With extension of the federal Terrorism Risk Insurance Act (TRIA) still up in the air, risk from terrorism remains significant for commercial lines carriers, a ratings agency said.

According to a new report by Moody's Investors Service, some commercial lines carriers still don't have "an adequate grasp of their assumed risks and potential liabilities."

The ratings agency's report predicted that some companies would face considerable risk management problems in the absence of federal legislation extending TRIA.

Moody's study, titled "Terrorism Risk Remains Material for Insurers as TRIA Expiration Looms," is based on Moody's recent survey and interviews with commercial lines carriers representing 60 percent of subject commercial lines direct written premiums.

Commenting on the report's findings, Moody's assistant vice president, James Eck, said, "In the absence of legislative action, the fact that TRIA is set to expire at year-end 2005 introduces additional complexity to insurers' risk management efforts."

Mr. Eck said that's because exposures currently being underwritten would no longer benefit from the federal backstop, which offers up to $100 billion of reinsurance for losses arising from foreign terrorists' attacks.

Mr. Eck added that in the absence of TRIA, widespread terrorism exclusions will likely again become the norm for commercial lines policies. However, he also noted that terror coverage for workers' compensation is mandatory, and certain states require property policies to cover all fire losses, including those arising from terror events.

Moody's forecasts that private reinsurers are unlikely to fill the reinsurance capacity void if TRIA expires, at least in the near term.

"Consequently," said Mr. Eck, "many insurance carriers--particularly the major workers' compensation writers--could be faced with dangerously high levels of risk aggregation, unless these companies substantially reduce their exposure to large accounts."

Nevertheless, Mr. Eck also acknowledged that it isn't clear whether an extended TRIA program would "actually provide meaningful benefit" to insurers except for solvency protection in the most extreme terrorism scenarios, since TRIA deductibles can already represent a big portion of a carrier's statutory capital, and will rise even further under current TRIA extension proposals.

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Moody's Assesses Post-TRIA Terror Risk

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