S&P watchful on implications of Tria delay

Standard & Poor’s (S&P) does not expect to take widespread rating actions in the short term on US insurers as a result of Congress failing to renew the Terrorism Risk Insurance Act (Tria) this year. But this could change if a solution is not imminent in January for players that are not prepared for this eventuality.

The rating agency noted that the perception of terrorism risk has evolved to where the industry is now comfortable assuming sizable conventional terrorism events including a two to six tonne truck bomb without Federal financial assistance.

But S&P also noted that a nonconventional event such as a nuclear, biological, chemical, or radiological attack without a federal backstop programme could have systemic economic, financial, and legal ramifications, and could severely hurt the insurance industry.

On this basis, it said it would review the ratings of some insurers and issuers depending on how Tria legislation develops in January.

Specifically, it said that insurers with stronger enterprise risk management (ERM) capabilities are better prepared to respond to the expiration of Tria. Such insurers have already been reducing their terrorism exposures during 2014 to less than their Tria deductibles in anticipation of Tria not being reauthorised or significantly scaled back.

It said players without such strong ERM capabilities were waiting for an imminent renewal that could leave them with oversize exposures possibly leading to overreactions. “For instance, these insurers may pull out of certain markets that they perceive to have higher terrorism risk.

“As a result, we could take rating actions on commercial-lines insurers that we feel are less prepared, and that have sizable concentrations in urban locations that we believe would be most vulnerable to potential terrorism events. The good news is that commercial-lines insurers with the highest marketshare of terrorism-exposed premiums have stronger ERM programmes,” S&P said.