Federal Reinsurance Program's Future Uncertain as TRIA Review Reveals Market Growth

Strategic Insights -

The Terrorism Risk Insurance Act of 2002 (TRIA) has served its function as a temporary backstop against catastrophic terrorism losses and should not be renewed in its current form, a U.S. Treasury Department report concludes. Commissioned to review the effectiveness of TRIA, the study found that insurer surplus and capacity for terrorism risk have grown over the program's life, while policyholder take-up rates and more affordable coverage have increased, despite rising insurance industry deductibles. The study's authors predict that removing the TRIA backstop will lead to rising premiums, lower policyholder take-up, and reduced terrorism insurance written by insurers, but expect the private market to develop additional terrorism insurance capacity over time.

Key Takeaways:

  • The U.S. Treasury Department's review of TRIA concludes that the federal reinsurance program has served its function as a temporary backstop and should not be renewed in its current form.
  • Insurer surplus and capacity for terrorism risk have grown over the life of the program, with a reported increase in insurer and policyholder surveys, and consultations with brokers, state insurance commissioners, the Insurance Services Office, and A.M. Best Co.
  • Policyholder take-up rates, along with more affordable coverage, have increased despite the rising insurance industry's TRIA deductible, which has increased from 7% in 2003 to 10% in 2004 and 15% in 2005.
  • The study predicts that removing the TRIA backstop will lead to rising premiums, lower policyholder take-up, and reduced terrorism insurance written by insurers, but expects the private market to develop additional terrorism insurance capacity over time.
  • The Treasury Secretary, John Snow, wrote a letter to the Senate Banking Committee and House Financial Services Committee opposing extension of TRIA in its current form, citing its original purpose as a temporary program and a need to encourage further development of the private market.
  • The report raises concerns about the possibility of introducing liability reforms as part of a TRIA extension, which could derail the entire program.
  • Industry trade organizations such as the American Insurance Association and Property Casualty Insurers Association of America remain committed to the view that a federal terrorism backstop of some form is essential, despite the study's findings.

Statistics:

  • The TRIA deductible rose from 7% in 2003 to 10% in 2004 and 15% in 2005.
  • The study found that policyholder take-up rates have increased alongside more affordable coverage.
  • The report predicts a rise in premiums, lower policyholder take-up, and a reduction in terrorism insurance written by insurers if the TRIA backstop is removed.
  • The private market is expected to develop additional terrorism insurance capacity over time.
  • The study's authors expect the higher premiums for those writers who continue to offer the coverage to spur a build-up of surplus, development of private reinsurance, and other risk-shifting tools.

Sources:

  • "U.S. Department of Treasury Report on Terrorism Risk Insurance Act"
  • Letter from Treasury Secretary John Snow to the Senate Banking Committee and House Financial Services Committee
  • American Insurance Association statement
  • Property Casualty Insurers Association of America statement
  • Raymond J Lehmann's article in A. M. Best via COMTEX