Despite a reduction in the number of large terror attacks in the United States, the market for terror (re)insurance is maturing and the peril is changing. Instead of targeting property, more frequent “soft” human attacks are becoming commonplace, increasing the threat of incidents occurring in or near public spaces and workplaces. Adding to the complexity is the current uncertainty around the U.S. terrorism risk backstop, known as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which is up for renewal on December 31, 2020. TRIPRA became law in November 2002, and has since been extended in 2005, 2007 and 2015. The law continues to provide an essential backstop protection to carriers, and it remains crucial to the continued stability of the terrorism insurance market, according to Emil Metropoulos, Terrorism Center of Excellence Practice Leader, Guy Carpenter.
Today’s scenario differs from that of the 2015 renewal because acts of terrorism have gravitated from catastrophic events causing enormous property damage to smaller, more localized human casualty-oriented events that involve attacks by lone wolves and smaller groups who use easily accessible weapons such as cars or assault rifles.
During the last TRIPRA renewal, there was a small pocket of resistance from lawmakers as the benefits were debated, which caused nearly a two-week delay in the TRIPRA renewal being put into action. Policies were written for shorter terms of less than a year, large accounts moved among various carriers, and carriers started requesting reinsurance contracts over multiple years.
“While the outcome of the 2021 TRIPRA reauthorization cannot be predicted, the lessons learned from the lag in the 2015 renewal decision were so impactful to the insurance industry and businesses in general that we do not anticipate that any party wants to replay the sequence of events that transpired,” says Metropoulos. “Although we assume less debate and resistance to a 2021 reauthorization relative to that of the prior reauthorization, changes to TRIPRA at a minimum should be expected and contingencies planned for.”
Metropoulos continues: “All carriers need to create mitigation strategies that include identifying where they are vulnerable and making sure they can non-renew and reduce exposures if needed as well as securing additional reinsurance protection all within a short time frame. Identifying these risks requires carriers to model data correctly to assess risk and prepare appropriately. Highly sophisticated terrorism modeling has evolved to consider the complexities of smaller, human-focused terrorism events. Guy Carpenter’s Sunstone™ modeling capability, for example, can rigorously contemplate a global terrorism target database with over 600,000 U.S. locations probabilistically, as well as drill down deterministically for select cities using the latest Computational Fluid Dynamics 3-D modeling technology and imagery.”
If it appears that the terrorism backstop will not be in place beyond 2021, large and medium insurers may need to begin to issue short-term policies and/or provisional notices of cancellation in upcoming renewals for policies that would be in effect after December 31, 2020. In addition, they may need to consider increased rates or further restrict deployed capacity as they reassess their exposure to terrorism.
“For smaller carriers, if TRIPRA expires or is renewed with significant cedent net retention increases, terrorism-exposed insurers with less than USD 500 million in surplus and exposure to terrorism losses may need to purchase additional private reinsurance to help protect capital and satisfy rating agencies and regulators,” Metropoulos adds.
No matter the outcome of the TRIPRA renewal, it is certain that rating agencies will continue to emphasize terrorism stress tests and assess ratings against specified criteria, including scenarios where the industry trigger falls short and there is no TRIPRA backstop protection.
“Ultimately, uncertainty about TRIPRA’s renewal may impact the nature and availability of (re)insurance coverage. Reinsurance protection can assist insurers in countering some of the potential effects of non-renewal or alteration of the program,” Metropoulos explains. “Guy Carpenter helps clients by creating tailored reinsurance covers that match insurers’ capital and risk levels for maximum efficiency. Exposed carriers with notable reliance on the backstop should be increasing the accuracy of their data and their modeling output. Guy Carpenter can provide clients with guidance in proactively addressing their plans for terrorism exposure identification and mitigation, facilitating a more effective dialogue with rating agencies.”
