AAIS REINSURANCE SURVEY  QUESTIONS AND RESPONSES SEPT. 4-10, 2002 1. Does your present reinsurance contract for personal lines, or a renewal of it, exclude or restrict coverage for terrorism losses? Responses:   Yes, 47;    No,13   2. If "yes" to #1, please describe the exclusion or limitation. Does it apply to all terrorist events or only to certain events, such as nuclear, biological, or chemical events? Responses:   17 Nuclear, biological, or chemical events only 30 More than nuclear, biological, or chemical events, including exclusions for all terrorist events 3. If "yes" to #1, do you have any other outlets for reinsuring terrorism losses in personal lines? Responses:   Yes, 3;   No, 44 4. If "yes" to #3, why didn't you use the other outlets? Were they too costly, too restrictive, or something else? Responses: 1 Too costly 1 Too restrictive 1 Other (still considering) 5. Has the amount (capacity) of personal lines reinsurance available to you been reduced? Responses:   Yes, 11;   No, 49  6. If "yes" to #5, please describe the nature of the reduction. (Higher retention? Lower limit? Other?) Responses:  8 Higher retention 8 Lower limit 0 Other (Note - some companies reported more than one type of reduction.)

Personal lines carriers feel the pinch in terrorism reinsurance 
Results from a recent AAIS survey

Property/casualty insurers report that reinsurers are imposing many of the same types of terrorism exclusions and limitations in personal lines that are being implemented in contracts for commercial lines.

That finding emerges from a recent survey conducted by the American Association of Insurance Services (AAIS), done on behalf of the Legal Affairs Ad Hoc Group of the National Association of Insurance Commissioners (NAIC).

Among other things, the survey indicated that:

• 47 of the 60 primary companies responding, accounting for more than $5 billion in personal lines premium, reported that some sort of restriction of coverage for terrorism losses in personal lines had been or would be incorporated into their reinsurance contracts.
• Of the 47 companies reporting restrictions, 30 of them reported that those restrictions were broader in scope than those applying to nuclear, biological, and chemical ("NBC") events only.

"We believe that the use of terrorism exclusions and restrictions in reinsurance contracts is even more widespread," wrote Susan Luecke, AAIS director of personal lines, in a letter to NAIC staff counsel. "Nonetheless, the fact that companies accounting for more than $5 billion in personal lines premium reported restrictions in reinsurance coverage demonstrates the magnitude of the problem."

However, only 11 of the companies reported that the overall amount, or capacity, of personal lines reinsurance available to them had been reduced.

The survey arose from an Aug. 29 conference call meeting of the NAIC working group and industry representatives, convened to discuss regulatory policy on terrorism exclusions in personal lines. During the call, NAIC staff expressed a desire for more information about what primary insurers were encountering from reinsurers in this regard, and AAIS staff offered to survey their members and invite other insurers to participate.

Given the need for a timely response, however, AAIS was effectively limited to inviting responses through its proprietary Product Advisory e-mail service. Notice was sent to industry publications, but the Sept. 10 deadline for responses allowed only those publications with daily Internet postings to use the notice.

Beyond the survey, AAIS staff has been communicating with the NAIC regarding the question whether insurers should have the option to exclude or restrict coverage for personal lines losses arising from terrorism.
In a Sept. 5 letter to NAIC staff counsel, Luecke wrote that personal lines insurers could face devastating losses in the event of a terrorist attack.

"A nuclear, biological, or chemical terrorist event has the potential to be catastrophic in nature," Luecke wrote, "because of the contamination that can occur, causing a massive number of homes to be rendered uninhabitable and their contents to be unusable."

Although personal lines policies have typically sought to insure only the effects of actual physical damage, Luecke explained that some courts have deemed contamination to be equivalent to physical loss which, absent appropriate exclusions, would be covered by most personal lines policies.

"The insurance industry cannot rule out the possibility of catastrophic loss with respect to personal lines exposures in the event of a nuclear, biological or chemical terrorist action," she wrote.
In the absence of an exclusion or limitation for terrorism losses, Luecke noted that:

• Losses arising from a number of named perils are not limited in scope in standard forms. Therefore, losses from terrorist events that involve explosion, aircraft, vehicles, and smoke would probably be covered by the vast majority of personal lines polices.
        Also, in light of certain court trends, it is "not outside the realm of possibility" that a terrorist act or event might be construed as an act of vandalism, and thus covered under standard policies.
• The standard nuclear exclusion would not apply to fire losses that result from a nuclear event.
• War exclusions generally apply only to armed conflicts between the U.S. and other sovereign nations, governments, or similar authorities.
• The AAIS exclusion for losses from "contamination," found in the "wear and tear" exclusion, is typically not applied to losses from sudden and accidental events.
• It remains unclear how new exclusions and limitations being used by some insurers to address losses from mold and other organisms would be applied to contamination caused by a terrorist's use of bacterial agents.

CLICK HERE for the complete text of Luecke's analysis of exposures to terrorism under personal lines policies.

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