If Congress fails to renew or makes significant changes to the federal government’s terrorism risk insurance program, some insurers will be forced to significantly alter their underwriting portfolios to reduce terrorism exposures. Also specialty or monoline workers’ compensation or commercial property writers focused on larger urban markets would likely have the greatest credit sensitivity to reductions in available terrorism reinsurance, according to a report from Fitch Ratings.

In the report, Fitch discusses potential economic and credit rating effects for the property/casualty industry and Commercial Mortgage Backed Securities (CMBS) market if the Terrorist Risk Insurance Program Reauthorization Act (TRIPRA), which is currently on track to expire Dec. 31, 2014, is not renewed or if coverage is substantially scaled back.

Terrorism insurance has been an important structural protection for CMBS bondholders and Fitch said it may decline to rate or cap its ratings on CMBS transactions with inadequate terrorism insurance if the federal reinsurance program changes or disappears. This would most likely occur on a high profile property in a single asset CMBS transaction, the ratings firm said.

Fitch said it would be more difficult to determine the ratings effects that a lack of terrorism coverage might have on multi-borrower CMBS pools.

Legislation has been introduced in the House of Representatives to extend TRIPRA, although action is unlikely before next year.

U.S. government sponsored terrorism reinsurance originated following the events of Sept. 11, 2001. Insurers were excluding terrorism exposure from coverage. Passage of the first terrorism reinsurance program required insurers to offer coverage of terrorism exposures to participate in the program, helping to alleviate economic uncertainty in commercial property and mortgage markets.

Over the last decade, commercial property insurers have enhanced their ability to measure and model exposure to terrorism events, according to the report. Net exposures are managed currently through the availability of large reinsurance limits through TRIPRA. Withdrawal of TRIPRA reinsurance protection without readily available substitute coverage “could lead insurers to exclude terrorism from property coverage to manage risk aggregations,” Fitch said.

The availability of private market stand-alone terrorism coverage has increased over time, however Fitch said it is unlikely that substantial private market capacity would arise as a substitute to TRIPRA coverage if the program ends. Likewise, Fitch said it is “difficult to predict whether financial and property markets have a greater propensity to adapt to an environment without government sponsored terrorism insurance program compared to the conditions in 2002. ”

Since insurers are prohibited from excluding losses from terrorism-related perils in workers’ compensation policies, TRIPRA expiration or meaningful changes “may have significant effects on workers’ compensation insurance coverage availability and pricing,” according to Fitch.

The Fitch Ratings report is titled, “U.S. Terrorism Reinsurance: Looming Uncertainty of Program Renewal.”

Source: Fitch Ratings