The reauthorization of the federal terrorism insurance backstop was met with relief in nearly all corners of the insurance industry, but program revisions made by Congress to limit government risk may exclude some insurance companies from a share in the game, a new report from Standard & Poor’s warns.
According to the financial services company, the problem lies with new stipulations in the Terrorism Risk Insurance Act, which raised the program’s trigger from $100 million in damages to $200 million, and increased co-insurance from 15% to 20%.
While the changes are “not significant enough to affect the insurance markets’ overall function or how much terrorism risk most insurers assume,” Standard & Poor’s did warn that small insurers assuming terrorism risk may not see any help from the government as a result of the higher industry event trigger.
“[Small insurers’] overexposure to terrorism risk that is less than their TRIA deductibles and within their co-insurance could be exacerbated by this amendment to this earlier program,” the company said in a press release. “They may not see any TRIA reimbursements with the doubling of the industry event trigger.”
The increased event trigger is particularly problematic when coupled with the increase in the mandatory recoupment from $27.5 billion to $37.5 billion, Standard & Poor’s said, despite a likely maxing out at to 6% of premiums.
Despite the concern over the TRIA renewal’s potential effect on small insurers, the ratings agency expressed general positive feelings on the legislation’s stabilizing effect on the market.
“The duration of the extension until 2020 adds to the stability of terrorism coverage,” Standard and Poor’s said. “Since the September 11, 2001 attacks, perceptions have changed so that terrorism is no longer a risk that the private market can fully assume.”
The company ended with an exhortation that the private market take on more terrorism risk in the future, saying “the industry could assume the risk for conventional terrorist attacks.”
“As noted, there is more of a question about the industry’s ability to manage nonconventional attacks reliably…due to these risks’ infrequent and evolving nature; unpredictable behavior may not be captured in probabilistic terrorism models,” Standard and Poor’s said.
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