U.S. commercial terrorism insurers will ‘likely be required to maintain higher capital standards’

With 12 days to go before the United States Terrorism Risk and Insurance Act (TRIA) expires, a risk modeling vendor predicts that commercial insurers who continue to cover terrorism in the U.S. after Dec. 31 will “likely be required to maintain higher capital standards,” while a commercial broker is warning there is “limited capacity” in the market for stand-alone commercial terrorism coverage.

Any company with “facilities, employees or components of their supply chain” in the U.S. is affected if TRIA is not renewed after Dec. 31, Risk and Insurance Management Society (RIMS) Inc. noted earlier this year.

TRIA, initially passed in 2002, essentially requires insurers to include terrorism coverage in commercial policies in the U.S., with the federal government sharing losses under certain circumstances.

The U.S. Senate and House of Representatives have yet to approve the same version of a bill proposing to extend TRIA past Dec 31. The Senate – which is adjourned until Jan. 6 – did pass the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) July 17.

But TRIPRA was not put to a vote in the House until Dec. 10, and the House voted to amend the bill. Before being sent to the president (who has the power to either sign a bill into law or to veto it), the same version of a bill has to be approved by both houses of Congress. The Senate adjourned Dec. 16 before the House’s amended version of TRIPRA was put before the Senate for a vote.

“Without a renewal, TRIA is set to expire on December 31,” stated Boston-based AIR Worldwide, a unit of Verisk Analytics Inc. that provides risk modeling software, in a press release Thursday.

In a client advisory Wednesday, commercial brokerage Willis Group Inc. said there is a concern for U.S. commercial clients with loan covenants requiring terrorism insurance coverage.

“There does remain a vibrant stand-alone terrorism solution which can be explored once clients have evaluated their needs,” London-based Willis stated. “The situation remains fluid and we will be updating advisories when we receive more clarity from the insurance carriers.”

Then on Thursday, commercial brokerage Marsh Inc. suggested that one option for its clients is to look to the stand-alone terrorism market for stop-gap coverage.

“The standalone market has large but limited capacity,” warned New York City-based Marsh in a statement. “They will not be able to fill all requests.”

Inflation-adjusted insured losses resulting from the Sept. 11, 2001 attacks were about US$42.9 billion, Representative Gregory W. Meeks of New York City said during a Dec. 10 session of Congress. After those attacks,  “terrorism risk insurance quickly became either unavailable or very, very expensive and unaffordable,” Meeks added at the time.

Another legislator representing New York City – Nydia Velazquez – told Congress Dec. 10 that under TRIA, “terrorism coverage averages just 3 to 5% of a small business’ annual insurance premium.”

Terrorism rates will decline or remain flat in 2015, but only if TRIA gets extended, Willis predicted in October in its Marketplace Realities report.

For its part, Marsh suggested Thursday its clients could approach insurers “to see if they will not invoke sunset clauses or conditional terrorism exclusions, and provide stop-gap coverage until either Congress renews TRIPRA or the policy expires.”

Carriers continuing to offer commercial terrorism coverage after Dec. 31 “would likely be required to maintain higher capital standards in order to avoid negative rating implications,” AIR Worldwide stated in a release Thursday. “Where coverage for terrorism-related events is still available, prices for this coverage will increase.”

AIR added that the construction and real estate business sectors “may be unable to obtain financing without adequate terrorism coverage in place.”

That warning came a week after an Illinois congressman, Randy Hultgren, told the House of Representatives that insurers in his state “may be subject to costly rating downgrades or have to exit certain insurance markets altogether” if TRIA is not extended.

The expiry of TRIA “has implications for insureds with TRIPRA terrorism coverage in most any line, with particular concerns for property, primary and excess liability, workers’ compensation, and captive programs,” Marsh warned Dec. 18.

In order to qualify for federal coverage under TRIA, an incident would have to be certified as a terrorist attack by three Cabinet members: The Secretary of State, Attorney General and Secretary of the Treasury, RIMS noted in a report in 2013, titled Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective. Another condition for the federal government to share losses is that attack would have to result in aggregate losses to the insurance industry of more than $100 million.

That “program trigger” will rise to $200 million if TRIPRA is passed into law. A different bill tabled in the House of Representatives – TRIA Reform Act of 2014, HR.4871 – proposed to increase that trigger to $500 million. That bill was never put to the full House for a vote.

Currently under TRIA, there is a deductible, to the private insurers, of 20% of their annual direct earned premiums from commercial P&C lines, RIMS noted in 2013. Once that deductible is exceeded, the federal government covers 85% of the insurer’s loss above the deductible, until the total losses are $100 billion.

TRIPRA proposes to reduce the federal backstop to 80% of an insurer’s loss above the deductible.

“It also provides important transparency on data collection that will in the future let us know how much money insurance companies are billing for terrorism coverage and what the potential exposure is for terrorism losses,” said Representative Steve Stivers, of the 15th District of Ohio, during debate on TRIPRA Dec. 10.