The impact of the terrorist attacks in the US will be felt for a long time yet. Jason Woolfe examines the effect on commercial property rates.

Companies buying commercial property insurance are likely to see prices rise by approximately 80% in the wake of the September 11 terrorist attacks in the US.

This figure was estimated by AXA and other companies such as Royal & SunAlliance.

Analysts warned that, in addition to rising rates, insurers would impose lower limits on their policies in order to cut their risks.

With claims totalling tens of billions of pounds across the industry as a result of the hijackings and destruction of the World Trade Centre, the market has less capacity and will demand a fast return on its capital.

Standard & Poor's insurance analyst Rob Jones says: "Since the market has been pretty soft in recent times, it is now about to harden in quite a big way.

"Insurers are having to pay a lot more for their reinsurance protection. They have lost money and will want to recoup that through higher premiums. We will also see deductibles and terms and conditions tighter than before, with lower limits."

Rates would rise fastest in the retrocession and reinsurance markets, driving up costs for primary insurers who would pass them on to their clients. "In the retro world and reinsurance world we would expect to see rates increasing very rapidly - by multiples rather than percentages," he says. We can certainly see double-figure increases in the direct level for commercial property."

He says insured companies will use captive insurers - companies set up to insure their parent organisations - and more risk management to reduce their exposures and costs.

Fitch insurance analyst David Wharrier says insurers should be understanding of their clients' needs when making large rate increases and should spread the increasing costs over a long period.

He says: "Certain risk managers are feeling a bit hard done by because insurance companies, in the light of September 11, are looking to increase rates across the board. Clients with a good trading record would hope that to be taken into account when they come to renew. They may agree that rates have been low in their favour for the past three or four years, but maybe they expect to pay that back over the next three or four years.

"It is unfair for insureds to pay it all back in 2002 and, from their financial planning perspective, not surprisingly, they would like to pay it back over a longer period."

But he acknowledges insurance companies would be under pressure to increase commercial property rates because declining stock markets have cut their investment income.

"One of the major considerations to come out of the World Trade Centre disaster is that you don't usually have a large catastrophe so closely related to a downturn in investments."

The commercial property insurance market is also likely to be affected by reduced capacity across the industry.

British Insurance Brokers' Association (Biba) chief executive Mike Williams says: "There is consensus among the major brokers that there's a lack of capacity. Companies will have to look at better risk management techniques, whether it's construction of their premises or the background of their employees, electronic systems protection or having disaster plans."

But director of broker firm Camberford Law David Ottewill says capacity is less of a problem in the property market than elsewhere. "There is an overall lack of market at the moment, but there is probably still property to be written. It's the liabilities, indemnities and retro cover that has a huge lack of market."