A.M. Best: 15% of Terrorism Exposed Rating Units Too Reliant on TRIPRA

Insurance rating agency A.M. Best Co. says 34 rating units failed a stress test to assess capitalization sans the federal terrorism backstop.

If the Terrorism Risk Insurance Program Reauthorization Act is not reauthorized, the agency has determined about 4 percent of an overall total of 889 rating units are too reliant on TRIPRA, and "materially exposed to terrorism risk," says Michael Russo, senior analyst and author of a briefing.

Narrowing the rating units down to the 226 that disclosed a material terrorism exposure, about 15 percent failed the stress test.

Those most affected by the test, nearly 60 percent, provide workers' compensation coverage. Another 32 percent are concentrated in commercial casualty.

Without any indication regarding the act's renewal, A.M. Best is taking some proactive measures to determine exposures, beginning with assumptions based on an attack similar to a 5- or 6-ton truck bomb.

(Details of the stress test can be found here.)

A.M. Best says it is concerned policies written at the beginning of the year could be exposed to terrorism risk by the end of 2014, when TRIPRA is set to expire.

If that occurs, what will happen is a "big unknown," says Russo.

"We're not sure what the appetite will be for insurers, or even reinsurers, to provide terrorism coverage anymore," adds Russo.

A.M. Best says it is having talks with the rating units—a single company or several affiliated companies with common rating assignments. The agency is requiring action plans, detailing what these units will do to reduce terrorism exposure by early December should TRIPRA either sunset or be changed.

If this occurs, those who failed the stress test will be brought before an A.M. Best rating commission and if analysts deem an action plan insufficient, "The rating unit will face negative rating pressure, most likely in the form of assigning a negative outlook," according to the briefing.

Rating actions could occur in early December.