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Best’s News & Research Service - September 10, 2021 07:59 AM (EDT)

Best’s Special Report: Decades After Sept. 11, Federal Terrorism Backstop Still Providing Stability to U.S. Insurance Market

  • September 10, 2021 07:59 AM (EDT)

Oldwick //BestWire// - The federal insurance backstop created in the aftermath of the Sept. 11 attacks continues to be successful in its goal of stabilizing the U.S. insurance market; although, according to a new AM Best report, some questions remain given evolving economic and market conditions and the absence of a true test.

The Best’s Special Report, “TRIA Has Generally Been Credit-Positive for Insurers,” notes that the terrorist attacks on Sept. 11 changed the world’s perception of risk. The insurance industry paid claims amounting to more than $30 billion in 2001 dollars to individuals and businesses affected by the attacks. Given the severity of the event, as well as uncertainty about evolving losses and future attacks, severe shortages in the availability of terrorism insurance occurred at a time when it was much desired. After the Terrorism Risk Insurance Program (TRIP) was implemented in 2002, reinsurers returned to the marketplace. Primary insurers began paying more attention to their aggregate exposures to a catastrophic event, previously considered just for property lines. Workers’ compensation catastrophe treaties became common, covering not just terrorism but earthquakes as well.

Under TRIP, the federal government acts as an excess reinsurer to primary insurers for terrorism. However, like any insurance product, its test will come in the event of a claim. Other questions remain as well, including whether the $100 billion cap is suitable given inflation and real GDP growth or if the treatment of cyber threats are appropriate as attacks widen and become more complex. The gap between an insurer’s deductible and the program trigger for federal assistance presents also creates potential issues for small insurers. “The expansion of TRIP to include domestic terrorism may leave small insurers, which write a larger share of their premium in TRIP-eligible lines, with a greater proportion of exposure to terroristic acts,” said Christopher Graham, senior industry analyst, industry research and analytics, AM Best.

Before Sept. 11, a single event never had affected so many different lines of business and coverages. In the years following the attacks, AM Best created a criteria that focused on the treatment of terrorism exposure in the rating process. The criteria also is concerned with the lack of the program’s permanency, and uses a stress test to analyze the impact of terrorism-related losses on an insurer’s balance sheet strength. The importance of the stress test increases each time the expiration of TRIP approaches; the current program expires in 2027. The hard market that followed the attacks, as well as the insurers and reinsurers that emerged, known as the Class of 2001, also led to the of publications of AM Best’s “Rating New Company Formations” criteria.

“Sept. 11 was a wake-up call to insurers that they needed to capture more than just a billing location or the total insured value of a policyholder’s buildings,” said Sridhar Manyem, director, industry research and analytics, AM Best. “Instead, insurers needed to capture the aggregation of exposures across all lines of business at each location for which they provided coverage.”

To access the full copy of this special report, please visit .

A video discussion with Graham and Tom Mount, senior director, AM Best, is available at .

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.

Press Release September 11 United States A.M. Best Rating Services, Inc. Terrorism Insurance

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