Terrorism
Get Ready

• Emil Metropoulos
• October 2019
• 

ON GUARD: Police on the scene with an armored critical incident vehicle following the shooting that killed 14 people at a social services center in San Bernadino, California, on Dec. 2, 2015. The incident was the deadliest workers' compensation terrorist attack to occur in the U.S. since the attacks on 9/11.
Photo Courtesy of AP/Damian Dovarganes

Key Points

• What’s Happening: The Terrorism Risk Insurance Program Reauthorization Act is up for renewal by Congress in 2020.
• Lessons Learned: Insurers were impacted by a delay in getting TRIPRA approved in 2015 so going forward they must make contingency plans in case the same scenario plays out.
• Actions to Take: With TRIPRA’s uncertainty expected to continue throughout 2019 and into 2020, exposed carriers with notable reliance on the backstop should be increasing the accuracy of their data and building capacity for modeling analytics and output.

Despite a reduction in the number of large terror attacks in the United States, the market for terror (re)insurance is maturing and the peril is changing. Newly emerging terrorism attack methods are changing the nature of threats. Attacks by “lone wolves” and small groups against soft targets reflect a shift in global terrorism trends, including the U.S. Unlike active shooter attacks whose motive may be personal or unclear, acts of terrorism typically involve specific targets and by definition require that the motive was ideological, political or emanates from religious extremism.

Instead of targeting property, more frequent “soft” human attacks are becoming commonplace, increasing the threat of incidents occurring in or near public spaces and workplaces.

Most of the recent terrorism events have not occurred in the United States and have not caused losses to the workers' compensation line. The exception being the 2015 San Bernardino mass shooting—the deadliest workers' compensation terrorist attack to occur in the United States since the attacks of Sept. 11, 2001.

Adding to the complexity is the current uncertainty around the terrorism risk backstop, known as the Terrorism Risk Insurance Program Reauthorization Act or TRIPRA, which is set to expire on Dec. 31, 2020. All of these factors impact rates and availability on all lines of business and create uncertainty and misperceptions.

A Brief History

The U.S. Congress created the Terrorism Risk Insurance Program Reauthorization Act in the aftermath of the Sept. 11 terrorist attacks as a federal backstop to cover a significant share of the loss for insurance claims related to terrorism incidents. TRIPRA became law in November 2002, and has since been extended in 2005, 2007 and 2015. The overall severity of terrorist attacks in the U.S. has declined in recent years and no events have been certified by the U.S. Treasury since 9/11. However, the law continues to provide an essential backstop protection to carriers, and it remains crucial to the continued stability of the terrorism insurance market.

Changing in Nature

The scenario today differs from that of the 2015 renewal because acts of terrorism have gravitated from catastrophic events causing enormous property damage to smaller, more localized human casualty-oriented events that involve attacks by lone wolves and smaller groups who use easily accessible weapons such as cars or assault rifles. (See chart below.) Between 2000 and 2017 there have been 250 FBI-designated active shootings in the United States, according to the agency. The greatest number of attacks occur at educational institutions, retail stores and shopping malls. Although active shooter attacks in themselves are not by definition acts of terrorism, their increased frequency is raising the question among some lawmakers as to whether they should be included by definition within TRIPRA.

Traditionally, terrorism insurance had been provided via property covers. However, in an era of small-cell, lower-level bomb, gun and knife attacks, there has been a greater need for coverages geared toward the destruction of life (fatalities and casualties).Work-related injuries and deaths are covered under workers' compensation systems in all states. Workers' compensation insurance policies are a compulsory purchase for employers in nearly all states. Unlike commercial property, workers' compensation carriers are unable to exclude or sublimit terrorism coverage on virtually every risk they write. As a statutory coverage with no stated policy limits, a carrier's aggregate exposure can easily pyramid into extremely high amounts.

The United States is the world's largest buyer of terrorism insurance. Workers' compensation and all liability lines combined represent 67% of the $190.6 billion total U.S. TRIPRA-eligible premium, eclipsing all property lines, according to the U.S. Department of Treasury's Report on the Effectiveness of TRIPRA from June 2018.

Lessons From Experience

During the last TRIPRA renewal, there was a small pocket of resistance from lawmakers as the benefits were debated, which caused nearly a two-week delay in the TRIPRA renewal being put into action. Policies were written for shorter terms, of less than a year, large accounts moved among various carriers and brokers started requesting reinsurance contracts over multiple years.

While the outcome of the 2021 TRIPRA reauthorization cannot be predicted, the lessons learned from the lag in the 2015 renewal decision were so impactful to the insurance industry and businesses in general that we do not anticipate that any party wants to replay the sequence of events that transpired. Although we assume less debate and resistance to a 2021 reauthorization relative to that of the prior reauthorization, changes to TRIPRA at a minimum should be expected and contingencies planned for. 

Mitigation Strategies

With the outcome of the 2021 TRIPRA renewal unknown, all carriers need to create mitigation strategies that include securing more reinsurance protection, identifying where they are vulnerable and making sure they can non-renew and reduce vulnerabilities if needed within a short time frame. Identifying these risks requires carriers to model data correctly to assess risk and prepare appropriately. However, terrorism is among the most challenging perils to model, especially for workers' compensation, where a high degree of data and expertise is needed. Highly sophisticated terrorism modeling has evolved to contemplate the complexities of smaller, human-focused terrorism events and the impact on workers' compensation. Often commercial models ignore the vast number of potential “soft target” events because they are too small and as a result tend to overemphasize a relatively smaller number of trophy targets in Tier 1 cities.

The commercial market has responded well to this terrorism model gap with new and improved applications which can rigorously contemplate a significantly larger number of targets that can exceed several hundred thousand distributed throughout the United States. In addition, today's cutting edge computational fluid dynamic scenario modeling can now contemplate not only distance and height and angle, but attack angle, confinement and building shielding—for a true 3-D modeling perspective. The overall impact has been an improvement in degree of data granularity and model output accuracy. More than ever, carriers need to analyze their exposures and accumulations and understand which locations or which segments of their portfolios need to be de-risked (by creating a shortlist and knowing when and which policies need to be non-renewed) or if there is a need to buy more reinsurance cover protection.

If it appears that the backstop will not be in place beyond 2021, large and medium insurers may need to begin to issue short-term policies and/or provisional notices of cancellation in upcoming renewals for policies that would be in effect after Dec. 31, 2020. In addition they may need to consider increased rates or further restrict deployed capacity as they reassess their exposure to terrorism.

For smaller carriers, if TRIPRA expires or is renewed with significant cedent net retention increases, terrorism-exposed insurers with less than $500 million in surplus and exposure to terrorism losses may need to purchase additional private reinsurance to help protect capital and satisfy rating agencies and regulators. For example, a small carrier who suffers a $100 million loss, but only has a $200 million surplus. With the industry trigger increasing to $200 million in 2020, an increasing number of these smaller carriers could have a terrorism loss below this amount, resulting in a scenario where they have no TRIPRA backstop protection and are only reliant on their privately purchased reinsurance—which in some cases may not be sufficient. Modeled terrorism losses could exceed 10% to 20% of policyholder surplus and all it takes is a location with a few hundred employees in a hospital or office building to pyramid into a five-ton truck bomb loss in excess of TRIPRA's $200 million industry trigger. If TRIPRA does not trigger as a backstop, their financial strength may be challenged. In the absence of additional structural changes to TRIPRA after 2021, these smaller carriers will need to increasingly rely on private treaty and facultative reinsurance for stability and capacity.

Regulators and Rating Agencies

No matter what the outcome of the TRIPRA renewal, it is certain that rating agencies will continue to emphasize terrorism stress tests and assess ratings against specified criteria, including scenarios where the industry trigger falls short and there is no TRIPRA backstop protection.

Earlier this year, AM Best warned that P/C insurers that have relied heavily on the federal terrorism reinsurance program face the risk of a potential negative rating action if the program is not renewed by the end of 2020.

Companies need to demonstrate their terrorism stress testing and action plans to mitigate the frequency and severity of terrorism exposures. It is incumbent upon carriers to address the risk mitigation requirements of the rating agencies (such as AM Best's BCAR tolerance, TRIPRA gap assessments and the establishment of solid risk mitigation contingency plans should TRIPRA either not be reauthorized or authorized contemplating larger net cedent retentions). As 2019 progresses, rating agency analysts will be probing these topics during their annual ratings meetings. Expectations have been raised for companies to demonstrate their risk management data quality, modeling analytics and overall accumulation management practices.

Looking Ahead

Uncertainty about TRIPRA's renewal is impacting the nature and availability of (re)insurance coverage. This, in turn, is affecting corporate decisions about investments and projects, which can cause a domino effect through the economy. Reinsurance protection can assist insurers in countering some of the potential effects of non-renewal or alteration of the program.

With TRIPRA's uncertainty expected to continue throughout 2019 and into 2020, exposed carriers with notable reliance on the backstop should be increasing the accuracy of their data and their modeling output. In addition, discussions with rating agencies should proactively address their plans for terrorism exposure identification and mitigation.