January 14th, 2013

Terrorism: Merits of Reinsurance Protection

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President, Lucy Dalimonte, Senior Vice President, Ellen Rieder, Managing Director and Emma Karhan, Senior Vice President

Although the need for the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) is clear, reinsurance protection can help companies withstand the non-renewal or alteration of the program. Indeed, even though the federal backstop currently remains in place, some insurers have decided to further protect their balance sheet with reinsurance protections. These standalone reinsurance protections typically exclude losses resulting from nuclear, biological, radiological or chemical instruments, but would protect all losses from their property, casualty and workers’ compensation business written. Standalone reinsurance pricing continues to vary depending on thegeographical location of the risk(s) as well as proximity of the risk to a perceived target of terrorism.

Insurance companies that are perceived to benefit from lower TRIPRA deductibles (based on direct earned premiums) will likely see a greater impact and may need to reduce their aggregate exposure to terrorism on the front end (reduce writings) or buy more reinsurance protection. While there currently seems to be ample capacity for companies that buy standalone terrorism reinsurance, increased demand would likely result in higher prices. Higher reinsurance costs could make it unaffordable for smaller companies to buy enough coverage. While it is still too early to predict, any dramatic change in TRIPRA could lead to contraction in the marketplace in both insurance and reinsurance.

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