A.M. Best conducting stress tests on insurers after U.S. terrorism insurance act passes

A.M. Best will continue to conduct stress tests on insurers to evaluate the effect terrorism exposures will have on balance sheets, the rating agency reiterated following last week’s Congressional action to reauthorize the Terrorism Risk Insurance Act.

The Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) was introduced in the House Jan. 6 – virtually identical to last year’s amended S. 2244 – was passed Jan. 7 and was passed in the Senate Jan. 8.

“The vote now sends the measure to President Obama, who is expected to sign it into law,” A.M. Best reports in a statement Friday.

The reauthorization extends the federal backstop for an additional six years, but the law does not address a permanent risk-sharing solution between the private sector and the federal government for insuring terrorism risks, A.M. Best notes.

Citing its Best’s Briefing on Oct. 9, 2013, A.M. Best reports that since a permanent solution has not been put in place, it will continue to conduct stress tests on insurers to evaluate the effect terrorism exposures will have on balance sheets. “Companies that are deemed to be over-reliant upon TRIPRA will need to have mitigation strategies in place prior to the planned expiration of the program, or they will likely face negative rating pressure.”

With regard to the recent passage of the new bill, A.M. Best notes that in addition to extending the federal backstop, additional changes include the following:

• gradually increases the US$100 million trigger to US$200 million by US$20 million annual increments over the next five years, starting in 2016;
• industry’s co-participation increases by 5% to 20% over the next five years, with a 1% increase annually starting next year;
• aggregate insurer retention increases by US$10 billion to US$37.5 billion over the next five years beginning in 2015;
• the limit on the federal backstop remains at US$100 billion and the individual insurer deductible remains unchanged at 20% of the preceding year’s net earned premium; and
• the mandatory recoupment (the amount that must repaid to the federal government if payment is required following an event) increases from 133% to 140%.

“The temporary nature of TRIPRA exemplifies why it is crucial for the financial strength of any insurer with a material exposure to terrorism risk to have a comprehensive risk management process,” notes the briefing from last fall.

“The increase in the industry deductible, trigger and co-participation could potentially alter the net liability of risks previously insured by a company, causing the insuring of these risks to exceed a company’s risk tolerance.”

In the wake of actions to reauthorize TRIA, ISO, a Verisk Analytics business, is filing revised terrorism forms that can be used by insurers in most states shortly after the anticipated signing of the bill by President Obama.

“We are committed to providing insurers with the critical tools necessary to respond to this development and enable smooth ongoing policy administration in connection with this important federal program,” Beth Fitzgerald, president of ISO Insurance Programs and Analytic Services, noted in a statement Friday.