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Insurers in US clash over terrorism-policy pricing

American International Group Inc, Ace Ltd and other insurers are at odds over how to put a price on the once-unimaginable risks of terrorist attacks on US cities as a federal deadline looms.

Estimating terrorism losses has vexed insurance companies since the government last year ordered them to provide the coverage. With little data for analysis beyond the Sept. 11 attacks, underwriters have turned to former spies and military officials rather than actuaries to help them gauge risk.

A study by Insurance Services Office Inc, a research company that helps the industry set rates, recommended premium increases of as much as 150 percent. Regulators and several companies, including American International, the world's biggest insurer, rejected the proposal. Billions of dollars in premiums depend on the rates underwriters pick before Feb. 24, when by law they must set prices for terrorism policies.

"A lot of top insurance people can't figure out what to do," said Ira Shapiro, a New York-based real estate consultant whose clients own 140 million square feet of commercial properties. Insurers are so split about how to price such policies that his customers have received price quotes with rate increases ranging from 4 percent to 751 percent, he said.

Even before the terrorism bill passed in November, insurers turned to Insurance Services to help them tackle the problem. The company supplies statistical and actuarial information by analyzing events such as natural disasters. Its loss estimates are an industry standard in most states and are used as guidelines to price millions of policies.

Insurance Services asked its hurricane and tornado modeling unit, AIR Worldwide Corp, to create a formula to estimate losses from potential terrorist attacks on different US cities, said Jayanta Guin, AIR's vice president of research and modeling.

AIR hired former Marine Corps Colonel Edward Badolato, a security consultant who once led military teams against terrorists in Asia, Africa, the Middle East and Latin America. He and other ex-military and law-enforcement officials created a database of likely targets where terrorists may strike.

Critics of the study said that the cities with the greatest risk have increased security, which may push terrorists elsewhere.
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