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CHICAGO — The federal terrorism insurance backstop set to expire at the end of this year likely will be replaced or extended, but insurers are worried about workers compensation exposures that could stem from a terrorism event if the backstop goes away, a panel of insurance industry experts said Tuesday.
“The big exposure in terrorism is not what everybody thinks,” said Benjamin A. Walter, president and CEO of Hiscox USA. “Everybody thinks of the building that falls down or the bridge that blows up or the infrastructure that's damaged. And that's an issue, but that's very modelable in terms of what the impact is.” What most insurers get “freaked out” about when it comes to terrorism risk “is the spiral that could happen on the workers comp side,” he said.
Mr. Walter made his remarks during a panel discussion at this year's 24th annual Insurance Executive Forum presented in Chicago by the Katie School of Insurance and Financial Services of Illinois State University. The group discussed potential outcomes in claim exposures and insurance policy pricing if the Terrorism Risk Insurance Program Reauthorization Act of 2007 expires at the end of 2014.
Unlike other commercial insurance that can exclude terrorism coverage, all states require insurers to cover terrorism in their workers comp policies. If TRIA expires, Mr. Walter said insurers would put pressure on state insurance regulators to allow terrorism exclusions in workers comp policies.
“States aren't going to want to go for that for understandable reasons, and that's going to put more pressure on the workers comp market, which has broader implications in the economy,” he said.
Keith Wolfe, managing director for Swiss Re Ltd., agreed that casualty claim liabilities would be more worrisome than property exposures in a post-TRIA environment. He believes that TRIA or a replacement is likely to be passed before that scenario would come to pass, possibly after the November elections.
“We think that there is probably a place for the federal government to still stay involved in this exposure,” Mr. Wolfe said. “The program that's currently enforced is something we're advocating heavily to see continue (and be) very similar or the same” to the current TRIA backstop.
Karen Clark, president and CEO of consulting firm Karen Clark & Co., told panel attendees that catastrophe models are becoming more transparent than previous “black box” cat models, which gave projections on potential cat losses but did not show specific claims data from insurers that is used to generate such predictions.
Ms. Clark called the science behind all cat models “little data” and said the backbone of such models is claims information that previously had been inaccessible to everyone but model developers.
“The big data actually comes from insurance companies, and that is the claims data,” she said. “That's literally the only big data.”
Bryon Ehrhart, CEO of Aon Benfield Americas, said Aon uses a transparent cat model, and said such models are preferable to “black box” cat modeling.
“Any material assumption needs to be revealed to the user of that report,” Mr. Ehrhart said. “I was very frustrated in my very early days at Aon when I met some of the modeling firms, and they just said, 'We have an answer, but we won't tell you the components.' I thought that would be a bad model, and it turns out 20 years later that it is a bad model. Clients do want to know, 'How do my exposures rate to losses? How does the way I pay claims relate to losses?'”
Andrew Nottestad, director of corporate insurance for United Continental Holdings Inc., said risk managers have gained more influence with C-suite executives in their companies
For instance, Mr. Nottestad said United “stress tests” its one-year and five-year financial plans by comparing those plans with three or four potential risks that are emerging worldwide, such as shifts in fuel prices and concerns over the spread of the Ebola virus.
“We make sure that the senior management's kind of aware that if this type of event happens, this is what the likely outcome is,” Mr. Nottestad said. “It also allows the executive risk committee, which is made up of the senior leaders of the firm ... to kind of think about these scenarios in a more strategic way before they happen so they can kind of get their arms around them.”
This year's Katie Forum took place at the Union League Club of Chicago and was moderated by Paul Bomberger, managing editor of Business Insurance.
Illinois State University’s Katie School of Insurance and Financial Services named the chairman of Lockton Cos. L.L.C. its 2014 Hall of Fame Laureate.