Terrorism insurers under pressure from TRIPRA expiration

The looming expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is a concern for insurers with significant terrorism exposures, AM Best warned.

TRIPRA is the federal terrorism insurance backstop enacted January 12, 2015 which provides several benefits to organizations that can ultimately reduce premiums and enhance terrorism coverage.

TRIPRA expires at year-end 2020 and insurers soon will need to consider the potential termination of the federal backstop for their longer-term policies, and prepare their risk management practices, a new AM Best special report notes.

Insurers with large balance sheets typically have higher risk appetites for trophy buildings in so-called Tier 1 cities (e.g., New York, Los Angeles), Best’s Special Report, “Insurers Adjust to Changing Terrorism Risk Landscape,” states. These large insurers would consider a government backstop an important component of their risk management. Small-sized and some medium-sized insurers are unlikely to amass sufficient gross losses to satisfy the $160 million programme trigger in 2018 ($200 billion in 2020), AM Best data shows. Given their smaller size and less room for error or reduced government involvement and support, establishing a conservative risk appetite backed by reinsurance and concentration limits becomes critical for these insurers, according to the report.

These industry concerns come at a time when the scope of terrorism is changing, the rating agency notes. The focus of more-recent terror attacks has shifted from inflicting property damages and causing mass casualties to primarily causing loss of human life. Cyber threats continue to evolve, and combined with the ever-present potential for nuclear, biological, chemical and radiation attacks, insurers need to be prepared, the report warns.

Although TRIPRA could help minimize the loss impact on an insurer’s capitalization, AM Best believes over-reliance on it is not a substitute for sound risk management. The agency’s assessment of enterprise risk management (ERM) emphasizes stress-testing for any insurer with a significant exposure to terrorism risk to ensure that resources are adequate in the event of a terrorist attack. Those companies that rely heavily on TRIPRA should be prepared to present detailed plans to AM Best if the backstop is not renewed, the report notes.

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