AM Best warns of rating actions on insurers if TRIPRA is not renewed

US insurers with a large exposure to terrorism risk could face being downgraded by AM Best if the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is not renewed – a scenario that looks difficult at best given the hyper-partisan atmosphere pervading Washington at the moment, the rating agency has warned.

The current TRIPRA expires on December 31, 2020. The original bill, referred to as the Terrorism Risk Insurance Act (TRIA) was passed in late 2002 in response to the 9/11 attacks and was authorized to address the availability and affordability crisis for those commercial businesses in need of terrorism insurance.

Although this public/private collaboration seems to have achieved its goal, there is some uncertainty as to TRIPRA’s future role, AM Best notes. As of today, whether TRIPRA will be extended again— and if so, under what terms and conditions—remains in doubt.

“The hyper-partisan atmosphere pervading Washington and the difficulty of bringing legislative proposals to a vote and ultimately enacting legislation has created even more uncertainty. Although a federal backstop helps with liquidity and reduces the financial impact of a terrorist event, overreliance on such a mechanism isn’t a substitute for sound risk management,” the rating agency said.

It said it has been assessing the impact of catastrophe risk, including terrorism risk, on insurers’ balance sheets using confidential information gathered during rating discussions, as well as information submitted in companies’ Supplemental Rating Questionnaires (SRQs).

This information is used to complete stress tests designed to gauge the potential impact of a large catastrophic event on a primary insurer’s capitalization. Although the vast majority of catastrophe-exposed insurers typically rely on reinsurance to mitigate catastrophe risk, insurers that have substantial terrorism exposure might also rely on TRIPRA to stay within their stated risk tolerances.

“Key concerns for AM Best with regard to terrorism are insurers’ net loss exposures to terrorism excluding the benefit of TRIPRA; aggregate exposures of risks in certain geographic areas; the number of locations in those areas; and the impact on risk-adjusted capitalization,” it said.

Beginning mid-year 2019, AM Best said it will compile a list of rated insurers with exposure to terrorism. Companies viewed to have material terrorism exposure in addition to a significant reliance on TRIPRA will then be asked to present detailed plans on how they will mitigate this exposure in the event that TRIPRA is not renewed.

“Although private terrorism reinsurance is currently available, a rating concern will be the future availability and affordability of reinsurance if the federal backstop is eliminated or changes significantly. Insurers that currently would be materially affected by the absence of TRIPRA, and that cannot provide a sufficient action plan to reduce exposures to terrorism risks, likely will face negative rating pressure by year-end 2019,” AM Best said.