Last month’s Boston bombings drew attention to the expiration of the federal backstop for terrorism insurance that occurs at the end of next year. While the end of 2014 may seem distant, companies will have to start thinking about their alternatives if Congress doesn’t reauthorize the backstop when they start shopping for insurance policies that take effect at the start of next year.
“There is a misleading focus on the Dec. 31, 2014 date,” said Robert Hartwig, president and economist of the Insurance Information Institute. “In September or so, companies begin to negotiate their coming-year insurance packages and insurers negotiate their reinsurance. They will all reflect the possibility that anything renewing in 2014 could face the possibility of TRIA no longer being in existence.”
The federal backstop for terrorism insurance, known as the Terrorism Risk Insurance Act, or TRIA, was passed in 2002, renewed in 2005 and renewed again in 2007, when it was renamed the Terrorism Risk Insurance Program Reauthorization Act, or TRIPFA.
To date, the government has not paid out on the backstop. The federal government has yet to say whether it will certify the Boston Marathon bombings on April 15 as a terrorist act. It would take such a certification, plus losses totaling $100 million, to result in the payout of federal funds. Risk modeler RMS has estimated property losses from the Boston bombings are unlikely to exceed $1 million.
A recent report from insurance broker Marsh shows 62% of U.S. companies currently buy terrorism coverage, and Marsh says the take-up rate has been in the low-60% range since 2009. Seventy-seven percent of companies in the Northeast purchase property terrorism insurance, versus just 53% of companies in the West and 58% in the Midwest. Media companies (81%), educational organizations (75%) and financial institutions (75%) are more likely to buy terrorism coverage than manufacturing companies (48%), energy and mining companies (43%) and chemical companies (42%), according to Marsh.
If Congress fails to extend TRIA, “we expect the availability of terrorism insurance to drop off and we expect pricing probably to increase,” said Ben Tucker, a senior vice president at Marsh Inc. and leader of its property specialized risk group.
Will the Boston bombings convince Congress to renew TRIA? “I think it shows Congress and the general public that programs like this are still needed,” said Carolyn Snow, a member of the board of RIMS, the risk management society, and director of risk management at Humana. “It’s just such an awful thing that it occurred, but it does focus people’s attention on the need for the program.”
Snow added that renewing TRIA is RIMS’ “No. 1 legislative priority.”
Hartwig expects a fight over renewing TRIA, noting that many members of Congress weren’t around in 2007, “so they’re not familiar with the issue.” Some legislators from rural areas “may misperceive it as a big city issue,” he said. “And then there’s a misunderstanding about the program – some people throw it into the same category as national flood insurance, which is plagued with cost overruns.”
In fact, Hartwig said, TRIA is “almost the only federal program that I can name that has achieved all of its goals and has achieved those goals at effectively no cost to taxpayers.”
Although a couple of measures have already been introduced in Congress to extend TRIA, opposition is already building. Last week, the Consumer Federation of America issued a statement arguing that the insurance industry’s current $586.9 billion in surplus means that it could easily handle the cost of a terrorist event, noting that 9/11 resulted in insured losses of $24 billion in 2013 dollars. The group suggested that insurers have become “nervous nellies.”
The insurance industry argues that terrorism risk is too random to be modeled and insured.
Marsh’s Tucker, pictured at left, notes that when it comes to natural disasters, insurers have hundreds of years of data to use to model the risks and price their coverage. “And wind and flood or earthquake, there’s no human element,” he said. “With terrorism, thankfully there haven’t been so many events that you could create a good model, and the human element brings in an unpredictability that we believe makes modeling from a probability perspective very difficult.”
Given that Congress is unlikely to have made any decision on TRIA by the end of this year, insurers will have to decide whether contracts with a start date of Jan. 1, 2014, offer terrorism coverage regardless of what happens to TRIA, or have a sunset clause that ends terrorism coverage if TRIA isn’t extended, Tucker said.
Companies that buy terrorism insurance as a standalone policy rather than part of their property-casualty coverage could consider a capacity commitment contract, which allows them to reserve capacity for a future date, or the flip approach, which involves buying excess capacity that could fill the gap if TRIA is not extended.
Companies could also choose to self-insure for terrorism, Tucker said, but that increases their risk exposure. And real estate and construction companies are often required by their lenders to have terrorism insurance, so self-insurance would leave them in breach of their lending requirements.
Tucker said another key area will be workers compensation insurance, and noted that workers compensation policies aren’t allowed to exclude terrorism. As a result, insurers try not to write too much coverage in areas seen as high risk, like central business districts.
“What they are already seeing right now in New York City and they expect it to happen in other areas, insurers are monitoring their aggregate [workers compensation] exposure to terrorism to closely,” he said. “If TRIA goes away, that will have an impact on the way that market operates with regard to monitoring of terrorism aggregates.”