A.M. Best Warns of Ratings Downgrades If Terror Reinsurance Act Not Renewed

Property/casualty insurers that have relied heavily on the federal terrorism reinsurance program face the risk of rating downgrades if the program isn’t renewed by the end of 2020, ratings firm A.M. Best has warned.

A.M. Best said that the Terrorism Risk Insurance Program Reauthorization Act, or TRIPRA, has been successful, but in a recent commentary the firm expressed concern that the partisanship in Congress places its renewal in doubt.

“Although this public/private collaboration seems to have achieved its goal, there is some uncertainty as to TRIPRA’s future role,” A.M. Best wrote in its May 10 commentary on the matter. “As of today, whether TRIPRA will be extended again – and if so, under what terms and conditions – remains in doubt. The hyper-partisan atmosphere pervading Washington and the difficulty of bringing legislative proposals to a vote and ultimately enacting legislation has created even more uncertainty.”

Then-U.S. President Barak Obama signed into law the Terrorism Risk Insurance Program Reauthorization Act, or TRIPRA, in 2015 for a five-year renewal. That law extended a program initially launched in late 2002 in the wake of the 9/11 terrorist attacks to help commercial businesses needing terrorism insurance find affordable coverage.

Beyond renewal uncertainty, however, A.M. Best said that a federal terrorism insurance backstop shouldn’t be the only risk management mechanism in place, and it will hold carriers into account if they have no other risk reduction plans of their own.

“Although a federal backstop helps with liquidity and reduces the financial impact of a terrorist event, over-reliance on such a mechanism isn’t a substitute for sound risk management,” A.M. Best said.

A.M. Best added that while some insurers typically use reinsurance to mitigate catastrophe risk, others that have major terrorism exposure might be using TRIPRA to also “stay within their stated risk tolerances.” The ratings agency said that in that scenario, it is worried about carriers’ net loss exposures to terrorism excluding the benefit of TRIPRA, aggregate risk exposures in some geographic areas and the number of locations in those areas. The impact on risk-adjusted capitalization is also a point of concern.

With these issues in mind, A.M. Best said it will compile a list of rated insurers in mid-2019, and ask those with “material terrorism exposure” as well as “significant reliance on TRIPRA” to show in detail how they’ll mitigate their exposure if TRIPRA is not renewed.

Insurers that would be significantly hit by TRIPRA’s absence and don’t present a plan to reduce terrorism risk exposures will face ratings downgrades by the end of 2019.

Source: A.M. Best