CRITICAL ISSUE REPORT
What has terrorism risk done to New York City’s insurance market?
By Emanuel Levy
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Airliners on their approach to New York’s LaGuardia terminal, when the wind direction dictates, fly over Staten Island, the city’s southernmost borough, go into a steep bank and a dramatic U-turn. That’s when passengers occupying window seats on the left side of the plane are treated to the eye-bulging panorama of majestic towers reaching skyward, surrounded by an almost unending array of other structures all of sizes and shapes. The awe-inspiring sight is unforgettable even in the face of the gut-wrenching, wing-wagging descent as the captain maneuvers to line up with the runway.
This recall of the view of Manhattan Island real estate, which this writer has experienced many times, was triggered by, of all things, a letter to the editor of Rough Notes from an insurance agent whose book of business includes office buildings in Manhattan. He reported that four of his companies had decided to suspend acceptance of office building risks but would continue to renew existing business. He listed the insurers as Peerless, OneBeacon, The Hartford and Zurich. While seeing the possibility of a shift to a tighter market, Al Singer, of Singer Nelson Charlmers in Teaneck, New Jersey, is evidently too savvy to jump to any conclusions. He asked Rough Notes to research the matter, perhaps polling other Manhattan producers to find if they had similar information.
Singer emphasized how serious a problem this would become for producers and property owners. He pointed out that a significant thinning had already occurred because of the loss of such major companies as Kemper, Royal, Atlantic Mutual and the possible reduction of options resulting from the merging of Travelers with The St. Paul. Asked about the use of the excess/surplus market, Singer said it was impractical because of higher rates, coverage differences and other factors.
Singer’s letter to the editor pre-dated the somewhat startling reports from security agencies in early August that New York and New Jersey financial institutions had been under surveillance by individuals with links to al-Qaeda. Buildings in New Jersey and Washington, D.C., were also cited. While it was soon acknowledged that the information was three to four years old, the authorities insisted that new data supported the threat.
Amazingly, the business community did not react with any anxiety, nor did the insurance industry. It may be the “boy who cried wolf” syndrome, but that would be an injudicious consequence.
ucers doing business in Manhattan would be time consuming and probably incomplete. The alternative was to phone some key people and relevant organizations.
Sharon Emek, secretary/treasurer of the Independent Insurance Agents & Brokers of New York (IIABNY), acknowledged some churning in the office building market below 57th Street, but had no knowledge of any formal decisions by individual companies. She said some insurers are not accepting new office building risks and that during the past few years they have been reviewing their portfolios to measure aggregation—that is the extent of their exposures. Where they find too great a concentration, they just will resist or refuse the business.
f course, is sophisticated today, but is not unlike the pre-computer days in theory and intent. There may not be too many in the business today who recall the mapping process. Insurers maintained detailed maps showing streets and house numbers. Properties insured were marked and underwriters referred to the maps before accepting a new risk. The idea was to avoid too many properties in one location as a means of avoiding possible conflagration events. The practice may still remain somewhere in the country, though that is doubtful. Aggregation control is a principle suited to areas with compacted properties where it is the better part of wisdom to avoid concentration of risk.
The president of the Professional Insurance Agents of New York (PIANY), T.J. Derella, had a more positive take on the office building market in Manhattan. Although his agency is not based in Manhattan, but in upstate New York, he has considerable business in the city. He said that a constricted market existed a year or so ago, but that he now is finding that rates for office building risks for property coverage are down from 5% to 10%. He also observed that the liability segment of the risk is no longer adversely affecting renewals and that business is now on a normal, everyday basis. In addition, according to the PIA president, even mercantile commercial risks have been stabilizing, and association members have not indicated any intractable difficulties.
Derella notes that this is a great change from the initial monumental impact of 9/11 on the New York insurance marketplace. That is certainly not difficult to understand. A major brokerage firm, Aon, did not respond to a request for comment on how its companies are treating office-building accounts, but it’s safe to presume that its size and influence shield it from difficulties.
Regarding the continuing threat of terrorist attacks, Derella points to the absolute need for continuation of the Terrorism Risk Insurance Act (TRIA), which is set to expire on December 31, 2005. He says that, in his opinion, the New York metropolitan area is the most exposed of all of the country’s metropolitan communities. He may well be right, but that should not lull the other communities into a false sense of security. Terrorists do not follow expected patterns. But he is correct that it is essential for the insurance business, as well as for all business enterprises, that Congress act promptly to keep this backstop in place. Its original enactment prevented an insurance debacle, even if it was only psychological.
The opposition to the Act mounted by the Consumer Federation of America (CFA) seems to have subsided. The CFA called TRIA a “bailout” for the insurance industry, which, it said, had sufficient assets to pay for terrorist destruction. CFA has a problem with its math. It also fails to understand that a terrorist act by foreign infiltrators is akin to an act of war, and it is a function of the federal government to safeguard the nation from attack and any fiscal consequences.
While researching the marketing questions raised by Al Singer and remembering the sight from the sky as the descending aircraft hovered over Manhattan, this observer wondered whether anyone knew the number of office buildings occupying the island, their dollar values, their replacement costs and the insurance exposure. Those figures may be somewhere, but none of the sources I contacted had a clue. It was suggested that I contact a variety of city agencies, but I’d rather guess at those numbers, even if my guess is a wild one. Hey, under today’s aura of suspicion, it might be a dangerous crusade. *
The author
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined that weekly insurance magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producers’ and other industry associations and is the recipient of many awards and citations. He served on the faculty of the College of Insurance for the annual orientation course for incoming insurance regulators and staff members, lecturing on the debate over state and federal regulation of the insurance business. He has written insurance articles for the Economist Magazine and for many years was insurance section editor of the World Book Encyclopedia’s annual historical review book.