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Senate's failure to reauthorize TRIA sends shockwaves through insurance sector

Private terrorism coverage could be scarce, costly

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Senate's failure to reauthorize TRIA sends shockwaves through insurance sector

The failure of the U.S. Senate last week to enact legislation extending the federal government's terrorism insurance backstop beyond its year-end expiration sent shockwaves through the insurance sector.

Brokers and insurers were scrambling to field policyholder requests for pricing and capacity information on private terrorism insurance coverage to replace the lapsing federal program. While an estimated $300 billion in total private market capacity is available, capacity for high-risk areas such as midtown Manhattan is limited and the coverage is expected to be expensive.

For risk managers in the construction and real estate industries in particular the program originally created by the Terrorism Risk Insurance Act of 2002 has been a crucial resource allowing them to fulfill insurance requirements imposed by loan covenants.

They and insurance buyers in other high risk industries potentially were left without coverage by the unexpected failure of the Senate to reauthorize TRIA before its Dec. 31 sunset.

“As an industry, everyone is surprised,” said Ben Tucker, New York-based head of the U.S. terrorism and political violence crisis management business at XL Group P.L.C.

“We are surprised and disappointed about the uncertainty it has created,” said Brad Wood, senior vice president, risk management, at Marriott International Inc. in Bethesda, Maryland, said

Many insurance industry lobbyists had been pushing for the program's reauthorization for months and were optimistic that it would be reauthorized in some form. TRIA, which has always contained a sunset clause, had twice been reauthorized previously.

The Terrorism Risk Insurance Program Reauthorization Act of 2014 was a compromise measure, earlier passed by the House, which would have extended the backstop for six years and raised the federal coverage trigger to $200 million in industry losses from $100 million. The measure also contained an unrelated measure that would have created the National Association of Registered Agents and Brokers to streamline the payment of state brokerage licensing fees.

The inclusion of NARAB proved to be the downfall of TRIA as Sen. Tom Coburn, R-Okla., who is retiring, objected to the measure on states' rights grounds. Mr. Coburn last week implemented a procedural measure extending debate time on the bill that effectively killed it for 2014. Industry organizations are already pushing lawmakers to quickly pass reauthorization legislation early in the next Congress (see related story).

Initial shock at the failure of the anticipated reauthorization gave way to urgent efforts to find private market alternatives.

“We are already seeing significantly increased demand for private-market terrorism insurance” effective Jan. 1, said James Dover, New York-based senior vice president of the terrorism and sabotage insurance practice for Ironshore Inc., which offers $300 million in per-risk capacity for stand-alone terrorism coverage.

Maurice R. Greenberg, chairman and CEO of Starr Insurance Holdings Inc., said in a statement: “While we have every hope that Congress will pass an extension of TRIA when it convenes in January, Starr is ready to respond to the needs of our clients. We have capacity for stand-alone coverage for a broad array of property, casualty and aviation exposures.”

XL, which offers $100 million of per risk capacity for stand-alone terrorism cover, saw a more than fivefold increase in submissions in the 48 hours after the Senate's inaction, Mr. Tucker said.

Demand is also growing at managing general agent Global Excess Partners L.L.C., according to New York-based partner Mary Pat Thurston. The company had received 18 new submissions by day's end last Wednesday, and the phones are “ringing off the hook,” she said.

There is about $300 billion of capacity for stand-alone terrorism insurance in the marketplace, according to market sources, but there is a huge variation in available capacity depending on the location of the property risks.

For so-called Tier One cities, which include New York, Chicago and San Francisco, available capacity can range from about $1 billion all the way down to $250 million, depending on ZIP code.

Competition for such Tier One capacity is likely to be acute in the aftermath of the terrorism bill's expiration, sources agreed.

“In central business districts, there is the potential that demand will outstrip capacity,” Ironshore's Mr. Dover said.

Tier One capacity will be quickly taken up, said Ms. Thurston of Global Excess.

“I do think there will be a rush to lock up available coverage for January, particularly in Tier One cities, said Robert Hartwig, president of the Insurance Information Institute Inc. in New York. “As policies expire, insurers will no longer be obliged to offer terror cover as they were under the act, so carriers will offer terrorism insurance on a case-by-case basis at a price generally higher.”

Real estate and construction risks will be in particular need of terrorism coverage to satisfy the requirements of loan covenants. Duncan Ellis, national property practice leader at Marsh L.L.C. in New York, said that the expiration of the program will have a major effect in areas such as construction, commercial real estate and “basically anywhere where commercial lending” is involved.

Policyholders with lender requirements on their mortgaged properties could technically be in default of those lender requirements and loan covenants if their coverage lapses when TRIA sunsets, said Ironshore's Mr. Dover.

Mr. Hartwig of III said that specific industries, such as those managing critical infrastructure, the energy and health care sectors, and the vacation and tourism industries, are also likely to move quickly to secure coverage.

High profile events, such as the National Football League's Super Bowl, would also be covered, he said.

“The Super Bowl will be played,” said Mr. Hartwig. “For those marquee events, they will do everything possible to secure coverage, and they're willing to pay top dollar to do it.”

The sunset of the TRIA legislation also triggered the activation of conditional commercial policy contract language to exclude terrorism coverage from Insurance Services Office Inc., part of Verisk Analytics Inc., the organization said Thursday in a statement.

The three major brokers all issued statements last week saying they are working with risk managers to secure private market coverage.

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