The Terrorism Risk Insurance Program Reauthorization Act of 2007 (“TRIPRA”) – the federal terrorism insurance backstop program – is scheduled to expire on December 31, 2014, unless it is reauthorized by Congress. For organizations that rely heavily on TRIPRA for terrorism insurance coverage, the current period of uncertainty can be unsettling. As they plan ahead, Marsh's property practice is suggesting, it can be useful to begin considering alternatives for insuring terrorism risk.
Originally enacted as the Terrorism Risk Insurance Act (“TRIA”), the law was reauthorized in 2005 and more recently in 2007 as TRIPRA. If the government does not continue to provide this reinsurance backstop as it does under TRIPRA, the market dynamics for terrorism insurance would be disrupted – likely resulting in increased pricing and capacity shrinkage especially for risks in the central business districts of major cities. Commercial property lines are especially sensitive, particularly for risks located in densely populated urban areas.
A handful of bills have been introduced in the U.S. House of Representatives to extend TRIPRA, however, to date there has been little substantive action on the legislation in the House Financial Services Committee. Congress this year is expected to study the issue before any legislative steps are taken, with House of Representative hearings possible later in the year.
If TRIPRA is not reauthorized, property insurers will likely exclude or dramatically reduce terrorism coverage from policies, according to Marsh's property practice. The private insurance market is unlikely to be an adequate substitute to TRIPRA; what limited coverage is available will be met with increased pricing.
Consider that before the 2005 extension, 50 interviews were conducted by Marsh's property and terrorism experts among commercial property insurers. Of those, 34 (68 percent) said they would have excluded terrorism coverage if the law was not extended at that date.
Alternative Approaches
According to Marsh's property practice, organizations that rely on TRIPRA can develop a number of risk transfer approaches if the law is changed or not extended. It is important to note that program structures are contingent upon an insured's specific needs. Also, buyers of TRIPRA coverage in high-demand areas are unlikely to be able to replicate their current level of coverages and limits provided by TRIPRA as part of their property and captive programs.
Property Programs
If TRIPRA is 100 percent embedded as part of an “all risk” property insurance program, organizations should determine which property insurers are likely to continue to offer terrorism coverage regardless of the law's extension, according to Marsh's property practice. If gaps of capacity are identified, insureds may want to consider:
- Standalone capacity.
- Standalone capacity commitment contracts.
- Excess standalone contracts with the option to drop down and fill gaps in capacity where property carriers cannot continue to offer terrorism coverage in the Act's absence.
Marsh's property practice believes that organizations that access TRIPRA coverage via a captive property program or as a standalone captive policy can consider securing standalone terrorism reinsurance for the captive's liabilities. This standalone capacity can then be accessed on a direct basis should TRIPRA not be extended.
Captives that already purchase standalone terrorism reinsurance as part of their property terrorism coverage can consider identifying standalone terrorism insurers to increase their capacity to cover potential changes in TRIPRA. If the law is not extended, captives can consider converting the standalone terrorism reinsurance limits to primary coverage and seek additional limits in the standalone terrorism insurance market, according to Marsh's property practice.
Data and Analytics
Marsh's property practice said that it is critical for clients to provide insurers and reinsurers the highest quality data to receive the most accurate terms, conditions, and pricing based on their actual exposures. Data related to property and employee accumulation, for example, can affect a carrier's view of terrorism loss and, in some cases, can help minimize the impact that default assumptions have on expected modeled losses. Examples include:
- Location and property/building information, including COPE (construction, occupancy, protection, and exposure) data.
- Total number of employees by location, at the address level.
- Shift information or maximum employees at each location at any one time.
- Single location or multiple building campus setting.
- Building construction type.
- Floor where employees are located.
Providing complete data can ultimately reduce the volatility and uncertainty of terrorism risk from an underwriter's perspective, allowing more accurate pricing and coverage. For an insured, it can lead to better understanding of exposures. Thus, an organization can be better positioned to purchase adequate coverage limits with appropriate terms and conditions in the event that TRIPRA legislation is changed or not extended, according to Marsh's property practice.
Terrorism Risk Modeling
Terrorism risk models can help organizations make informed risk financing decisions in the event that TRIPRA is changed or not extended. The terrorism modeling process follows techniques that are similar to earthquake and windstorm models, and are based on engineering outcomes calculated from event modeling and building response databases. These models are constantly refined by the insurance industry.
Marsh's property practice said that individual companies are increasingly using data management systems and modeling tools to understand the relationship between vulnerable sites and the potential likelihood of impact from terrorist acts – or other risks – on their operations and profitability. These models aim to quantify the potential economic losses stemming from a terrorist event and support financial quantification of these risks to:
- Achieve greater understanding of their financial exposures, insurance program design, and risk financing options.
- Assess the appropriateness of insurance deductibles and limits.
- Rate the terrorism risk to negotiate adequate insurance premiums.
- Help prioritize risk mitigation strategies.
- Enable efficient business continuity planning.
- Understand the correlation and potential benefits of diversification among sites, locations, and regions.
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Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].