Insurers in the US should prepare for there being no terror backstop: Guy Carp

The market should brace itself for some disruption if the Terrorism Risk Insurance Act (TRIA) is not extended in 2020—and carriers should definitely assume that changes to the terrorism backstop will be made, and prepare accordingly.

That is according to Emil Metropoulos, senior vice president and workers’ compensation & terrorism centre of excellence practice leader at Guy Carpenter, who told APCIA Today that lessons should be learned from the last time it was renewed in 2014.

“During 2014, we did see some resistance and debate on TRIA’s need and benefits among select lawmakers, which caused a nearly two-week delay beyond its January 1, 2015 reauthorisation,” Metropoulos said.

“As 2014 progressed, insured policies contributing to carrier accumulations in central business districts and Tier 1 cities initially were written for shorter terms of less than a year.

“The industry saw several large accounts move among various carriers, and in some cases move into the residual markets. In addition, carriers started requesting reinsurance contract terms over multiple years and reserving market capacity via option covers—beyond the December 31, 2014 expiration.”

He added that while the outcome of the January 1, 2021 Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) reauthorisation cannot be predicted, the lessons learned from the lag in the 2015 reauthorisation were so impactful to the insurance industry and businesses in general that the market should try to avoid a repeat of this scenario.

“We would like to think that all parties do not want to replay the sequence of events that transpired,” he said.

“Although we assume less debate and resistance to a 2021 reauthorisation relative to what we saw in 2015, guidance and clarity from the Federal Insurance Office and US Treasury should not be expected until early to mid-2020, amid the potential uncertainty and backdrop of an election year and a polarised Congress.”

Metropoulos added that changes to TRIA at a minimum should be expected and risk management contingencies planned for by carriers, assuming that carrier retentions and co-participations may be subject to increases.

“As the industry awaits clarity and timing around TRIA’s reauthorisation going into 2020, it should be anticipated that the rating agencies will continue to conduct their focus on terrorism stress tests and assess ratings against specified criteria, including scenarios where the $200 million TRIA industry trigger is not reached—and as a result there is no backstop protection.

“In such case, the balance in the supply and demand for privately placed re/insurance that we have benefited from since 2002 could become unbalanced, resulting in notable shortfalls in needed terrorism limits and coverages.”

Since 2002, TRIA has been a unique risk-sharing mechanism covering terrorism risks that are somewhat challenging for the industry to quantify and where there remains considerable variability in the range of possible outcomes. A such, the market has developed around its backstop, he explained.

“For nearly 18 years, TRIA has shaped the way US institutions and re/insurance companies insure, manage and think about terrorism risk. Overall, TRIA has been highly effective and essential in making terrorism risk and re/insurance available and commercially viable in the US.

“As a result, it has facilitated an important balance in the supply and demand for privately placed re/insurance limits—at rates and pricing that has cleared the market,” he concluded.