Failure to extend the federal government's terrorism insurance backstop program would affect “virtually every property owner or business” in major metropolitan areas that wish to or must carry terrorism insurance, according to an analysis released Wednesday by Moody's Investors Service Inc.
“Many of these insureds now have embedded coverage, which is typically much less expensive than stand-alone coverage,” said Moody's in “Debate on Terrorism Risk Insurance Program Ongoing; P&C Insurers to Bear More Risk.”
Failure to reauthorize the program, which is slated to expire on Dec. 31 unless extended by Congress, could mean that all-risk markets willing to provide coverage would likely become limited, Moody's said. The analysis noted that the stand-alone terrorism insurance doesn't have the capacity to meet demand. Prices for terrorism coverage would rise, according to the report.
“Many businesses, especially those that are obligated to carry terrorism coverage, will have no choice but to purchase coverage at available market rates; and coverage for a broad range of catastrophic losses is also a requirement in many loan covenants,” said the report. It predicts that repercussions of a failure to renew the program would be “wide-ranging, from stalled expansions to the divesting of real estate in high-risk markets.”
Workers comp insurers 'especially exposed'
The Moody's report added that workers compensation insurers are “especially exposed, particularly in the event of a nonrenewal, due to the effectively unlimited (uncapped) nature of that mandatory coverage line of business, notwithstanding the continued availability of some catastrophic reinsurance protection available in the private reinsurance markets.”
It said that workers compensation insurers might avoid underwriting policies on a direct basis that are considered the most vulnerable to terrorism-related losses.
“In such a scenario, state workers compensation assigned risk funds would likely see a substantial influx of exposures from concentrated metropolitan areas,” said Moody's, adding that such an approach “does not necessarily ultimately release insurers from exposures to terrorism losses, as assigned risk funds recoup their losses from insurers participating in that line of business in the particular state, based on their recent shares of admitted market premiums.”
The Senate Banking, Housing and Urban Affairs Committee gave its unanimous approval to a bill last week that would extend the program for seven years while requiring insurers to bear a larger portion of any future catastrophic terrorism losses than they are required by current law. An extension bill could be introduced in the House as early as this week.