TRIA Renewal 'Far From Certain': Morgan Stanley

The investment firm warned there is no time to procrastinate when thinking about 2006 renewals. "In 2005, and in some cases, beginning in 2004, insurers could face the issue of potentially not having any terrorism coverage for policies being written during that period," said William Wilt, equity research analyst at Morgan Stanley.

Specifically, Mr. Wilt said, the current TRIA will expire on Dec. 31, 2005, while a renewal of the legislation is "far from certain." He noted that Congress did not pass the original legislation until November 2002?more than one year after the Sept. 11 attack.

The implication is that annual policies written after Jan. 1, 2005 might not be covered by legislation at the turn of the following year. So in some cases, risk-attaching policies being written in 2004 would carry the same danger; since such policies can have terms that extend beyond one-year and up to 18-36 months.

According to Morgan Stanley, Montpelier Re Holdings Ltd., for one, is now explicitly excluding terrorism coverage on direct per-risk policies when writing these contracts.

Mr. Wilt commented, "As we head further into 2004, Congress is likely to once again consider TRIA."

"We suspect pressure will build through 2004 for action, but progress, if any, is not expected till late 2005," he forecast. "Whether the bill will be renewed could depend on whether the perceived risk of terrorism is greater or less in 2005," he said. "Also it depends on the resolve of the various constituencies to push for the legislation."

But given the difficultly in passing the legislation the first time around, "we remain cautious" about the prospect, commented Mr. Wilt, who added that if renewal legislation does not pass, "we believe it poses a key risk for the industry."

Morgan Stanley observed that the biggest area of concern remains workers' compensation?a sizeable portion of the WTC insured loss?since terrorism coverage is mandatory for workers' comp, even without a federal legislation.

But even beyond workers' comp, in property risks, "fire following" is not likely to be allowed to be excluded in most states, perhaps in as many as 30 states?based on the reaction of many states at the beginning of 2002. This would mean that insurers would be forced into a position of funding losses that they might not have the financial capacity to cover.

Many p-c insurers would face a daunting challenge if the TRIA sunsets without getting renewed. Some experts forecast that losses from potential future terrorist attacks on the U.S. soil could run above those levels suffered at the WTC site, according to Morgan Stanley.

The early emphasis on the TRIA extension, however, does not, by any means, presume that the current legislation is perfect. In fact, U.S. insurer exposures, even with the federal backstop, could be huge in case of an attack?in many cases, in the hundreds of millions of dollars in deductibles, according to Mr. Wilt. For many companies, the potential exposure even goes well beyond their net WTC loss.

Furthermore, most primary carriers have no reinsurance to cover their retained exposures. Reinsurers are excluding terrorism coverage for most policies, while some are writing it as a separate business line. As such, the majority of the insured risk rests with the primary insurers and the federal backstop program.

Currently, American International Group Inc., as well as the soon-to-be-merged St. Paul Companies/Travelers Property Casualty Corp, would have the highest potential exposure to a TRIA-covered terrorist event, based on the amount of commercial-lines premium volume earned and assuming that the loss gets spread evenly based on market shares, Morgan Stanley said.

The firm said others with large potential exposures, based on deductibles, would include ACE Limited, The Chubb Corp., CNA Financial Corp., and The Hartford Financial Services Group Inc.

Another current problem with the TRIA that Morgan Stanley points out is that the program?thankfully?has not yet been tested. And many uncertainties remain that relate to its implementation, such as payment patterns and the calculation of insured losses.

Difficulties aside, the bottom line for Morgan Stanley is, "we much prefer current legislation than no legislation?even with its shortcomings."