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Failure to extend terrorism backstop could rattle comp market

Terrorist attack

A failure to extend the federal terrorism backstop beyond 2020 could lead to a “domino effect” of increased pricing across all lines of insurance, but could be particularly disruptive to the workers compensation sector, a Marsh LLC official told members of Congress.

On Jan. 12, 2015, President Barack Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act, which extended the Terrorism Risk Insurance Act, commonly known as TRIA, through Dec. 31, 2020. TRIPRA reduced the level of federal coverage of insured terrorism losses through 2020 by incrementally increasing the program trigger and the insurer’s co-participation percentage on a yearly basis.

“We cannot afford to be complacent,” Tarique Nageer, terrorism placement and advisory leader within the Marsh U.S. property practice in New York, told members of the U.S. Senate Committee on Banking, Housing and Urban Affairs on Tuesday.

Committee members are already meeting with key stakeholders and exploring potential reforms that could improve the program and reduce taxpayer exposure “without having a material negative effect on the costs and take-up rates for terrorism coverage,” said Sen. Mike Crapo, R-Idaho, chair of the committee.

Legislators understand that after the program lapse in 2014 that they have to start the process of extending the program early enough so that another lapse does not occur, Sen. Sherrod Brown, R-Ohio, ranking member of the committee.

“While there have been no significant insured losses in recent years and the industry is well capitalized, the access to terrorism insurance is still dependent on insurers’ preference, appetite and aggregate concerns,” Mr. Nageer said. “There’s a strong possibility that if the federal backstop ceases to exist, we could see a domino effect of increased pricing across multiple insurance lines, not just terrorism, with the likely result of major market disruption.”

Workers compensation insurers and reinsurers immediately focused on employee concentrations in large cities deemed high-risk terrorism targets, according to his written testimony submitted to the committee. Workers compensation losses emanating from the 9/11 terrorist attacks are estimated at about $2.8 billion (in 2018 dollars), but could have been substantially higher if the World Trade Center had been at full occupancy.

Employers will likely face challenges as insurers begin to underwrite comp policies without the potential financial protections of TRIPRA, with insurers less willing to underwrite the risks of employers in certain high-profile industries with large employee concentrations or in major cities, according to Mr. Nageer’s testimony.

“The impact of TRIA on the workers compensation market makes clear that as long as the federal backstop remains in place, there should be adequate capacity for workers compensation terrorism coverage,” he told the senators. “Because of its state-regulated nature, workers compensation policies cannot limit or exclude coverage for perils such as terrorism or nuclear, biological, chemical or radiological” events.

While NBCR attacks can lead to significant loss of life, such risks are not typically included in reinsurance policies, Mr. Nageer noted.

It is “important” that the federal government cover losses from future NBCR attacks, given their potential catastrophic nature, said Howard Kunreuther, co-director of the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania in Philadelphia.

“Currently, it’s ambiguous as to exactly what will happen although they have the intent to do that,” he said.

The U.S. Treasury Department and the insurance industry also need to coordinate on the program’s response to interdependent events such as cyberattacks that can cause catastrophic losses, Mr. Kunreuther said.

Congress could look to the example set by Pool Reinsurance Co. Ltd., the U.K. government-backed terrorism reinsurance backstop, for insights on potential reforms to the U.S. terrorism insurance program, Mr. Kunreuther said. For example, Pool Re — which was set up in 1993 by the U.K. government and insurance industry, and whose members include most insurers and Lloyd’s of London syndicates that offer commercial property insurance in the United Kingdom — is working with the government and insurers on mitigation initiatives such as concrete structures or barriers to protect property, he said.

Sen. Brown asked the experts about the availability and affordability of coverage for religious institutions, which are increasingly experiencing attacks from white supremacists, he said, noting that he had heard from some religious organizations that such coverage was unaffordable.

“The law is basically silent on that,” said Baird Webel, specialist in financial economics, Congressional Research Service in Washington. “There is a make-available provision, but it does not include specifications on what the premium is supposed to cost. This is certainly an issue.”

But there is “enough capacity within the marketplace” for a wide range of risks, including religious institutions, Mr. Nageer said.

“The terrorism marketplace, as we see it, is quite competitive,” he said.

Sen. Brown also asked the experts for how long the federal backstop should be extended.

“I think anywhere between seven to 10 years would be a good outcome,” Mr. Nageer said. “It would allow the marketplace to adapt and grow, build capital and be able to take on more of a trigger or coinsurance mechanism.”

“A longer period is always desirable, but I think there are tradeoffs in doing that because when you have a longer period, the question is are there going to be changes that would require one to review this,” Mr. Kunreuther said. “I think cyber is a very good example of that, by the way, because there are some real challenges as to how one is going to deal with cyber and that would not have been necessarily true five or 10 years ago.”

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