TRIA extension unlikely until last minute: Brokers

NEW YORK--The federal government is unlikely to take any action on a possible extension of the federal terrorism insurance backstop until December 2007, so risk managers will again have to secure terrorism coverage in an uncertain insurance market, brokers say.

Members of Congress have many competing priorities and will be unable to devote their attention to another extension of the Terrorism Risk Insurance Act until the extended law expires in December of next year, several brokers said during a panel discussion on the state of the terrorism insurance market and the future of TRIA, sponsored by the Assn. of Professional Insurance Women Inc. in New York on Tuesday.

"It's going to come down to the wire again in 2007," said Robert Blumber, managing director and manager of Marsh Inc.'s terrorism specialty group in New York.

James Dover, director, special risks/counter terrorism for Aon Crisis Management in New York, said there is a 50/50 chance that Congress will eventually pass another TRIA extension. While Mr. Dover said he is hoping for such a renewal, he is working with clients and advising them to plan for a nonrenewal of TRIA.

A long-term solution with a minimum 10-year guarantee would be ideal so that buyers do not have to deal with an uncertain situation every two years, Mr. Dover said. In the absence of a long-term solution, the conditional exclusions included by carriers in policies during last year's renewal period come back into play, he noted.

A permanent solution "has to be affordable and provide good coverage," he said.

One possible solution occasionally discussed--the combination of terrorism and catastrophic risks into one insurance program--is not viable because of the challenges presented by terrorism risks, including the difficulty in modeling a terrorist event, the brokers said.

Amid the uncertainty over whether TRIA will be extended again, buyers have to take the time to understand which insurers in their programs are willing to take on terrorism risk and incorporate standalone capacity when possible, Mr. Blumber said. A key question, though, is how the standalone market would respond to an expiration of TRIA and whether standalone capacity becomes so scarce that it drives up the price, he said.

The recently released report on the terrorism insurance market by the President's Working Group on Financial Markets did a good job of summarizing developments in the terrorism insurance market, but it failed to address the impact of these issues on the insurance industry, the brokers said.

"They don't address the issue of what happens without a terrorism backstop," said Kim Quarles, a New York-based senior vp of Willis North America.

The report also does not factor in other key issues, including the fact that a majority of large insurers are publicly held companies that have financial responsibilities to their shareholders and must justify their decisions to rating agencies that are willing to downgrade them if they take on too much terrorism risk, she said.

Ronald Robinson, chair of the Chicago-based Defense Research Institute's TRIA subcommittee and a partner in the Los Angeles law firm of Berkes Crane Robinson & Seal L.L.P., served as moderator of the panel discussion.