U.S. government ‘likely’ to extend terrorism insurance law but industry will have ‘limited capacity’ if it doesn’t: Marsh

The United States government will likely extend the Terrorism Risk and Insurance Act (TRIA) beyond the end of 2014, but if it does not, there will likely be “limited capacity” and higher prices for such coverage, especially for properties in the central business districts in major cities, commercial brokerage and risk management provider Marsh Inc. suggested in a report released Monday.

New York City-based Marsh published its Terrorism Risk Insurance Report four days after the President’s Working Group, chaired by Treasury Secretary Jacob Lew, released a report warning that prices for commercial property policies with terrorism coverage “are increasing in anticipation of a potential expiration” of TRIA.

TRIA was passed into law in 2002, the year after the Sept. 11 hijacking of four civilian airplanes. TRIA was extended, in 2007, to Dec. 31, 2014. Three bills that propose to extend TRIA beyond the end of this year have been referred to committees of the House of Representatives.

Marsh noted in the report that most companies that bought terrorism coverage in 2013 did so under property policies, but many of these policies have clauses that cancel terrorism coverage after Dec. 31 if TRIA is not extended.

“Congress will likely pass (Terrorism Risk Insurance Program Reauthorization Act) legislation in the final weeks of this year,” Marsh stated in the report. “Despite likely committee action in the second quarter of 2014, due to the congressional calendar and the November congressional elections, lawmakers have a limited amount of days in session to consider and pass a reauthorization bill.”

U.S. property and casualty insurance carriers are required to participate in the Terrorism Risk Insurance Program (TRIP). Essentially the carriers are required to cover losses in incidents which are “certified” by the U.S. government as terrorist acts, while the federal government acts as a backstop, paying a portion of a carrier’s insured losses that exceed the carrier’s deductible. The maximum available coverage from both the government and industry is US$100 billion.

“If Congress does not renew or extend the federal backstop, the market dynamics for terrorism insurance will be disrupted and will likely result in increased pricing and limited capacity, especially for risks in the central business districts of major cities,” Marsh warned in the report. “Commercial property lines are especially sensitive. Property insurers likely will exclude or dramatically reduce terrorism coverage.”

Marsh recommended that commercial policyholders who have relationships with carriers who use captives to cover terrorism “should consider working on options to cover any reduction in risk transfer that might result from TRIPRA’s sunset or extension with reduced benefits.” Marsh added that organizations “without existing commercial

terrorism insurer relationships should seek to establish such relationships.”

If TRIA is not extended, Marsh contended, “the best solutions will likely be to directly purchase commercial terrorism insurance for layers not involving the captive (and keeping a portion of the risk in the captive) or replacing the captive entirely with a commercial terrorism option.”

Marsh also commented on the impact on workers compensation coverage if TRIA expires.

“Workers’ compensation insurers are evaluating what their business will look like absent TRIPRA, causing some to stop underwriting risks of employers in certain high-profile industries with large employee concentrations or in certain major cities,” Marsh warned.