New terrorism bill would work: Fitch
The passage of a bill similar in form to the Terrorism Risk Insurance Program Reauthorization Act of 2014, approved by the Senate Banking Committee this week, would stem the risk of any economic or insurance market disruption tied to terrorism exposures in the near term, according to Fitch.
The current programme, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), expires on December 31, 2014.
The rating agency stated that material structural changes to or the elimination of TRIPRA could lead commercial insurers to significantly adjust underwriting portfolios to reduce gross terrorism exposures. Specialty or monoline workers' compensation or commercial property writers that focus on larger urban markets would have the greatest credit sensitivity to reductions in available terrorism reinsurance protection.
Insurer withdrawal of underwriting capacity in response to a lack of terrorism reinsurance protection could have broader economic consequences, particularly in commercial real estate and construction markets, Fitch said.
In its current form, the proposed bill has three significant changes to the existing legislation. First, it extends the terrorism reinsurance programme for an additional seven years. Second, it increases the aggregate industry retention by $2 billion annually until it reaches a $37.5 billion cap. Third, the insurance companies co-pay increases 1 percent annually until it reaches 20 percent.
Fitch notes that several countries have established permanent long-running terrorism insurance programmes. While each country's programme is different, the fact that many developed countries have a programme for this risk underscores the scope of the global terrorism threat and the perceived value of a government-supported response, given broader economic and societal consequences of terrorist attacks.
Several other countries' terrorism insurance programs include the establishment of an actual re/insurance vehicle that provides coverage with insurers ceding premiums to participate in the program.
Premium cessions are not a consideration of the current US Senate proposal. However, this structure provides some market information on demand for coverage and the price of risk. Reinsurance premium payments also provide an accumulation of funds over time to pay any future losses.
The political feasibility of a permanent US terrorism reinsurance programme currently appears remote; however, a permanent program would eliminate the periodic uncertainty of the TRIPRA renewal process, Fitch said.
“Based on experience from historical natural disasters and the September 11 attacks, the likelihood is high for US government financial involvement in some form following losses from a large scale terrorist event. TRIPRA provides a framework detailing the expected nature and scale of government involvement before an event takes place.”
