Discussion of the Terrorism Risk Insurance Act today on Capitol Hill in Washington, D.C., ranged from the capital position of the reinsurance market, the ability to model terrorism risks, whether smaller and mid-sized insurers would suffer disproportionately from a lack of renewal and whether the trigger for the federal backstop should be increased.
In the end, all five panel members that gave testimonies and were subsequently questioned by several members of Congress today were in favor of Terrorism Risk Insurance Act (TRIA) reauthorization in a hearing called by the Committee on Financial Services subcommittee on Housing and Insurance, called “The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer Exposure.”
Questions and doubts about its current state persisted, however.
Ernest Csiszar, former director of insurance in South Carolina and former president of the NAIC, was most open to such changes being made in the case of a renewal: “While I’m in favor of renewing TRIA for an extended period of time, I also think we can take steps to make it more market-friendly.
“First, I suggest we take a look at that $100 million trigger I think it can be set much higher than it is,” Csiszar said. “I would caution that there are still some modeling problems with this, I would caution that here are still problems with the data, but I would take a close look at that trigger.”
When asked directly what he could recommend as a new trigger, Csiszar pointed to industry loss warranty triggers of $10, $15, $20 billion, of which $20 is the most popular, saying that somewhere in that range would be effective.
He was also the first to suggest the government charging for TRIA in a way that’s comparable to the National Flood Insurance Program, in an attempt to pool funds, effectively setting aside billions for potential terrorism losses.
The five members of the panel were Csiszar; Sean McGovern, director, risk management and general counsel, Lloyd’s of London; Kean Driscoll, CEO, Validus Reinsurance; John Seo, co-founder and managing principal, Fermat Capital Management; and Robert Hartwig, president and economist with the Insurance Information Institute.
Driscoll also displayed some reservations with the program, agreeing with U.S. Representative Randy Neugebauer (R-TX), the chairman of the committee in saying that the private reinsurance sector has never been more prepared to take on more risk. However, he also noted exceptions, such as nuclear, biological or chemical terrorism attacks, that do require a federal backstop, even if the responsibility for more conventional acts of terrorism falls more on the shoulders of reinsurers.
While the chairman went on to suggest that the backstop served as corporate welfare, Driscoll would not go that far, but did say that “there’s something unnatural about it, because you’re trying to transfer risk for free.”
Hartwig countered by emphasizing the unique nature of terrorism risk, saying that the most risk should lie with the body that has the most information about the risk, which in this case, is the federal government.
Indeed, while McGovern said Lloyd’s was in favor of a long-term extension and that any changes should be installed incrementally and over time, Hartwig was easily the biggest proponent of a long-term extension of TRIA as it stands, going so far as to say that the program has “no major structural defects”; however, he did acknowledge later that the mechanism for defining an event and certifying it as an act of terror should be tightened in light of confusion following the Boston Marathon bombing earlier this year. His major concern, if the program was changed or allowed to lapse, was that “smaller insurers would be disproportionately impacted by changes to TRIA.”
Although Driscoll and Csiszar attempted to respond to this concern, with Driscoll saying reinsurers such as Validus would be more willing to support smaller members if changes are made and Csiszar pointing out that reinsurance prices actually tend to drop when risk appears to increase, as more policies are purchased and the market is infused with additional capital.
For more on A.M. Best’s stress testing related to the potential expiration of TRIA, click here, and for an interview with Howard Mills discussing the uphill climb the industry has in pursuing reauthorization, click here.
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