With no indications whether Congress will decide the future of the Terrorism Risk Insurance Program Reauthorization Act (TRIA), A.M. Best is urging insurers to be prepared to take into account the added exposure that would be added to policies beginning in 2014 if TRIA is not renewed.

Specifically, insurers that rely on the federal backstop are advised to make “detailed plans to be implemented in the event TRIA is not renewed or its protection is materially reduced,” according to the firm’s report, “As Expiration of TRIPRA Approaches, Rating Pressure Increases.”

“A federal backstop helps reduce the impact terrorism has on an organization’s risk-adjusted capitalization, but overreliance on such a mechanism is not a substitute for sound risk management,” the report added.

As per A.M. Best’s treatment of terrorism risk in the rating process, it uses a stress test to assess the impact of a particular terrorism attack on an insurer’s balance sheet. This year, A.M. Best determined that 226 property/casualty rating units, out of a total of 889, have material terrorism exposure and loss estimates. Of this population, 34 rating units (3.8 percent of the total) failed the stress test and were determined to be over-reliant on TRIA.

By early December, if TRIA is not renewed or if its protection is reduced, each rating unit that failed the stress test will be brought before a rating committee to present an action plan. If the plan is found insufficient, a rating downgrade will likely follow.

The entire population of 226 rating units spanned 10 different composites. However the rating units that failed the stress test were concentrated in the workers’ compensation and commercial casualty composite. In addition, most of the modeled losses relating to the commercial casualty composite members consisted of workers’ comp exposures as opposed to property exposures. This is of particular importance as terrorism protection is mandatory for most workers’ comp products, which leaves rating units with large workers’ comp terrorism risks even less options when contemplating how to reduce this exposure, A.M. Best said.

Regardless of reauthorization, given TRIA’s temporary nature, A.M. Best advises insurers to invest in or maintain advanced modeling capabilities, saying, “Data quality is of utmost importance when assessing the true exposure of an insured risk. Characteristics such as construction type, number of employees, number of building locations and ensuring an accurate address are just some characteristics that can have a drastic effect on the modeled results.”

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