Posted on 24 Jan 2013 by Neilson
Property/casualty insurance trade groups are gearing up for a fierce lobbying effort in support of extending the widely popular Terrorism Risk Insurance Program Reauthorization Act, set to expire in December 2014. A key facet of the industry's effort to renew TRIPRA, a top legislative priority for 2013, will focus on whether cyber-terrorism risks will be covered under the law should Congress extend the law beyond the 2014 deadline, industry representatives said.
As currently written, it is unclear whether the law provides the same federal backing to insurers hit with catastrophic cyber-terror claims that they would receive after more conventional terrorist attacks. That could have significant consequences at a time when cyber-attacks, both foreign and domestic, are becoming increasingly commonplace.
"If a terrorist or group of terrorists launch a severe cyber-terror attack on the United States or businesses in the U.S., there are serious questions about what impact that would have on the market. Right now, there is no specific reference to cyber-security in the law, so there is uncertainty about what the federal government's role would be in that kind of situation," said Robert Gordon, senior vice president of policy development and research for the Property Casualty Insurers Association of America.
Gordon, who served as a senior attorney for the U.S. House Financial Services Committee during past terrorism risk insurance legislation negotiations, said cyber-terrorism did not come up during previous negotiations over how to extend the program. "It wasn't a concern back then. But given the number of statements coming from the administration about cyber-security, it's a much bigger concern for our members than it has been before now," Gordon said.
However, with Congress facing a series of politically charged fiscal issues, industry representatives said they did not expect lawmakers to take up TRIPRA extension legislation in the near future (Best's News Service, Nov. 28, 2012).
Congress enacted what was then known as the Terrorism Risk Insurance Act following the terrorist attacks of Sept. 11, 2001 as a way to generate more insurance coverage capacity for terrorism events and in turn, provide greater economic stability following future attacks. Congress reauthorized the program in 2004 and again in 2007.
Andrew Colannino, an A.M. Best vice president who follows terrorism insurance-related issues, said the concern is about reduced capacity if the law is allowed to expire. "Right now, many insurers are dependent on the capacity provided by having the coverage in place. If the law goes away, they may have to curtail writing terrorism-exposed risks. How might insurers be affected? Youd really have to go on a case-by-case basis with each insurer to see how much theyd be affected. If capacity is reduced, there would be a significant increase in prices for terrorism insurance."
A.M. Best is looking at whether an insurer has the strength to play claims, Colannino said. The capacity insurers get from the federal government in the event of a catastrophic terror event allows them to write larger risks because they arent keeping all of the exposure for themselves. "The alternative is to go to the reinsurance market, where the capacity is not there to the extent that it is with TRIPRA. And if the coverage goes away, youre really not going to be able to raise prices enough to offset the decreased capacity," he said.
Gordon said terrorism insurance is designed to speed up the recovery process following an attack. The difference is, Gordon said, that in the case of terrorism, it is impossible to model potential risks because of the intentional nature of terrorism and the fact that attacks are often designed to maximize disruptions to the U.S. economy. Another difficulty is government intelligence about potential attacks is classified and not given to insurers to aid in risk modeling
Without the program, industry representatives said fewer insurers would be willing to offer coverage to "trophy properties" that could become the target of a terrorist attack.
Current estimates cited by PCI say the available "stand-alone" terrorism capacity in the private market is between $2 billion and $10 billion. But with TRIPRA in place, the capacity of covered annual TRIA premiums swells to $200 billion.
That said, some remain skeptical of the idea that the private market could not step in to fill the role of the federal government under TRIPRA.
"Because of how TRIA retentions are calculated, some monoline companies have been conferred an unintended competitive advantage by having a relatively small statutory retention. Therefore, they have been more aggressive in offering terrorism coverage," said Conan Ward, president of Conan Ward Consulting Inc. and the former chief executive officer of Validus Reinsurance Ltd. "By letting a more market-based, risk-based pricing structure dictate pricing and retentions, the overall market and consumers would be better served."
Michael Lagomarsino, an A.M. Best assistant vice president said "The main concern we have is determining whether a company is sufficiently managing its aggregate risks. Are they watching the areas where they are likely to experience an aggregation of risks? Are they watching their geographic concentrations in top-tier cities, or are they moving into more rural areas? There is ongoing uncertainty, so you have to have a long-term commitment to this kind of coverage. The government is there currently to keep companies viable in this area."
For federal government funding to kick in, the country would have to see total terrorism-related damages exceed $100 million in a given year. At that point, each insurer offering terrorism insurance would be required to cover a deductible amounting to 20% of its annual premium income for TRIPRA-covered lines of business.
Once the federal backstop kicks in, insurers would still be required to cover 15% of all claims up to the law's $100 billion cap. The other 85% would be covered by the federal government and paid back over time.
The U.S. Treasury Department would determine the rate at which it would recoup the money spent by the federal government. That funding would be recovered through charges on future insurance premiums. Those features were included in the legislation to minimize taxpayers' financial risk from terrorism.
"Some have characterized TRIPRA as a government bailout of the industry. But if you look at the law, you will see that the industry has significant skin in the game. This is just a stabilizing mechanism," said J. Stephen Zielezienski, senior vice president and general counsel of the American Insurance Association.
In fact, the legislation is designed to keep the program from kicking in for events smaller than an attack on the scale of the Sept. 11 attacks. According to an Insurance Information Institute study, if TRIPRA were to be triggered, insurers would have to pay up to $37.4 billion ($27.5 billion in deductibles plus $10.9 billion in co-pays), making a TRIPRA-eligible attack the worst in U.S. history. The entire insured losses from the Sept. 11, 2001 attacks were $31.6 billion, the III report said.
Despite the popularity of TRIPRA in the insurance industry, there are areas of the law that could be improved, Zielezienski said. He said Congress should look at similar programs set up in other countries to see whether TRIPRA can be made to function more efficiently or to better serve the country's economic interests, including on the cyber-terror front.
But Zielezienski said he wasn't optimistic that Congress would be willing to tackle the cyber-terror question any time soon.
"Making some changes to TRIPRA would be nice," Zielezienski said. "From a practical standpoint, we just want to ensure the program stays in place."