A new analysis of the Terrorism Risk Insurance Act concluded more than a third of the top 30 insurers would be dangerously exposed to terrorism risk if Congress elects to increase the insurers’ co-pay to 25 percent.
Currently, the federal government has no obligation to pay losses from a terrorist attack until damages reach a trigger of $100 million in insured losses. After this threshold is reached, each insurer’s deductible is 20 percent. Seven of the top 30 insurers could be considered overexposed to losses from a terrorist attack, according to the Wharton Risk Center of the Wharton Risk Management and Decision Processes Center in the University of Pennsylvania.
The amount of insurers among the top 30 greatly exposed to a terrorism-related loss rises to 11 should the deductible hypothetically increase to 25 percent, concluded the Risk Center.
“Should the deductible level be increased again, some companies could face a significant risk of insolvency or financial distress after a severe terrorist attack because they will not have the sufficient capital to pay their claims,” according to the report. “Other insurers might stop selling insurance to some of their commercial clients to avoid having too high a concentration of terrorism exposure in one location.”
An extension of TRIA is being mulled in Congress (separate Senate and House bills need to be reconciled) while the sunset of the federal insurance backstop is set for Dec. 31. Each modifies the program in different ways.
To arrive at its conclusion, the Risk Center used a deductible-surplus ratio of 0.15 as a threshold. Anything over this mark generally means the insurer has a relatively high level of exposure to terrorism.
Looking at the top 450 insurers, representing 99.8 percent of the market based on direct earned premiums, 39 percent (175 insurers) reach this dangerous 0.15 threshold of overexposure if the TRIA deductible increases to 25 percent. Right now, 140 insurers reach this mark with a TRIA deductible of 20 percent.
Meanwhile, the House proposal eventually increases TRIA’s trigger to $500 million. This puts small insurers at greater risk of having a loss that is greater than its TRIA deductible but less than the trigger.
Chad Hemenway is Managing Editor of Advisen News. He has more than 15 years of journalist experience at a variety of online, daily, and weekly publications. He has covered P&C insurance news since 2007, and he has experience writing about all P&C lines as well as regulation and litigation. Chad won a Jesse H. Neal Award for Best Single Article in 2014 for his coverage of the insurance implications of traumatic brain injuries and Best News Coverage in 2013 for coverage of Superstorm Sandy. Contact Chad at 212.897.4824 or [email protected].
