P&C Industry Urges Feds To Stick With Terrorism Reinsurance Program

Washington

Backing out of the terrorism reinsurance business would be a really bad idea for the financial security of private businesses and the health of the overall U.S. economy, property and casualty industry leaders warned in comments to the U.S. Treasury Department.

Indeed, reducing federal support for the Terrorism Risk Insurance Program in 2011 "would have a far-reaching effect on the availability and affordability of terrorism risk insurance," the Insurance Information Institute concluded in a recent paper–echoing a sentiment voiced by numerous major players in the industry.

The Institute's paper used the 9/11 anniversary earlier this month to remind federal officials that terrorism will remain "a serious and continuous threat to the United States in the decade ahead."

The Institute's observations were prompted by the Treasury Department's request for formal comments on whether to reduce the potential exposure of the government to a terrorist event. The Institute did not submit formal comments but instead noted that it had updated two previous reports dealing with terrorism.

"The nine-year anniversary of Sept. 11 is an important reminder that any changes to the law [would introduce] a measure of market uncertainty, which in turn could lead to pricing and capacity volatility, problems that the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), with its seven-year extension of the law, was designed to end," said Robert P. Hartwig, the Institute's president.

The program in its current form is scheduled to run through 2014.

"TRIPRA makes terrorism insurance coverage available and affordable for many key projects that might otherwise never get beyond the drawing board," according to Mr. Hartwig, adding that "the last thing the fragile U.S. economy needs is for any of these projects to be derailed."

He noted that "the 9/11 attack was the largest loss in the history of the global insurance industry until Hurricane Katrina in 2005," pointing out that "as construction moves ahead on the new World Trade Center site, insurance claims dollars continue to play an essential and highly visible role in rebuilding lower Manhattan."

He said that in July 2008, Risk Management Solutions, a risk modeling firm, put potential insured losses from a terrorist attack in the U.S. at $1.6 billion–an increase of 8 percent from estimates the previous year.

Mr. Hartwig, citing RMS statistics, said terrorism targets are more likely to be in the commercial or private sector, such as sports stadiums, now that governments' counter-terrorism efforts have been stepped up.

Meanwhile, a host of other major insurance entities warned Treasury in formal comments that it would be a mistake to curtail the federal reinsurance program.

Swiss Re and Lloyd's said the federal backstop is underpinning the market, predicting that ending the program was likely to substantially limit private market capacity for terrorism risk coverage.

"In the long term, it is unlikely that the stand-alone terrorism market will have the capacity, or risk appetite, to step in should TRIA [the Terrorism Risk Insurance Act] be allowed to expire in 2014," Lloyd's officials said in a letter to the President's Working Group on Financial Markets.

Swiss Re officials said in a separate letter that because the current program, enacted in 2007, mandated that insurers make coverage available, combined with a softening commercial market, the cost of terrorism risk insurance has declined in recent years.

Another factor was the provision in the 2007 law with mandates that include coverage for domestic and foreign acts of terrorism, Swiss Re said.

"In the event of the program's expiration, a number of underwriters in the property market have indicated that terrorism risk would be excluded completely," Swiss Re warned, adding that "terrorism risk continues to be extremely hard to quantify, making the federal government backstop an absolute necessity to a healthy functioning market."

Swiss Re said the uncertainty of defined scenarios and the unreliability of frequency assumptions are not expected to change significantly in the near future. The current federal backstop, Swiss Re said, "allows insurers to partially cap and quantify the risk and, therefore, better manage the exposure."

Lloyd's officials said "some appetite may evolve to offer a limited 'writeback' in some cases, but such coverage would be more limited than provided now and would continue to exclude chemical, nuclear, biological and radiation coverage."

Expressing the brokerage point of view, Marsh said cutting the federal program would "greatly reduce the availability of terrorism insurance in high-risk areas, such as business districts within major metropolitan areas." The broker added that "pricing for terrorism insurance would dramatically increase" in such areas.

Limiting availability and affordability "would have a profoundly negative impact on those businesses with the greatest need for protection against terrorism risks," Marsh said.

Marsh noted that "on occasions when TRIA coverage has been unavailable, Marsh clients have used terrorism policies provided by insurance companies on a standalone basis to manage and transfer their terrorism risk adequately." However, the broker added, "a significant increase in either natural catastrophes or man-made events–such as terrorism–would likely result in a market hardening, which in turn would have an adverse impact on the affordability of terrorism risk insurance in the future."

"This effect would be exacerbated in the absence of a mandated terrorism risk insurance mechanism," Marsh concluded.

The comment period ended Aug. 2 with 49 entities responding, mostly insurers and their trade groups.