The private insurance market is not in a position to fill the gap that would be created if Congress fails to renew the federal terrorism risk insurance program, concludes a new report to Congress by the government’s financial regulators.
If Congress does not renew the Terrorism Risk Insurance Act (TRIA), thereby ending the federal government’s financial backstop for private insurers offering terrorism risk coverage, the market for terrorism risk insurance would likely shrink and perhaps disappear, according to the report by the President’s Working Group on Financial Markets (PWG). (See complete report below.)
“Challenges continue to exist regarding the ability of the private market to provide terrorism risk insurance without a federal backstop, particularly with respect to the ability of insurers to model the frequency and severity of losses that could arise from acts of terrorism. Also, reinsurers and the capital markets appear reluctant to provide further support to the terrorism risk insurance market,” the PWG says.
Absent TRIA, terrorism risk insurance, particularly for high-value exposures, could become a smaller, specialty market if such coverage remains available at all, according to the report.
According to the report, private market per-risk capacity for terrorism risk insurance coverage has increased only moderately since 2010.
“Policyholders who wish to obtain terrorism risk insurance evidently are able to do so, although some in higher risk industries and some in key urban locations pay relatively high prices,” the report says.
The report also cites a statement made by broker Marsh in January that uncertainty around the future of TRIA is leading to less availability of workers’ compensation capacity and rate increases for risks in major urban areas.
The report echoes what the insurance, risk management, banking and commercial real estate industries have been saying about the need for TRIA, while downplaying the arguments forwarded by the Cato Institute, Heritage Foundation and some consumer and taxpayer groups that argue that the program inhibits the expansion of the private insurance market and should be non-renewed or scaled back.
The PWG findings also parallel those of a Fitch Ratings report last August that concluded that if Congress fails to renew or makes significant changes to TRIA, some insurers will be forced to significantly alter their underwriting portfolios to reduce terrorism exposures.
While it backs reauthorization of TRIA, the PWG report also suggests that Congress may want to tweak TRIA in order to increase the share of risk assumed by the insurance industry — a move insurers do not favor.
The PWG report’s findings are also in keeping with the conclusions reached by a bipartisan group of senators who last week introduced a bill that includes a seven-year reauthorization of the law and raises the share of losses private insurers would have to pay. The Senate bill retains the current insurer deductible at 20 percent but increases insurers’ co-share on losses above $100 million from 15 to 20 percent.
The President’s Working Group on Financial Markets is required to report to Congress on the long-term availability and affordability of insurance for terrorism risk. The PWG is composed of representatives from the Treasury, the Federal Reserve System, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.
Congress initially passed TRIA in 2002 in the wake of the Sept. 11 terrorist attacks in order to protect the commercial insurance market. The law requires U.S. insurers to make terrorism risk insurance available and provides a federal government backstop for the insurers’ financial exposure. Congress is currently considering whether to renew the program, which is slated to expire at the end of the year.
At the same time that the PWG report supports reauthorization, it says that gradual increases in the industry’s share “appear unlikely to cause significant market disruptions” as long as some level of a federal government backstop is maintained.
It says that increasing the industry’s share of the exposure to terrorism risks in past years “has not significantly adversely” affected price or availability. Lawmakers have reduced the government’s potential liability with each reauthorization since 2002.
Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA), said the PWG report “confirms that the private market alone does not have the capacity to provide the levels of terrorism risk coverage currently produced under TRIA.”
However, both the AIA and the Property Casualty Insurers Association of America’s (PCI) disagreed with the PWG on the effect of increasing the industry’s retentions.
“As the uncertainty as to whether TRIA will be renewed grows, the market continues to tighten,” said Robert Gordon, PCI senior vice president, policy development and research. “However, it is important to note that increasing the industry share through the co-share, deductible, or trigger will affect the availability and affordability of terrorism insurance for consumers.”
The government has not yet paid out any funds under the TRIA.
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