80% of North American insurance CFOs report U.S. TRIA renewal important to their firms

More than two-thirds of property and casualty insurance chief financial officers surveyed said that if the United States Terrorism Risk and Insurance Act (TRIA) expires Dec. 31, it will have a “minor or no impact” on their organizations, Towers Watson reported recently.

In the same survey, about six in seven respondents said preparing for their Own Risk and Solvency Assessment (ORSA) is important, but only one in four “will invest in internal risk management and capital utilization capabilities” in the next one to two years, Towers Watson said. The survey included 35 chief financial officers from North American P&C insurance firms.

“This survey was open to respondents from May 13 through June 10, 2014,” a Towers Watson spokesperson wrote in an e-mail to Canadian Underwriter. “In this survey, 35 (39%) of our 89 registered program members (CFOs of North American P&C insurers) participated. A survey sample of 35 on a population of 89 is accurate within +/-12.93% at the 95% confidence level, and within +/-10.82% at the 90% confidence level.”

Eleven per cent of respondents said “their own companies would utilize capital” for mergers and acquisitions, while 20% would use capital for business expansion, Towers Watson stated in an Oct. 7 release.

“Respondents said their companies were far more likely to deploy capital for internal investments such as core data systems and infrastructure (49%), data and analytics (40%), new product development (31%), and building talent and skills within the organization (31%).”

Four in five respondents identified TRIA “as important to their companies,” while 86% identified ORSA as important, Towers Watson reported.

TRIA — which will expire Dec. 31, 2014 unless a bill extending it is signed into law — essentially requires American insurers to offer terrorism coverage to commercial policyholders and for the U.S. government cover losses under certain circumstances. Risk and Insurance Management Society (RIMS) Inc. has warned that any company with “facilities, employees or components of their supply chain” in the U.S. would be affected if TRIA expires.

Last July, the Senate passed a bill proposing to extend TRIA through Dec. 31, 2021. A different bill proposing to extend TRIA through 2019 — and to reduce the federal share of insurers’ losses — was approved June 20 by the House of Representatives’ Committee on Financial Services. That bill had yet to be put to the full House for a vote as of Sept. 30, when the House of Representatives adjourned. All House of Representatives seats — and 33 of 100 Senate seats — are up for election Nov. 4. The new U.S. Congress is scheduled to re-convene Nov. 11.

“In relation to TRIA, over 70% of respondents believe nonrenewal or material reduction to the act would have a minor or no impact on their organization, and none expect a severe impact,” Towers Watson stated in its release.

Currently, in order to trigger TRIA coverage, an attack would have to result in aggregate losses, to the industry, of more than US$100 million, RIMS said in a paper released in 2013. The deductible, to private insurers, is 20% of their annual direct earned premiums from commercial p&c lines. Once that deductible is exceeded, the federal government covers 85% of the insurer’s loss above the deductible, until the total losses are US$100 billion.

The market for terrorism coverage is “currently tightening given uncertainty” over TRIA renewal, the Insurance Information Institute warned in September.

The results of Towers Watson’s survey indicates insurance company CFOs “are paying close attention to the federal government’s progress on reauthorization, but they don’t see the existence of the federal backstop as vital to their business objectives,” stated Alejandra Nolibos, director in Towers Watson’s P&C business, in the firm’s Oct. 7 release announcing the CFO survey results. “This may reflect an industry on its way to implementing risk management practices through which some extreme risks are seen as manageable.”

With regard to OSRA, 26% of CFO respondents “indicated their companies will invest in internal risk management and capital utilization capabilities in the next one to two years,” Towers Watson stated.

“This relatively low ranking is somewhat surprising,” Nolibos stated. “Effective risk management is inextricably linked to informed capital utilization decisions and a strong ORSA process.”

In the U.S., an ORSA “will require insurance companies to issue their own assessment of their current and future risk through an internal risk self-assessment process and it will allow regulators to form an enhanced view of an insurer’s ability to withstand financial stress,” states the U.S. National Association of Insurance Commissioners on its website.

In Canada, the Office of the Superintendent of Financial Institutions (OSFI) has published two guidelines that took effect Jan. 1, 2014.

Guideline E-19, the ORSA of federally regulated insurers, stipulates that insurers “should identify, define and assess the materiality of all known, reasonably foreseeable, emerging and other relevant risks that may have an impact on an insurer’s ability to continue operations, in both normal and stressed situations.”

It also requires insurers to set internal targets based on their own capital needs. OSFI’s other ORSA guideline, A-4, is on regulatory capital and internal capital targets.