The last several years have been characterized by a decline in both the frequency and severity of terrorist incidents in the US. There have been no certified terrorism losses in the country since the Terrorism Risk Insurance Act (TRIA) was originally passed following the attacks of September 11, 2001.
Nevertheless, the federal backstop created by TRIA and reauthorized as TRIPRA — along with similar public private mechanisms that exist in other countries — remains crucial to the continued stability and health of the property terrorism insurance market.
As TRIPRA’s expiration on December 31, 2020, approaches, Marsh & McLennan Companies (MMC) colleagues have spoken with Treasury department officials and legislators in both chambers of Congress, who generally recognize TRIPRA’s importance and appear optimistic about its extension.
In the coming months, policymakers will continue to consider their options and the potential effect that program changes could have on the marketplace.
MMC will continue to advocate for a robust reauthorization bill to help keep the terrorism insurance market viable and competitive for US buyers.
Meanwhile, we expect that insurers will closely monitor legislative activity. If it appears likely that the backstop will not be in place beyond 2020, they may impose sunset clauses in upcoming renewals for policies that would be in effect beyond December 31, 2020.
Some insurers may also increase prices or limit deployed capacity as they reassess their exposure to terrorism.
TRIPRA’S IMPACT ON THE REINSURANCE MARKET
Reinsurance capacity for terrorism can differ by reinsurers’ preference, appetite, and expertise. For conventional terrorism, reinsurers can deploy multiple aggregates to individual attack types.
However, the potential exposure from nuclear, biological, chemical, and radiological (NBCR) events is much larger and likely a “net loss” to reinsurers since retrocessional facilities do not typically cover NBCR.
Due to uncertainty around TRIPRA’s future, insurers and terrorism insurance buyers are selectively seeking additional reinsurance limits and coverages, under the assumption that there is a finite amount of capacity available in the private market, especially for NBCR events.
If TRIPRA is allowed to expire or is renewed with significant cedent net retention increases, terrorism-exposed insurers with less than $300 million in surplus will likely need to purchase additional private reinsurance market capacity to help protect capital and satisfy rating agencies and regulators.
Multiple carriers accessing the reinsurance market capacity simultaneously will impact pricing.
Should TRIPRA expire without a replacement, insurers with the ability to do so will likely deploy terrorism capacity only for preferred locations and pricing.
Reinsurers are also likely to only provide additional capacity at notably higher rates, which could create capacity shortfalls for some central business districts and employers with significant workers’ compensation accumulations.
As such, a federal backstop remains essential if the private reinsurance market is to continue to provide capacity to higher-risk areas.