If Congress acts to extend the federal government backstop for terrorism insurance, the new version will likely impose higher deductibles and risk retentions on U.S. property/casualty insurers, says Moody’s Investors Service in a new report.
In its report, “Debate on Terrorism Risk Insurance Program Ongoing; P&C Insurers to Bear More Risk,” the rating agency says changes to the Terrorism Risk Insurance Act (TRIA), could have market consequences.
The government program requires and, according to Moody’s, has enabled U.S. insurers to offer terrorism coverage. TRIA is set to expire at the end of 2014,
Although the Senate and House are still considering differing proposals, Moody’s says it expects the program to be extended with a finite term, as it was in the past two amendments since its initial 2002 passage.
“The stakes for U.S. P&C insurers and their insureds are high,” said Alan Murray, a Moody’s senior vice president and author of the report. “Non-renewal of this program, or a significant reduction of the federal backstop, could result in insurance market dislocations, as insurers find themselves with sharply higher risk exposures. Coverage would become less widely available, more costly, and perhaps even unavailable for some high-profile risks in certain large urban markets.”
Moody’s says any extension will likely continue the past renewal trend of shifting increased financial responsibility to insurers, however, resulting in higher deductibles and/or retentions for insurance companies. Additionally, loss triggers, which determine the amount of losses to activate the federal insurance backstop, may be increased.
Program deductibles remain a risk to insurer capital, currently at 20 percdent of direct premiums earned, says the rating agency. Although some U.S. insurance groups could seek capital support from their domestic or international parents in the event of a major terrorism loss, it is unclear to what extent smaller, less diversified industry participants would be able to recapitalize, says Moody’s.
Finally, to hedge against exposures that would cease to be back-stopped if the program is not renewed, many insurers have included measures such as sunset clauses or short-term policies in their 2014 terms and conditions, according to Moody’s. However, in the absence of a federal backstop, workers’ compensation policies remain problematic, because coverage exclusions or carve-outs are generally not permitted by law, the report says.