Despite being overshadowed by the transnational Islamist terrorist threat since September 11, 2001, a number of destructive and costly attacks have been carried out by non-Islamic domestic groups and individuals. These include the Irish Republican Army (IRA) in the United Kingdom, Timothy McVeigh of the Oklahoma bombing in the United States and the Tamil Tigers in Sri Lanka. Such acts have resulted in significant property losses for (re)insurers. Indeed, as shown below, seven of the top ten most costly terrorist attacks (in terms of insured property losses) between 1990 and the first quarter of 2014 were carried out by these domestic groups.
Posts Tagged ‘Legislation’
The threat from terrorism has undergone significant change since the attacks of September 11, 2001. Heightened and more effective counter-terrorism activities in the following years have prevented repeat attacks on the scale of those carried out in New York and Washington D.C. Nevertheless, al-Qaeda and its affiliates, along with individuals inspired by the movement, still pose a significant threat to Western interests around the world as events over the last 18 months have shown.
The chart shows that in 2012 there were over 850 insurers participating in the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), writing over USD183 billion in premiums. Using the current 20 percent deductible requirement of TRIPRA and policyholder surplus as a filter, Guy Carpenter found that the smaller to mid-sized insurance carriers would be most affected should there be an increase in the deductible of any program that replaces TRIPRA. Without TRIPRA, insurers with less than USD300 million in surplus would likely need to incorporate additional private reinsurance market capacity to protect their capital and to satisfy rating agencies and regulators.
The Republican-led Financial Services Committee in the U.S. House of Representatives put forward a draft proposal outline to reauthorize TRIPRA on May 1, 2014. After further negotiations, the House Republican leadership presented the TRIA Reform Act of 2014 on June 11 that proposes a five-year reauthorization of the federal program (to the end of 2019) with a similar copay structure to that of the Senate bill. However, a number of changes have also been proposed that have the potential to impact the market if fully implemented, including higher program triggers for non-NBCR events, an increase to the recoupment rate and an enhancement to the program’s taxpayer repayment requirements. The table outlines the different terms and durations that have been put forward by the Senate and the House.
Guy Carpenter released its latest report on global terrorism. The report highlights evolving global terrorism risks and the impact these risks have on the reinsurance market. It also emphasizes the vital role the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) plays in the United States ensuring the availability and affordability of terrorism (re)insurance capacity throughout the country.
Here we update our review of some recent GC Capital Ideas stories related to the issue of terrorism, addressing the impact on both the insurance industry and technology:
New Marsh Report: Need for Terrorism Insurance Strong: A new report released by Guy Carpenter parent company, Marsh, confirms that demand for terrorism insurance remains strong and the existence of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) plays a key role in making coverage available and affordable.
Chart: Countries Operating Compulsory or Optional Terrorism Pools: A summary of the compulsory and optional terrorism pools that operate around the globe.
Range of Cyber Risks: Cyber risks range from legal liability and computer security breaches to privacy breaches of confidential information. Data breaches typically involve the intent to either copy, extract or destroy data. However, the risks that companies face transcend simple data incidents and often include the broader range of perils associated with the structural vulnerability of our economy to failures of technology generally. Further risks include cyber extortion, cyber terrorism, loss of revenue due to a computer attack, recovery costs, reputational damage and supply chain disruption.
Here we review GC Capital Ideas entries highlighting Europe’s embrace of periodic payment orders over traditional lump sum payments for the settlement of bodily injury claims.
Time Off for Certain Behavior: The Courts Act of 2003 fundamentally changed the way that catastrophic injury claims are settled by insurers. It gave the courts the power to enforce a periodic payment order (PPO) as compensation instead of an upfront lump sum payment. A PPO is an annuity payment from the insurer to the claimant, and is designed to cover ongoing care costs, loss of earnings and other expenses associated with the injuries sustained for the rest of the claimant’s lifetime.
Chart: Prevalence of Annuity Settlements in Europe: For bodily injury claim settlements in Europe, the trend is shifting away from lump sums and towards annuity-type settlements, which come with risks related to longevity, inflation and hedging.
Here we bring together the GC Capital Ideas two part series on periodic payment orders authored by Victoria Jenkins:
Time Off for Certain Behavior, Part I: Behavioral economics is a fascinating field and one which actuaries should be aware of in their everyday work. It is the study of inherent biases in human decision-making. Many examples of these biases have been cited in connection with the financial crisis, and increasingly the implications for insurance are being examined.
Time Off for Certain Behavior, Part II: Our experience in doing this has led to an “actuarial hunch” that PPO claims converted to their Ogden equivalents are not from the same underlying statistical distribution as traditional lump sum values. Fitting severity distributions to these claims in among the traditional lump sums can feel a bit like fitting to “apples and oranges.”
Victoria Jenkins, Managing Director
On a Hunch
Our experience in doing this has led to an “actuarial hunch” that PPO claims converted to their Ogden equivalents are not from the same underlying statistical distribution as traditional lump sum values. Fitting severity distributions to these claims in among the traditional lump sums can feel a bit like fitting to “apples and oranges.” On comparing claimants with similar injuries, claims settled more recently as a PPO, revalued to an Ogden basis, just seem to be more expensive than claims that were settled a few years ago prior to the arrival of PPO settlements. This difference persists even after adjusting for inflation and after adjusting for the fact that it is often the larger claims that settle as a PPO. If our observation turns out to be true, excess of loss reinsurance pricing could have an implicit double loading. First, in the inclusion of these claims in the original lump sum severity curve fitting process (including the derivation of the development pattern applied to lump sums) and second, in the PPO loading applied afterwards. Similarly this sort of distortion could affect the parameterization of capital models for classes of business that have experienced PPO claims.