TRIA extension remains uncertain; AM Best assesses consequences
AM Best has identified 30 insurers with substantial terrorism exposures and a heavy reliance on the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which is due to expire on December 31, 2020—something the rating agency has described as a significant concern.
Earlier this year, AM Best announced a review of the terrorism risk mitigation plans of rated insurers with material terrorism exposure that were reliant on TRIPRA. It requested detailed mitigation plans from each of these insurers in order to determine what steps were going to be taken in the event TRIPRA is not renewed.
The Terrorism Risk Insurance Act (TRIA) provides a financial backstop to property/casualty insurers for commercial businesses in need of terrorism insurance.
“Whether the programme is extended beyond 2020 and, if so, under what terms, remains in question. Given the nature of the programme and its lack of permanency, AM Best felt it imperative to re-engage with its rated insurers before the programme expires,” it said in a report detailing the results of the review published on October 17, “Terrorism Risk Mitigation Plans Not Expected to Affect Ratings”.
Through this analysis and review, AM Best has determined that no rating actions on those companies is necessary at this time. However, it said it will follow up in 2020 to confirm that the companies have implemented their mitigation plans.
Loss data
In terms of the 30 insurers with substantial terrorism exposures and a heavy reliance on TRIPRA, AM Best asked some to revise and remodel the loss data using more refined exposure information.
“In each of these instances, revised and remodelled loss data proved to be substantially lower and more in line with capital and expected risk appetites,” AM Best said.
“The same concern was observed in a previous analysis in 2013 in the lead-up to the prior programme’s expiration in 2014. Examples of these data refinements included accounting for shift work and the maximum number of employees occupying a single insured property at a given time, multiple insured locations versus a single insured location, and the layout of the property, whether campus or high-rise.”
AM Best said that for the remainder of the companies involved, the quality of the data was sufficient and a thorough review of each company’s detailed action plan was conducted. In each case, appropriate mitigation initiatives were in place which, upon execution, would reduce or eliminate the substantial loss exposures identified if TRIPRA were not to be extended.
In addition, all the companies were found to be acting in line with appropriate risk management practices, removing the need to place any of these companies under review.
The rating agency also pointed out that among the companies reviewed one of the most common terrorism exposure mitigation initiatives has been the purchase of additional reinsurance protection, which is currently available and affordable.
Other prominent strategies include the use of non-renewal notifications on the largest exposed risks to relieve the over-concentration at a given location and the use of a terrorism exclusion endorsement (for property only) contingent on the expiration of TRIPRA.
A number of insurers indicated they would be looking at each of these options in advance of policy renewals. AM Best said that it will follow up with these companies in 2020, when the strategies are due to be implemented.
Although no rating actions were taken as part of AM Best’s terrorism exposure review, the rating agency said that TRIPRA’s possible expiration on December 31, 2020, remains a “significant concern”. The stress test used by AM Best for this analysis was not meant to be a worst-case scenario but rather a simulation of a conventional weapon attack, similar to a five-tonne truck bomb.
A significant nuclear, biological, chemical, or radiological (NBCR) attack would likely have far-reaching effects that go beyond reasonable rating assumptions.
AM Best concluded by saying that terrorist attacks are inherently unpredictable, making it almost impossible to predict the ultimate severity of an attack. Therefore, as Congress debates the future of TRIPRA, the rating agency will continue to monitor rating units’ terrorism exposure data and will be prepared to take appropriate rating actions as necessary.
