TRIPRA renewal will increase risk retention

The expected renewal of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is likely to lead to the imposition of higher deductibles and risk retentions on US P&C insurers, according to Moody’s.

The rating agency expects the programme to be extended with a finite term as it was in the past two amendments since its initial 2002 passage.

Moody’s said that an extension is likely to continue the past renewal trend of shifting increased financial responsibility to insurers, however, resulting in higher deductibles and/or retentions for insurance companies.

Additionally, loss triggers, which determine the amount of losses to activate the federal insurance backstop, may be increased.

"The stakes for US P&C insurers and their insureds are high," said Alan Murray, a Moody's senior vice president and author of the report.

"Non-renewal of this programme, or a significant reduction of the federal backstop, could result in insurance market dislocations, as insurers find themselves with sharply higher risk exposures. Coverage would become less widely available, more costly, and perhaps even unavailable for some high-profile risks in certain large urban markets."

The report said that programme deductibles still remain a risk to insurer capital and are currently at 20 percent of direct premiums earned.

“Although some US insurance groups could seek capital support from their domestic or international parents in the event of a major terrorism loss, it is unclear to what extent smaller, less diversified industry participants would be able to recapitalize,” said Moody's.

It noted that many insurers have included measures such as sunset clauses or short-term policies in their 2014 terms and conditions, to hedge against exposures that would cease to be back-stopped if the programme is not renewed.

Moody’s concluded that in the absence of a federal backstop, workers' compensation policies remain problematic, because coverage exclusions or carve-outs are generally not permitted by law.