Risk models show industry burden under TRIA

The extension of the federal Terrorism Risk Insurance Act represents solvency protection in extreme events but is not an industry subsidy, according to risk modeling experts at Risk Management Solutions and AIR Worldwide Corp.

While it is impossible to predict how much insured damage terrorists would cause in any specific year, the average annual loss retained by the industry under the new federal program should eclipse 90 percent any terrorism loss. There is a 10 percent chance of damages reaching deductibles if an attack occurs.

Industry estimates of losses from the Sept. 11, 2001 attack range from $30 billion to $40 billion, including about $20 billion in losses in New York City that would have qualified for coverage under TRIA had the law been in effect on that date.

Deductibles are rising from 17.5 percent to 20 percent of direct earned premium through the 2007 extension. At the same time, the government quota share on losses above retention is estimated to shrink from 90 percent to 85 percent.

At the end of 2007, companies could face bearing the risk with no government backstop. “The law amends the TRIA statute and includes higher insurer retention levels for 2006 and 2007,” noted Jack Seaquist, senior manager at AIR. “However, while insurer retention will grow incrementally over the next two years, the program’s expiration at the end of 2007 will result in a dramatic increase in insurers’ loss retention in 2008, assuming no further government or industry solution is forthcoming.”

AIR illustrated the legislation’s impact by modeling three scenarios based on the portfolio of a typical medium-sized, multi-line property and casualty company. The sample company has a high concentration of exposures in major cities and $2 billion in total annual premiums.

A delivery truck bomb is detonated in a major U.S. city in the first scenario. The damage results in almost $12 billion in losses to the industry. The representative company would retain 100 percent of its $230 million total losses, since the deductible would not be reached in any year.

The second scenario suggests the detonation of a large truck bomb in a major U.S. city. This scenario results in a $40 billion loss for the industry. The representative company would retain $345 million of its $760 million total loss in 2006, more than $400 million in 2007, and all $760 million after the expiration of TRIA.

Finally, the third illustration is a chemical attack in a major U.S. city resulting in an $85 billion insured loss. The insurer would retain $407 million of its $1.4 billion total loss in 2006, nearly $500 million in 2007, and the full $1.4 billion after the expiration.

Risk at home and broad
The rise in deductibles and shrinking of government’s role are coming at a time when the risk may be less at home but not abroad. “Near-term terrorism risk in the U.S. has decreased since the initial TRIA bill, mainly due to homeland counter-terrorism measures, but the Jihadist threat continues to rise worldwide,” said Dr. Andrew Coburn, director of terrorism research at RMS.

RMS believes macro-attacks within the U.S. will remain a threat for many years with the possibility of a larger scale attacks increasing over time.

Topics USA Profit Loss Risk Management