July 14, 2004 by Canadian Underwriter
With the future of the Terrorism Risk Insurance Act (TRIA) currently being debated by U.S. legislators, the American Academy of Actuaries (AAA) says the insurance industry will not be prepared to assume the risk if TRIA is not renewed beyond its December 31, 2005 deadline.
In its report, “P/C Terrorism Insurance Coverage: Where do we go post-TRIA”, the AAA notes four reasons the industry will be challenged to assume terrorism risk if the government backstop is removed. First, despite the advancements made in terrorism modeling over the past two years, its remains difficult to quantify terrorism risk, not the least of which is the result of its being a man-made, intentional act. Predicting the actions of terrorist who are daily devising new ways and targets for attack is a tall order for risk modelers and makes quantifying exposure difficult.
Second, terrorism risk is concentrated in major urban centers, working against insurers’ need to diversify their exposure. “Typically, when the insurance industry cannot diversify nor retain risk by itself, the industry relies upon the reinsurance market to hedge and transfer its risk.” But in light of the potentially unlimited exposure of terrorism risk, reinsurers are unlikely to welcome this exposure. The inability to spread risk is particularly troubled for highly-regulated lines such as workers’ compensation, where coverage is mandated by government and terrorism exclusions are not allowed.
Third, the US$25-30 billion price tag insurers saw for 9/11 was spread across lines of business, highlighting the aggregation of exposures insurers face in a future attack. With a price tag easily reaching US$50-100 billion for a future attack, and given industry surplus of US$347 billion ar the end of 2003, the solvency of some commercial lines carriers would be challenged, the AAA concludes.
“It is likely that a long-term successful solution to the problem of terrorism coverage in the U.S. economy in general will require the partnership of the insurance sector with other sectors and / or including government.” Potentially this could involve some type of pool mechanism as is in place in other countries, the AAA suggests.
The full report is at www.actuary.org.