A Future Without the Terrorism Insurance Backstop?

The federal backstop that is widely credited with establishing today’s robust terrorism insurance market may be gone in just 24 months. The consequences could be severe, from reduced availability of coverage to increased premiums. The impact would be particularly acute in dense metropolitan areas like New York, Chicago and San Francisco, but would also have nationwide implications.

Hearings about the future of TRIPRA — the Terrorism Risk Insurance Program Reauthorization Act — have already started on Capitol Hill. Created after the Sept. 11, 2001 terrorist attacks, the federal backstop program, which is scheduled to expire on Dec 31, 2014, enabled insurers to offer coverage for a risk that most carriers saw as uninsurable. The attacks on the World Trade Center alone resulted in claims of more than $40 billion.

The original program, the Terrorism Risk Insurance Act (TRIA), was established in 2002, extended in 2005, and reauthorized for seven more years, in 2007, as TRIPRA. By all accounts, TRIPRA continues to do what it was intended to do — provide stability and create a viable insurance market. Take-up rates have increased year-on-year, coverage is widely available and premiums are affordable.

However, TRIPRA’s future is uncertain. The earlier reauthorization was controversial and the act was modified to shift more costs to the insurance industry. Now, there’s a real possibility that TRIPRA will not be reauthorized and will end entirely or be significantly altered. For those who will be impacted, the time to prepare is limited.

A Challenging Environment

It is impossible to predict what will happen. The political environment is different than it was five years ago. The 9/11 attacks are more remote in time and the public consciousness and leadership in Washington and key legislative bodies, such as the House Committee on Financial Services and Senate Banking Committee, have changed and will see even more new players in 2013. There are different fiscal demands and competing priorities, such as addressing the possibility of a widespread cyber attack.

The battle lines are being drawn and Congressional hearings and related lobbying are already under way. Those who support reauthorization and those who oppose it are crafting their arguments and marshaling support.

Factions that are opposed to reauthorization argue that while TRIA and TRIPRA were necessary in the past, they are no longer needed. The backstop accomplished its goal of creating a private insurance marketplace capable of providing terrorism coverage, and government support is no longer required. They note that the backstop was always intended to be temporary.

Opponents argue further that the insurance industry now has the knowledge it needs to assess risk and price terrorism coverage and has even developed a surplus, which can absorb risks. Opponents also maintain that taxpayers should not be responsible for paying insurance losses on private property.

Threats Remain, TRIPRA Still Essential

On the other side, proponents, including the insurance industry and a number of large property owners, say TRIPRA is still essential to sustaining a workable terrorism insurance marketplace. The need has not diminished and it’s still difficult to model and price risk. Moreover, the United States is rife with possible terrorism targets and multiple terrorist attacks were thwarted in just the last year.

In addition, as the federal backstop has been extended and modified, financial responsibility has shifted more decisively to insurers. They have become responsible for covering a greater share of potential losses; substantial thresholds and deductibles have been implemented; and the entire program is capped at $100 billion.

To trigger TRIPRA funds, for example, a terrorism event must result in aggregate industry insured losses of at least $100 million, up from just $5 million in the original act and $50 million in losses required by the extension.

All-Risk Markets Will Shrink

If TRIPRA isn’t extended past the end of 2014, the impact will be huge. There is already insufficient capacity and aggregation limits have been reached in some high-risk markets, such as New York City and other major metropolitan areas.

A failure to reauthorize will affect virtually every property owner or business that chooses or is required to carry terrorism coverage. Many of these insureds now have embedded coverage, which is typically much less expensive than standalone coverage.

All-risk markets willing to provide coverage will be limited and, while the standalone market is likely to be sufficient to meet demand, prices will rise. Reinsurance capacity for these risks will also be limited.

In light of all these factors, what are the next steps for businesses, their insurance advisers and producers? First, many businesses, especially those that are obligated to carry terrorism coverage, will have no choice but to navigate this new world. Publicly traded companies must have catastrophe coverage and it’s also a requirement in many loan covenants.

Some carriers that currently provide embedded coverage may choose to discontinue offering coverage. Coverage will be less available and could be prohibitively expensive. Some businesses may be unable to meet their insurance requirements or take a heavy financial hit from escalating premiums. The repercussions could be wide-ranging, from stalled expansions or acquisitions to the divesting of real estate in high-risk markets.

Meet with Clients, Begin Planning Now

Whatever ultimately happens with TRIPRA, planning should begin now. Agents and brokers should be meeting with clients to apprise them of possible scenarios, help them identify and analyze risks and exposures, and begin reviewing coverage now, while there are more options. Clients may want to secure capacity by locking in long-term standalone coverage. They may also want to revisit and possibly lower limits.

Producers and other advisers can also help clients develop risk management plans and recommend clients open discussions with lenders or their board of directors, among others.

Some insurance professionals may also want to advocate for TRIPRA by taking the issue to Washington and their elected officials. They can meet Congressional members and staff on their own or work through a trade association to express their concerns.

For any of these actions, whether it’s getting up to speed on the issues, advising clients or getting involved in public policy, there’s no time to delay. While 24 months may seem remote, in practical terms it’s right around the corner. And no one knows what the next two years will bring. The time to act is now.

Cruz is the product head for Hiscox Terrorism Underwriting in the United States. Finch, a partner in Dickstein Shapiro’s Washington, D.C. office, is head of the firm’s Global Security Practice.