Recently legislation was introduced in the U.S. House of Representatives to extend the Terrorist Risk Insurance Program Reauthorization Act (TRIPRA), which expires Dec. 31, 2014. This is the opening act of a likely heavily debated process on the possibility of extending and/or modifying this federally backed program, according to Fitch Ratings.In a new special report, Fitch discusses some potential economic and credit rating effects for the property/casualty insurance industry and Commercial Mortgage Backed Securities (CMBS) market if TRIPRA is not renewed or coverage substantially declines.
U.S. government sponsored terrorism reinsurance originated amidst great national fear and anxiety following the events of Sept. 11, 2001. Insurers were frequently excluding terrorism exposure from coverage. Passage of the first terrorism reinsurance program required insurers to offer coverage of terrorism exposures to participate in the program, alleviating economic uncertainty in commercial property and mortgage markets.
Over the last decade, commercial property insurers have enhanced their ability to measure and model exposure to terrorism events. Net exposures are managed currently through the availability of large reinsurance limits through TRIPRA. Withdrawal of TRIPRA reinsurance protection without readily available substitute coverage could lead insurers to exclude terrorism from property coverage to manage risk aggregations.
Although, private market stand-alone terrorism coverage has increased over time, it is unlikely that substantial private market capacity would arise as a substitute to TRIPRA coverage if the program is allowed to expire. Likewise it is difficult to predict whether financial and property markets have a greater propensity to adapt to an environment without government sponsored terrorism insurance program compared to the conditions in 2002.
Insurers are not allowed to exclude losses from terrorism related perils in workers' compensation policies. Workers' compensation is statutorily required in almost every U.S. jurisdiction and exclusions and limitations of this product line are generally prohibited. TRIPRA expiration or meaningful program changes may have significant effects on workers' compensation insurance coverage availability and pricing.
Terrorism insurance has been an important structural protection for CMBS bondholders. Fitch may decline to rate or cap its ratings on CMBS transactions with inadequate terrorism insurance. This would most likely occur on a high profile property in a single asset CMBS transaction. However, it more difficult to determine the ratings effects that a lack of terrorism coverage might have on multi-borrower CMBS pools.
Fitch will continue to monitor and assess any potential changes to TRIPRA. Material changes or elimination of TRIPRA will require some insurers to significantly adjust underwriting portfolios to reduce gross terrorism exposures. Specialty or monoline workers' compensation or commercial property writers that focus on larger urban markets would likely have the greatest credit sensitivity to reductions in available terrorism reinsurance protection.
The report 'U.S. Terrorism Reinsurance: Looming Uncertainty of Program Renewal' dated July 31, 2013, is available at 'www.fitchratings.com' under 'Insurance' and 'Special Reports'.