Uncertainty over renewal of the federal terrorism insurance backstop presents considerable risk management challenges but also opportunities for risk managers who prepare appropriately.
Risk managers must prepare their organizations for the possibility that the backstop, which was originally created by the Terrorism Risk Insurance Act in 2002, could expire on Dec. 31, a panel of experts said.
“At the moment, navigating through TRIA is a bit like walking a tightrope,” said Janice Ochenkowski, managing director of global risk management at Jones Lang LaSalle Inc. in Chicago. But, she said, “A professional risk manager can do it.”
Ms. Ochenkowski, made her comments as part of a panel examining issues surrounding TRIA renewal titled “TRIA: If a Tree Falls in the Woods ...” at the Risk & Insurance Management Society Inc.'s Annual Conference & Exhibition last month in Denver.
Ms. Ochenkowski, who also is vice chairman of the RIMS external affairs committee, said that TRIA isn't an insurance policy. Rather, it is a backstop for eligible insurers in the event of a terrorist event. If TRIA is allowed to expire, those insurers could face unlimited liability for terrorism-related losses and likely would look to reduce their exposure by writing fewer policies and lowering limits, she said.
Another panelist, Emil Metropoulos, senior vice president at Guy Carpenter & Co. L.L.C. in New York, said that with U.S. property/casualty insurance and reinsurance capital estimated at $700 billion and the largest modeled terrorism loss scenario being a nuclear detonation in midtown Manhattan that could result in $941 billion in losses, the industry is not adequately capitalized to handle such an event without a federal backstop.
Consequently, if TRIA is not renewed, those companies able to find coverage for terrorism losses might find it prohibitively expensive, Ms. Ochenkowski said. Meanwhile, risk managers with high-risk operations or offices in major urban areas may have difficulty obtaining adequate coverage, she said.
Given the uncertainty and the potential consequences if TRIA isn't renewed, Ms. Ochenkowski said risk managers should ensure that relevant stakeholders in their organizations understand the potential effects of TRIA not being renewed.
“If you can't get the face-to-face meetings, next I'd suggest writing an email,” she said, advising risk managers to make the message specific to each group of stakeholders and limit it to a high-level presentation hitting highlights of the effect of TRIA's potential nonrenewal.
“For a risk manager, this is a phenomenal opportunity for you to be a thought leader in your organization,” Ms. Ochenkowski said.
She also advised risk managers to build higher costs into 2015 budgets.
“In addition to keeping your organization advised make sure you are keeping up to date on the situation,” Ms. Ochenkowski said. Risk managers should work with their brokers to create a plan and to price options, she said, then present that plan to their organizations and allow plenty of time for discussion.
Mr. Metropoulos suggested that risk managers align their insurance programs with insurers that will continue to support terrorism programs if TRIA expires. “You can bind standalone terrorism products to lock in coverage prior to a TRIA sunset,” he said.
Risk managers also can consider techniques like a “standalone capacity reservation approach” in which the standalone terrorism capacity initially takes an excess position in the firm's terrorism coverage program with an option to “flip” to the primary position if TRIA is not extended, Mr. Metropoulos said.
Other strategies involve the use of captives, he said, including retaining risk in the captive — subject to sufficient capital — or reinsuring the captive's exposure in the standalone terrorism market.
“You will have to manage risk in 2015 with or without TRIA,” said Ms. Ochenkowski, and a risk manager should be ready either way.
Richard Rabs, chairman of RIMS external affairs committee, moderated the panel discussion.