Availability, affordability of terrorism insurance in U.S. ‘at risk’ if TRIA is not renewed: Working group

Private reinsurance for losses in the United States arising from terrorism is “supported by limited capital” and “generally” excludes attacks committed by “domestic agents” and those using nuclear, biological, chemical or radiological (NBCR) weapons, a recent report suggests.

The U.S. President’s Working Group on The Long Term Availability and Affordability of Insurance for Terrorism Risk submitted Thursday a report that noted some insurance industry sources say “as little as” US$6 billion to $8 billion of “global reinsurance is available for terrorism risk” in the U.S.

“Industry sources report concerns that the long-term availability and affordability of insurance for terrorism risk will be adversely affected if (the Terrorism Risk and Insurance Act) is not renewed before it expires at the end of 2014, and that the market is already tightening in anticipation of the termination of the federal government backstop,” the PWG report added.

The Terrorism Risk Insurance Act (TRIA) was passed into law in 2002, after companies encountered difficulty finding insurance — at reasonable rates — that covered terrorism in the U.S., in the aftermath of the hijacking of four civilian airplanes Sept. 11, 2001.

The PWG is chaired by Treasury Secretary Jacob Lew. Its other members are the Chairman of the Board of Governors of the Federal Reserve System, the Chair of the Securities and Exchange Commission and the Chairman of the Commodity Futures Trading Commission. The report released April 17 was prepared using comments provided by stakeholders.

In its report, PWG noted that property and casualty insurers are required to participate in the Terrorism Risk Insurance Program (TRIP) and to make coverage available for acts which are “certified” by the U.S. government as terrorist acts. The program also authorizes the federal government to act as a backstop and pay a portion of a carrier’s insured losses that exceed the carrier’s deductible.

TRIA expires Dec. 31, 2014 and several organizations, including Risk and Insurance Management Society Inc. (RIMS), have called for the U.S. government to extend it. Three separate bills proposing to extend TRIA were introduced in 2013 in the House of Representatives and referred to committee.

“Recent trends … indicate that prices are increasing in anticipation of a potential expiration of TRIA,” PWG noted in its report, adding that data from commercial brokerage firms Aon plc and Marsh Inc. “indicate that terrorism risk insurance premiums, viewed in the aggregate, constitute between 3 and 5 percent of overall property insurance premiums.”

PWG referred to testimony given at a hearing Feb. 25 at the Senate Committee on Banking, Housing and Urban Affairs.

“According to commenters, a significant challenge to pricing terrorism risk is the lack of credible empirical historical data on which to base loss projections and pricing,” PWG stated. “When empirical historical data are not available, insurers often rely on commercial catastrophic risk models to price risk (e.g., for other low-frequency, high-severity perils such as earthquakes, floods and severe storms).”

Risk models, according to the report, “have become more advanced” in the past 12 years.

“Nonetheless commenters report that such models are still of relatively limited utility particularly in terms of developing pricing for the risk of large scale attacks with a sufficient degree of confident.”

PWG concluded that “private reinsurance does not appear to be a sufficient substitute for the market certainty provided by TRIA.”

Despite the extension in 2007 of TRIA, “private property reinsurance generally continued to exclude categories of terrorism” committed by those who are “domestic” agents, as well as “all losses caused by NBCR attacks,” PWG noted.

PWG added that TRIA “does not explicitly address coverage for losses from NBCR or cyber attacks.”

In order to be a certified by the U.S. government, a terrorist act would have to result in losses exceeding $5 million in the U.S. and be certified by the U.S. Secretary of State, Attorney General and Secretary of the Treasury, RIMS noted in a report in 2013.

Such an incident attack would have to result in aggregate losses to the insurance industry of more than $100 million. An insurer’s deductible is calculated at 20% of its 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 $100 billion, RIMS reported in its 2013 paper, titled Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.

In that report, RIMS contended that TRIA should be renewed and should require p&c carrier to include coverage of acts of terrorism involving the use of NBCR weapons.