Insurers need to reassess their exposure strategies in the wake of the Terrorism Risk Insurance Act's two-year extension in a market that could face a capacity shortage in some areas, recent industry analyses warn.
Reports by modeling firm AIR Worldwide Corp., insurance broker Marsh and rating agency Moody's detail changes made under the TRIA extension measure, which increased the coverage trigger and decreased the percentage of the federal government's share of loss before the act sunsets on Dec. 31, 2007.
AIR, the Boston-based subsidiary of the Insurance Services Office, used its terrorism 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 losses–the hypothetical company would retain $407 million of its $1.4 billion loss in 2006, nearly $500 million in 2007, and the complete $1.4 billion loss after TRIA expires.
Under a scenario with a $12 billion industrywide terrorism loss, the hypothetical company would retain all $230 million in total modeled claims 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 reevaluate their own terrorism risk-assessment strategies with respect to industry best practices."
In its TRIA update report, Marsh said the higher $50 million trigger this year could have an impact on small, regional insurers as well as captives writing primary terrorism risk, creating "some capacity shortages in those areas."
The report said the stand-alone insurance market would continue to offer "terrorism risk-transfer solutions with TRIA's extension," with demand focusing on:
o Coverage of $50 million events no longer covered by the backstop.
o Support of TRIA captives primarily through reinsurance.
o Demand for certain coverage for select or single locations.
o Need for global or international-only terrorism insurance policies.
TRIA's eventual sunset and uncertainty over long-term risk-transfer alternatives means more development of the stand-alone market is likely, Marsh predicted. With TRIA extended to 2007, Marsh suggested that the stand-alone market might be willing to offer longer-term solutions to clients, "permitting a foothold in the stand-alone insurance market for clients' risks."
Overall, however, "since insurer deductibles represent a significant portion of statutory capital for most insurers, the extended TRIA program does not solve the financial risks posed by the specter of terrorism risk," according to a Moody's analyst, James Eck.
Indeed, the way TRIA was extended, "in Moody's opinion…the federal government is signaling its eventual exit from the terrorism risk reinsurance business at the end of 2007," added Mr. Eck, author of "Terrorism Risk Insurance Extension Act of 2005 Buys Some Time for P&C Insurers."
"Moody's continues to believe that private reinsurers are unlikely to fill the reinsurance capacity void once TRIA finally expires," according to Mr. Eck.
"Consequently, many insurance carriers–particularly large workers' compensation writers–could be faced with dangerously high levels of risk aggregation unless these companies substantially reduce their exposure to large accounts," he added, suggesting that "the insurance industry should start planning for such a contingency immediately."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.