Two industry analyses on the potential industry impact of the Terrorism Risk Insurance Act extension warn insurers that they need to reassess their exposure strategies and that TRIA ramifications could include a capacity shortage in some areas.
Reports by AIR Worldwide Corporation and insurance broker Marsh, a subsidiary of Marsh & McLennan Companies, detail the changes made under the TRIA extension bill, which increased the certification trigger for insurers and decreased the percentage of the federal government's share of loss over the next two years before the act sunsets.
(The certification trigger==the level of damage at which the federal terrorism insurance backstop kicks in--will increase from the current $5 million to $50 million in 2006 and $100 million in 2007. Deductibles and co-participation percentages of insurers will be increased in each year as well.)
AIR, based in Boston, and a subsidiary of Insurance Services Office, Inc. headquartered in Jersey City, N.J., used its terrorism loss models to give a loss example of a sample company with $2 billion in total annual premium. The company was assumed to have a high concentration of exposure in major cities.
In a worst-case scenario==a chemical attack in a major U.S. city costing $85 billion in insured loss for the industry--the hypothetical company would retain $407 million of its $1.4 billion loss in 2006, nearly $500 million in 2007, and the total $1.4 billion loss when TRIA expires in 2007.
Under a scenario with a lower level of terror losses, a $12 billion industry terrorism loss would result in the hypothetical company keeping all $230 million in total modeled terror losses over all years covered under the TRIA extension because the deductible would not be reached.
"The impact of these changes on insurers will vary depending on the severity, location and timing of any future attack and on an individual insurer's actual book of business," said Jack Seaquist, a senior manager at AIR in a statement. "Therefore, it is essential that insurers re-evaluate their own terrorism risk assessment strategies with respect to industry best practices."
In its TRIA update report, Marsh said the industry would probably react favorably to the legislation, but the higher $50 million trigger could have an impact on small regional insurers and captives writing primary terrorism risk, creating "some capacity shortages in those areas."
The report said the standalone insurance market would continue to offer "terrorism risk-transfer solutions with TRIA's extension." The primary demand will be to cover the $50 million events no longer covered by the backstop; support of TRIA captives primarily through reinsurance; certain coverage for select or single locations; and global or international-only terrorism insurance policies.
TRIA's sunset and uncertainty over long-term risk transfer means more investigation into the standalone market. Because of TRIA was extended to 2007, Marsh suggested that the standalone market may be willing to offer longer-term solutions to clients "permitting a foothold in the standalone insurance market for clients' risks."
A copy of AIR's report is available through: www.air-worldwide.com.
The Marsh report can be viewed at: www.solutions.marsh.com/TRIA/.
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