TERRORISM RISK INSURANCE - July 8, 2016 Roundtable Weekly

Treasury Releases Report on Terrorism Risk Insurance Program’s Effectiveness and Recommends Premiums Be Retained for Future Claims  

A “Report on the Overall Effectiveness of the Terrorism Risk Insurance Program” released June 30 by the U.S. Department of the Treasury’s Federal Insurance Office (FIO) concludes that the Terrorism Risk Insurance Program (TRIP) is an important mechanism in ensuring that terrorism risk insurance remains available and generally affordable in the United States, while calling for changes in how premiums could finance the program in the future.  The FIO report is based on data collected on the program this year and public comments such as those submitted by the broad-based Coalition to Insure Against Terrorism (CIAT), which includes The Real Estate Roundtable. (Roundtable Weekly, June 3).

 FIO TRIP report cover x220 

Report on the Overall Effectiveness of the Terrorism Risk Insurance Program” released June 30 by the U.S. Department of the Treasury’s Federal Insurance Office (FIO)

The FIO report was mandated in the Terrorism Risk Insurance Program Reauthorization Act of 2015, which was signed into law on January 12, 2015.  TRIP provides a federal backstop for certain U.S. property and casualty insurance losses resulting from a certified act of terrorism. 

The FIO report includes a call to change how the program is implemented, including a proposal that participating insurers set aside a portion of the premiums collected for future terrorism claims.  The report estimates that insurers have collected 24 billion dollars in premiums under the federal program since 2003.  Since an event has never been certified as an “act of terrorism” under the federal program, there have been no claims paid to date.  

While the FIO recognizes that a portion of the premium now covers the cost of capital to support providing terrorism risk insurance” — the report also notes that the premium has contributed to increasing surplus levels of participating insurers, which can help them remain solvent following a significant terrorism loss. Therefore, the report recommends that policymakers may consider “whether some amount of the premiums charged for terrorism risk should be segregated in some fashion to support future terrorism risk claims.” (InsuranceJournal.com,  July 5)

A number of additional conclusions from the FIO report:

Viewed on a national basis, the coverage being made available is comprehensive and would likely not be possible in the absence of the program.

Although some regional differences exist, premiums for terrorism risk insurance generally remain a relatively small percentage of total premiums for lines of coverage eligible for the program.

There is no evidence that coverage would be more available in the absence of the Program. Rather, costs would presumably increase and availability decrease, at least in certain areas.

Continued evaluations will focus on whether the terrorism risk insurance market is operating in a fashion that allows coverage to be available and affordable to all commercial segments of the economy.

Since the data collection was voluntary, and was the first attempt at obtaining comprehensive data, conclusions drawn from this data are necessarily limited.

Treasury has proposed a rule requiring mandatory submission of information by participating insurers beginning in calendar year 2017.

 Marsh 2016 TRIP report cover x220 

Marsh this week released its 2016 Terrorism Risk Insurance Report

CIAT’s May 31 comment letter to the FIO stated, "As part of its economic national security, America needs a stable, reliable, and competitive terrorism insurance market so employers can invest in assets and create jobs without assuming the risk and liabilities of a terrorist attack. The TRIP program has been the key factor in ensuring that this market continues to exist."

CIAT also commented on the need for a long term solution: "While TRIA was originally intended to be a temporary measure — a bridge to a time when the private market could return fully to the marketplace — there has been no evidence that private markets can develop adequate terrorism risk capacity without some type of federal participation."  (Roundtable Weekly, June 3)

Additionally,  Marsh this week released its 2016 Terrorism Risk Insurance Report, which shows that take-up rates for terrorism insurance are steady at approximately 60%  and higher when the total insured value is above 100 million dollars. Media companies topped the list on the take-up rate (~79%), while the Northeast had the strongest take-up of the four regions.

The Roundtable believes that TRIP plays a vital role in shaping an effective, long-term, market-based terrorism insurance program that provides adequate market capacity and safety measures for the U.S. economy.  A Roundtable working group has recently been created to explore a more private-sector based, permanent solution.

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