Insurance groups already are mapping their strategies for 2007, the year in which the Terrorism Risk Insurance Act again is set to expire. The act, which provides protection for insurance companies against extreme losses but has been deemed a temporary solution, was first approved in 2002 and received a last-minute extension at the end of 2005 from Congress before it expired.

In the meantime, though, how will the revised TRIA affect the insurance industry in the next two years? Risk Management Solutions determined that the newly passed act would shift the relative share of the risk from the government to the insurance industry.

Based on the new TRIA terms, over 90 percent of the RMS modeled average annual loss would be retained by the industry. If a terrorist attack occurred, there also is less than a 10 percent chance that it would cause the industry deductible to be reached, since only the most extreme, low-probability attacks will cause losses in excess of $30 billion. For example, the 2001 World Trade Center attacks resulted in approximately $32.5 billion of insured losses. If an event of this magnitude occurred today, it would produce only a minimal TRIA recovery for the insurance industry.

At the end of 2007, individual insurance and reinsurance companies could face the challenge of bearing the risk of terrorism losses with no government backstop, according to RMS. But with the current act's goal of weaning insurance companies from the luxury of a governmental backstop becoming more clear, the group recommends having sound underwriting practices and accumulation controls, good analytical tools, and discipline throughout the organization in order to manage terrorism risk effectively.

“Since the introduction of TRIA in 2002, risk management practices have advanced significantly, and virtually all of our clients with a material amount of terrorism exposure are actively managing their risks in an increasingly sophisticated and broad manner,” said Peter Ulrich, senior vice president of enterprise risk management, RMS. “Several years ago, companies focused on exposure accumulation and scenario modeling, but now they are using probabilistic modeling to help inform decisions on underwriting guidelines, risk selection, reinsurance transactions, and the possible securitization of terrorism risk.”

Special Reports /

The Impact of TRIA, Version 2.0

Related Stories

Recommended For You