Workers’ compensation market vulnerable without Tria

The workers’ compensation in the US is particularly vulnerable to the Terrorism Risk Insurance Act (Tria) expiring at the end of the year while terrorism coverage could become unavailable in major cities and construction businesses may be unable to obtain financing.

Those are some of the implications of the now inevitable expiry of Tria at the end of the year, according to catastrophe modeling firm AIR Worldwide. Efforts to reauthorise Tria fell apart late on December 16, 2014.

“If Tria expires, commercial insurers will no longer be required to offer terrorism coverage beginning January 1. Without a federal backstop, insurers may seek to limit underwriting for high concentrations of risks in major cities—causing terrorism insurance coverage to become unavailable or unaffordable. Insurers that do continue to offer commercial terrorism insurance would likely be required to maintain higher capital standards in order to avoid negative rating implications. Where coverage for terrorism-related events is still available, prices for this coverage will increase,” AIR Worldwide said.

It added that in the absence of Tria, the workers’ compensation insurance market would be particularly vulnerable to terror attack losses. State workers’ compensation statutes offer insurers less flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions.

“With or without Tria, it is mandatory for US employers to provide workers’ compensation coverage. If coverage is not available, employers may be forced to purchase insurance in the residual markets or self-insure. This could result in large amounts of risk being transferred to the residual market in a few states,” AIR said.

It added that allowing Tria to expire would have widespread implications, not only for the insurance industry, but also for the broader economy. “Construction and real estate business sectors may be unable to obtain financing without adequate terrorism coverage in place. If insurers limit underwriting following an expiration of Tria, businesses with high concentrations of employees could have difficulty obtaining coverage for workers’ compensation, including higher education institutions, hotels, airports, hospitals, and financial services, among many others.”