The new U.S. federal budget calls for slashing the $100 billion government-provided backstop for terrorism insurance, surprising many in the property/casualty industry who thought the subsidy was safe from tinkering until 2014.
Most industry executives seem to have been taken by off-guard by the possibility of cuts to the Terrorism Risk Insurance Act (TRIA), which was renewed in 2007 for a seven-year period.
Executives argue that any changes now could throw an already fragile industry into turmoil.
“The intent of the seven year extension was not dealing with this for seven years,” says Robert Hartwig, president of the Insurance Information Institute. “As far as I know, there is no additional interest in underwriting terrorism risk.”
According to published reports, the federal budget, assuming the economy stabilizes, includes a proposal to cut TRIA beginning in the fiscal year that starts Oct. 1, 2010.
The Obama administration’s budget projects savings, of $263 million over the 2010-2014 period and $644 million over the period of 2010-2019.
The budget does not detail how those saving will be accomplished or how TRIA would be changed.
TRIA provides a $100 billion backstop to commercial property and workers compensation reinsurers and carriers in that offer coverage for terrorist attacks.
Hartwig argues that the industry is not prepared to absorb terrorism risk and that changes to the law should not be made arbitrarily.
“I don’t know how they would undo a piece of legislation that is already done,” Hartwig says. “Firms involved in the terrorism insurance market are expecting that the government would be involved for the next five years. Business that rely on this cover are unaware that this proposal is even in place.”
Reducing the federal government’s $100 billion backstop could not come at a worse time for many reinsurers and carriers that have seen their surpluses diminish, says Aaron Davis, director of Aon’s National Terrorism and Property Resources group.
“It’s already a highly stressed P/C market because of the general asset write-downs because of the financial crisis,” says Davis, adding that the budget proposal includes references to the industry’s growing policyholder surplus as the reason for the TRIA changes.
Aon numbers show that while policyholder surplus has grown since 2001, industry surplus is actually down 10 percent year-over-year and could drop another 25 percent by the end of 2009.
The private market for terror cover also could not absorb additional risk and any rollback of TRIA could actually cut capacity and raise rates, Davis explains.
“There are private market solutions, but nowhere near the $100 billion that TRIA provides,” Davis says.
How TRIA is changed will determine much of the industry response, but the key will be whether aggregate cover is reduced or the actual industry triggers are modified.
“The details of any potential changes are vague at this time. Any proposed change would then have to be ratified through Congress, thus it is too early to understand the potential impact on the terrorism market as a whole,” says Rob Cruz, vice president of Terrorism Global Response for Hiscox USA.
Cruz says that if there is a change on the very top — meaning the $100 billion cap is slightly reduced — the industry will see a minor impact.
“However, if the certification threshold is raised from $5 million or the backstop loss level is raised over its current $100 million level there would be significant considerations,” Cruz says. “We just have to wait and see.”
Davis agrees, adding that how the industry reacts over the next several months will depend greatly on the Obama administration’s specific changes to TRIA.
“I think everyone will become much more active when [any proposed] changes are clear,” he says.
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