Almost four years after the terrorist attacks in the United States, Canadian businesses are now scaling back on expensive terrorism property insurance.
"It's a mix between believing that we're noble and nice and nobody would do harm to us ... but also the fact that no major acts of terrorism have taken place in Canada," said Daniel Galvao, vice-president of Marsh Inc., a unit of Marsh & McLennan Cos., the world's biggest insurance broker.
Roughly one-third of the top 500 large and mid-sized businesses in Canada have purchased this type of coverage this year, down from almost half in 2002, according to Marsh.
In Toronto, almost half of the big and mid-tier companies paid for terrorism property insurance this year, down from 70 per cent in 2002, the company said.
Canadian firms are shying away from the coverage for several reasons, Galvao said in an interview. For starters, it's expensive. Premiums can run as high as 5 per cent, meaning that $100 million worth of coverage would cost $5 million a year. Also, many Canadian companies believe they aren't at risk of being attacked, he added.
"Terrorism acts are a detached reality to the average Canadian, something that only happens abroad," Galvao said.
Terrorism insurance first attracted scrutiny in the wake of the 2001 attacks on the World Trade Center and the Pentagon as insurance losses exceeded $30 billion (U.S.). Marsh and other companies then began excluding acts of terrorism from new policies, forcing customers to buy stand-alone policies.
Computer-related terrorist attacks, as well as biochemical and nuclear attacks, remain excluded from basic terror insurance policies. Biochemical coverage, however, can be purchased for about $5 million per $100 million worth of coverage, Galvao said.
Canadian companies seem to be turning away from coverage at the same time their U.S. counterparts are bolstering their protection. Nearly half of large and mid-sized U.S. companies had terrorism property insurance at the end of 2004, up from 27 per cent a year earlier, Marsh said in a recent report.
As is the case in the United States, financial services and real estate-related companies in Canada are among the largest customers of the protection. About 70 per cent of the large and mid-sized companies in those sectors in Canada have bought the coverage, up from 65 per cent three years ago.
In Canada's energy sector, including oil and gas concerns, 55 per cent of companies have bought the insurance, up sharply from about 13 per cent in 2002. About one-quarter of media and transportation-related large and mid-sized companies have the coverage, Galvao said.
He noted Marsh and other insurance companies have widened sales in recent weeks because of the possibility that the 2002 U.S. Terrorism Risk Insurance Act won't be renewed by Congress at the end of the year. The act requires insurance companies to offer terrorism insurance to businesses. In exchange, the act also limits the industry's losses in the case of attacks by foreign terrorists.
If the act isn't renewed, it will likely be more expensive and difficult for companies, including those in Canada, to buy such coverage.