Best’s News & Research Service - October 16, 2019 04:29 PM (EDT)
State Regulators, Trade Reps Urge Long-Term Renewal of Terrorism Insurance Program
WASHINGTON //BestWire// - State regulators joined with insurance representatives to urge lawmakers to quickly approve a long-term extension of the Terrorism Risk Insurance Program, the federal backstop that has provided market certainty since the 9/11 attacks.
“By requiring insurers to offer terrorism coverage, we believe the federal backstop has been successful in bringing marketplace confidence and stability where a marketplace for a broad range of commercial risks might not otherwise exist,” said Chlora Lindley-Myers, director of the Missouri Department of Commerce and Insurance, who spoke on behalf of the National Association of Insurance Commissioners.
The NAIC supports a long-term TRIP reauthorization of up to 10 years, she told a joint panel of the U.S. House Financial Services Committee.
“We have not seen evidence to suggest that the insurance marketplace is capable or willing to voluntarily take on a substantial portion of terrorism risk absent a federal backstop,” she said. “Without TRIP, we believe terrorism risk insurance would become unavailable and unaffordable and we could revisit some of the same market disruptions and economic uncertainties the nation faced in the aftermath of the Sept. 11 attacks.”
Although the United States has not suffered a repeat of 9/11, terrorism remains a constant threat. The Institute for Economics & Peace estimated terrorism cost the global economy $415 billion between 2013 and 2017 (Best’s News Service, June 19, 2019).
United Educators, a risk retention group, strongly supports H.R. 4634, which will reauthorize the Terrorism Risk Insurance Act for 10 years with no changes, said Joe Carter, group acting president and chief executive officer. Carter appeared on behalf of the American Property Casualty Insurance Association.
“The fundamental barriers that originally hindered the accurate modeling of terrorism have not changed and thus, TRIA continued to be a linchpin for insurers to make terrorism risk insurance available,” Carter said. “While the private market does participate heavily in shouldering terrorism risk, it is not prepared to meet the market’s need entirely without TRIA.”
In a recent APCIA survey, 75% of its members said they may explicitly exclude terrorism coverage in their commercial policies if TRIA is not reauthorized, he told lawmakers. “Many small and medium-size insurers would be crippled by a catastrophic terrorism loss without the TRIA program,” Carter said.
Without the promise of a renewal, Marsh expects to see more sunset provisions in policies and higher costs as the Dec. 31, 2020 expiration date nears, said John Doyle, president and CEO of insurance broker Marsh.
Lawmakers should not allow the program to lapse, as it briefly did at the end of 2014, he said. Insurers and rating agencies are closely monitoring legislative activity related to reauthorization, he said.
“Uncertainty about the future of the federal backstop as the deadline looms closer will impact the availability and nature of insurance coverage,” he said. “We are already seeing an impact on policies that extend beyond 2020, with some insurers either seemingly unwilling to offer terrorism coverage beyond the expiration or seeking to increase prices to cover the additional risk to their portfolios.”
Renewal of the program should be immediately embraced on Capitol Hill, David Sampson, APCIA’s president and CEO said in a statement.
The federal program acts as a financial backstop for the property/casualty industry to help drive down the cost of terrorism coverage. Before the backstop kicks in, individual events must be certified as acts of terror by the Secretary of State, the Treasury Secretary and the U.S. Attorney General (Best’s News Service, June 1, 2016).
For federal funding to kick in, the country would have to exceed losses of $180 million in a given year rather than losses from a single event. The aggregate trigger increases to $200 million next year, according to an analysis by the Congressional Research Service. Once the federal backstop kicks in, insurers would still be required to cover 20% of all claims. The other 80% would be covered by the federal government and paid back over time.
AM Best this year has compiled an internal list of rated insurers with terrorism exposure and asked some with certain exposures or Terrorism Risk Insurance Program Reauthorization Act reliance to present detailed contingency plans on how they will mitigate their exposure if the program lapses.
AM Best Senior Financial Analyst Edward Zonenberg, told AM BestTV on Oct. 16 he was impressed by the professionalism and prudent risk management that most of the companies treated this potential exposure. Two basic themes emerged, he said.
“One was sharing the risk through reinsurance, either through facultative reinsurance on individual risks, or increased excess-of-loss reinsurance, or increased catastrophic reinsurance,” Zonenberg said. “The second strategy that was employed was to not cover the terrorism peril.”
“Due to the prudent actions outlined in each company’s mitigation strategy, we do not see an explicit rating action based on the expiration of TRIPRA,” Zonenberg said.
“However, having said that, it is dependent on the successful execution of these mitigation plans,” Zonenberg said. “We reviewed each company’s mitigation plans, and in many instances asked for more details.”
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)