John Talley, TAL Consulting
The 2002 Terrorism Risk Insurance Act created a federal backstop for insurance claims related to acts of terrorism and a system of shared public and private compensation for insured losses resulting from acts of terrorism. Its possible expiry now threatens the availability of terrorism coverage, says John Talley of the Missouri Department of Insurance.
When it was first signed into law, the Terrorism Risk Insurance Act (TRIA) was set to expire December 31, 2005. It was repeatedly extended, first for two years to December 31, 2007, and then until December 31, 2014. On January 12, 2015, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2015, extended TRIA to December 31, 2020.
“The quick and early action on TRIPRA 2019 and bill 2877 has eased some of the tension in the insurance industry and marketplace.”As TRIPRA is set to expire next year, the reauthorisation of the programme is still unclear, leaving many in the insurance industry concerned about the potential fallout from its expiry. The concern is widespread across the industry, affecting all product lines, including property, business interruption, liability and workers’ compensation, where terrorism insurance is mandated regardless of whether the TRIPRA backstop is available.
US commercial insurers consider the government backstop an important component of their risk management. They are pushing for the extension of the programme, hoping to fend off a gap in the programme like the one that occurred in 2015, when their policyholders scrambled for alternative coverage.
Many producers reported being “flooded” with requests for terrorism policies that were not tied to the federal programme. Standalone terrorism coverage (policies not backed by the programme) tend to be costlier, especially in high-risk areas such as major metropolitan cities.
As the available supply of standalone coverage is diminished, others who may need this type of coverage at the last minute may be unable to obtain it. With all of this in mind, many brokers and producers are advocating for a reauthorisation of TRIPRA to help keep the terrorism insurance market viable for US insureds.
Should TRIPRA expire without an extension or replacement, workers’ compensation programmes throughout the US will experience the most significant pressure from insurers. If the past is any indication, commercial insurers will be less willing to underwrite the risks of employers in some high-profile industries, such as those with large employee concentrations or those in some major cities.
The carriers that are willing to continue writing workers’ compensation will most likely increase rates and premiums. Some carriers will move out of the market altogether, reducing the options available to buyers—in some areas, drastically. In most states, workers’ compensation coverage is required by law and there are no limits to losses, creating a potentially catastrophic situation.
Captive insurance companies can participate in TRIPRA in the same way as commercial insurers, but their participation is optional. A 2018 US Treasury report found that captives offer standalone terrorism coverage at a higher rate than commercial insurers, and that captives purchase a substantial amount of reinsurance to cover a certified act of terrorism under the TRIPRA.
The availability of reinsurance is an important issue. Should TRIPRA expire, regulators and rating agencies may require exposed insurers with less than $300 million in surplus (most, if not all, captive insurers) to purchase additional reinsurance from the private reinsurance market to protect capital. The additional strain on the reinsurance market will assuredly affect market pricing and capacity.
On October 11, 2019, the House Financial Services Committee (HFSC) chair, Rep Maxine Waters, introduced House Bill 4634 to reauthorise TRIPRA. The bill had 86 co-sponsors that crossed party lines. HFSC held a hearing on October 16, 2019 in which the insurance industry and insurance regulators gave their unanimous support for passage of the bill. The following people spoke in support of the bill.
Dawn Dinkins, chief operating officer for reinsurance at AXA XL, said: “The Reinsurance Association of America supports the TRIPRA of 2019 which would reauthorise TRIP for 10 years with no changes. In particular, we urge Congress to reauthorise TRIP before the end of the year, to avoid uncertainty with respect to insurance and reinsurance contracts that will begin to renew starting on January 1, 2020.”
Chlora Lindley-Myers, director of the Missouri Department of Commerce and Insurance, speaking on behalf of the National Association of Insurance Commissioners (NAIC) and state insurance regulators, said: “State insurance regulators strongly urge Congressional action to extend TRIA to avoid market disruptions likely to occur in the absence of a federal backstop programme.”
Joe Carter, acting president and CEO of United Educators RRG, speaking on behalf of the American Property Casualty Insurance Association, said: “Knowing that a programme like TRIA is in place to support a speedy economic recovery following a catastrophic terrorist attack is crucial to United Educators and other commercial property-casualty insurance companies.
“For this reason, APCIA and United Educators strongly support TRIPRA, which will reauthorise TRIA for 10 years with no changes.”
John Doyle, president and CEO of Marsh, said: “A federal backstop remains essential to the availability and affordability of terrorism coverage in higher-risk areas, including here in Washington, in New York and in hundreds of other communities across the country with universities and colleges, large shopping malls, hospitals and sports arenas.”
Doyle added: “As an alternative, businesses can consider standalone property terrorism insurance. But while it can complement TRIPRA coverage, offering broader coverage—for example, for noncertified acts of terrorism—its pricing, along with the constraint of limited available aggregate for certain risks, prevents it from serving as a replacement for TRIPRA for many organisations.”
On October 31, 2019, the US HFSC voted to pass TRIPRA. Subsequently, on November 19, 2019, the US House of Representatives voted 385–22 to pass the bill and send it to the US Senate. The bill will extend the terrorism legislation to 2027. It also tweaks the existing statue to add a provision for study on relevant cyber terrorism exposure and includes language for evaluating the availability and affordability of terrorism risk insurance, specifically for houses of worship.
The US Senate has created its own bill to extend TRIA. On November 14, 2019, Senator Thom Tillis (Rep) sponsored and introduced Senate Bill 2877, that would reauthorise the TRIA. The bill had 15 bipartisan co-sponsors. As of November 20, 2019, the US Senate Banking Committee passed the bill.
The quick and early action on TRIPRA 2019 and bill 2877 has eased some of the tension in the insurance industry and marketplace. However, several steps must still be overcome before TRIA is extended.
Missouri has several licensed captive insurance companies that offer their insureds terrorism coverage. Whatever the outcome, the Missouri captive domicile is ready to aid the captive insurance industry in covering this potentially catastrophic risk.
John Talley is captive programme manager at the Missouri Department of Insurance. He can be contacted at: email@example.com
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