of money," he said. "The insurance industry is scratching its head and saying, 'How do we determine how to charge an individual company?' "

LOAD-DATE: December 23, 2002