BOSTON, Dec. 29, 2005 — AIR Worldwide Corporation (AIR) conducted an analysis of the potential impact on insurers of the Terrorism Risk Insurance Extension Act of 2005. The Act was signed into law last week and extends the Terrorism Risk Insurance Act of 2002 (TRIA) through the end of 2007.
"The law signed by the President amends the TRIA statute and includes higher insurer retention levels for 2006 and 2007," noted Jack Seaquist, a senior manager at AIR. "However, while insurer retention will grow incrementally over the next two years, the program's expiration at the end of 2007 will result in a dramatic increase in insurers' loss retention in 2008, assuming no further government or industry solution is forthcoming."
Under the extension, the trigger for payment of federal funds will increase from $5 million to $50 million for certified acts of terrorism occurring after March 31, 2006, and to $100 million for certified acts of terrorism occurring in 2007. The federal share of losses, paid only when certified insured losses exceed the trigger, remains at 90% in 2006, but is reduced to 85% in 2007.
Insurers' deductibles will continue to be calculated as a percentage of the previous year's direct earned premium in covered lines. However, the deductible will increase from the current 15 percent to 17.5 percent in 2006 and 20 percent in 2007. The new legislation excludes the following types of coverage from the program: commercial auto, burglary and theft, surety, professional liability, and farmowners multiple peril.
To illustrate the legislation's impact, AIR modeled three scenarios based on the portfolio of a typical medium-size, multi-line property and casualty company. The sample company, with $2 billion in total annual premiums, is assumed to have a higher concentration of exposures in major cities. All losses are estimated using AIR's Terrorism Loss Estimation Model.
"The impact of these changes on insurers will vary depending on the severity, location and timing of any future attack and on an individual insurer's actual book of business," said Mr. Seaquist. "Therefore, it is essential that insurers re-evaluate their own terrorism risk assessment strategies with respect to industry best practices."
The AIR Terrorism Loss Estimation Model is used by insurers, government agencies, and major corporations to assess terrorism risk in the United States from both international and domestic terrorist threats. The model simulates both conventional and non-conventional weapons effects, and resulting losses to property, workers' compensation, and group life lines of business.
About AIR Worldwide Corporation
AIR Worldwide Corporation (AIR) is a leading risk modeling company helping clients manage the financial impact of catastrophes and weather. Utilizing the latest science and technology, AIR models natural catastrophes in more than 40 countries and the risk from terrorism in the United States. Other areas of expertise include site-specific seismic engineering analysis, catastrophe bonds, and property replacement cost valuation. A member of the ISO family of companies, AIR was founded in 1987 to provide its insurance, reinsurance, corporate, and government clients a complete line of risk modeling software and consulting services that produce consistent and reliable results. Headquartered in Boston, AIR has additional offices in North America, Europe, and Asia. For more information, please visit www.air-worldwide.com.