September 18th, 2014

Terrorism Reinsurance Strategies

Posted at 1:00 AM ET

Even if the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is renewed without wholesale changes, the recent organic growth in US nationwide workers compensation premiums as a result of rate rises and payroll growth is likely to cause insurance companies’ deductibles to increase. This in turn is likely to increase demand for terrorism reinsurance.

Guy Carpenter has therefore been exploring additional coverages for terrorism protection over the last couple of years. Multiple options have been priced for terrorism on both a combined basis (with current catastrophe coverages) and a standalone basis. These include traditional excess of loss cover by expanding current catastrophe limits and including terrorism, aggregate excess of loss cover to be structured to attach within/above TRIPRA deductibles and option contracts in 2014 for terrorism capacity at January 1, 2015 with fixed prices.

Other options have included 24 month contracts to reserve capacity for 2015 that include cancellation provisions in the event of TRIPRA being renewed with similar terms and evolution of prior reauthorizations, multi-line bundling of catastrophe programs to consolidate capacity that may result in expanded program limits and facultative cover for select locations and policies contributing to the largest probable maximum losses.

It is important to note that the influx of capacity from alternative sources into the US property catastrophe reinsurance market has not yet been widely deployed into terrorism risk. This is mainly due to a lack of confidence in the probability component of terrorism models, the tail risk/payout patterns for workers compensation and the possible correlation of a downturn in the equity/investment market to a large-scale terrorism event.

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