The (re)insurance sector does not have the capital necessary to withstand high-loss scenarios that involve nuclear, biological, chemical or radiological weapons, according to a report from Guy Carpenter & Co. LLC, a global risk and reinsurance specialist. And recent legislation to reauthorize the Terrorism Risk Insurance Act has garnered support from insurance industry groups.
The proposed legislation raises the program trigger for terrorist attacks other than nuclear, chemical, biological and radiological to $500 million from $100 million by 2019, which insulates taxpayers from program activation, according to Rep. Randy Neugebauer (R-Texas), chairman of the Insurance and Housing Subcommittee, who introduced the bill.
“Over the past decade, the terrorism risk insurance marketplace has modernized and advanced,” Neugebauer said. “Now is the time for Congress to take off the training wheels and transition to a terrorism risk insurance market that is less dependent on a taxpayer-funded backstop.”
The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) would decrease the federal share of insurers’ losses to 80 percent from 85 percent; alter taxpayer repayment requirements; extend the program for five years and make no programmatic changes for the first year, giving the market time to adjust; clarify and streamline the terrorism certification process, to better protect policyholders and maintain TRIA’s current activation and co pay thresholds for less predictable, catastrophic NBCR events throughout the length of the reauthorization.
“Despite a significant increase in the number of global terrorist attacks and fatalities over the past five years, evolving capacity and the absence of a major terrorism loss for reinsurers have resulted in a softening of the terrorism reinsurance market in some countries and regions,” said Aaron Bueler, managing director and leader of Guy Carpenter's workers compensation practice and terrorism task force. “In the U.S., the renewal of TRIPRA will play a significant role in determining how much affordable capacity will be available for businesses who buy terrorism insurance coverages.”
The National Association of Mutual Insurance Companies (NAMIC) has supported the proposed legislation. “With just months until the TRIA program expires, any sign of progress is a welcome one,” said Jimi Grande, SVP of federal and political affairs. “The TRIA program is vital to protecting our economy from the threat of terrorism and to fostering growth during this slow economic recovery.”
The American Insurance Association (AIA) also supports the bill. “We do however remain concerned with certain provisions of the bill that could lead to decreased market capacity,” said Leigh Ann Pusey, AIA president and CEO. “Most notably, the creation of a bifurcated approach for nuclear, biological, radiological and chemical attacks vs. conventional attacks falsely assumes that the insurance market operates based on the same distinctions. Differentiation based on the type of event introduces needless complexity, creating potentially adverse consequences under the program and insurance market capacity. We are also concerned about the steep increase in the program trigger and co-share, which could also lead to a reduction in capacity.”
Nat Wienecke, SVP, federal government relations at the Property Casualty Insurers Association of America (PCI) also came out in support of the bill. “PCI is particularly thankful that the legislation provides for a reasonable reauthorization duration, continues protection for domestic as well as foreign terrorist attacks, maintains the 20 percent insurer deductible, and incorporates very important technical corrections to the terrorism certification process,” said “And, PCI appreciates that thresholds for nuclear, radiological, biological, chemical remain unchanged in the Committee’s legislation, which is especially important for workers compensation carriers.”
The absence of a major terrorism loss for reinsurers has resulted lower coverage costs for areas with less perceived risk, Guy Carpenter said. “This reflects the wider reinsurance market’s environment of having adequate capacity and, for some countries, the presence and support of stable terrorism pools that are designed to mitigate the withdrawal of (re)insurance capacity following significant terrorism events. Reinsurance buyers that have purchased terror cover in these countries have consequently benefited from rate decreases and improved terms and conditions in some instances, depending on where and what they write,” Guy Carpenter said. “The U.S. market, however, continues to be challenged by the uncertainty over the potential expiration of TRIPRA on Dec. 31, 2014. Either substantial modification or non-renewal of TRIPRA has the potential to impact terrorism coverage in the United States.”
Uncertainty over TRIPRA's future has been evident this year as several workers’ compensation renewals with sizeable employee concentrations in large U.S. cities changed carriers and, in some cases, moved into the various residual market mechanisms, according to the Guy Carpenter.
“We are encouraged by the recent legislative activity addressing the expiration of TRIPRA and hope for continued progress and a final bill in the near future,” Bueler said. “The planning process for the January 1, 2015 (re)insurance season will start soon and the certainty of a TRIPRA renewal will be a key factor.”
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