13 May 2019Analysis

Captives could face rating downgrades amid TRIPRA uncertainty

The Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is due to expire on December 31, 2020, but further extensions are uncertain, raising the potential for property/casualty insurers - and by extension captives - to face rating downgrades due to over-reliance on the programme, according to AM Best.

AM Best suggested the "hyper-partisan atmosphere pervading Washington" and difficulty of bringing legislative proposal to a vote has created further uncertainty as to whether the programme will be extended.

In terms of ratings, AM Best said that insurers that have substantial terrorism exposure may rely on TRIPRA to stay within their stated risk tolerances. While a federal backstop can help with liquidiy and reduce the financial impact of a terrorist event, AM Best said that "over-reliance on such a mechanism isn't a substitute for sound risk management."

JPMorgan Chase's single-parent captive,  Park Assurance Company, is one such example of a captive using TRIPRA that could face negative ration action in the event of non-renewal of the programme.

While Park Assurance Company is well-capitalised and boast a financial strength of A (Excellent), AM Best said the captive is reliant on the protection afforded by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA). While the TRIPRA programme offers significant protection from terrorism losses, the net impact on Park could still be burdensome.

AM Best suggested negative rating action could occur in the event of the non-renewal of TRIPRA, although it is mitigated as Park has the ability to terminate all terrorism-related contracts if the Act is not renewed.

According to Marsh’s 2018 Terrorism Risk Insurance report, the number of Marsh-managed captives underwriting one or more insurance programmes that access TRIPRA increased 44 percent from 115 to 166 captives in 2017.

Beginning mid-year 2019, AM Best will compile a list of rated insurance companies with exposure to terrorism.

Insurers with material terrorism exposure in addition to a significant reliance on TRIPRA will then be asked to present detailed plans on how they will mitigate this exposure in the event that TRIPRA is not renewed.

While there are alternatives to TRIPRA in the form of private terrorism reinsurance, AM Best said its future availability and affordability creates rating concerns if the backstop is eliminated or changes significantly.

“Insurers that currently would be materially affected by the absence of TRIPRA, and that cannot provide a sufficient action plan to reduce exposures to terrorism risks, likely will face negative rating pressure by year-end 2019,” said AM Best.