Representatives of the property/casualty insurance industry all testified in favor of extending the Terrorism Risk Insurance Act during a House Financial Services committee hearing last week, but some recommended more changes to the existing program than others.
As Carrier Management reported in a separate article, Kean Driscoll, chief executive officer of Validus Reinsurance, called for government program to continue to cover catastrophic terrorism loss scenarios related to NBCR, or nuclear, biological, chemical and radiological, attacks.
Sean McGovern, director of risk management and general counsel for Lloyd’s of London, said: “We accept the need to assess whether or not TRIA should change—and it may well be that the balance between government and private market involvement could tilt more towards the private market. But any changes to TRIA to facilitate greater private market involvement should not sacrifice the stability TRIA has already achieved.”
“How changes are made can be just as important as what changes are made. For example, sudden or drastic increases in the retentions or co-shares could prompt some insurers and reinsurers to concentrate their capacity elsewhere,” he said.
On the other hand, Ernest Csiszar, the former Director of Insurance for South Carolina, suggested that lawmakers should consider raising the TRIA’s $100 million loss attachment trigger to $20 or $25 billion.
With industry capital over $500 billion, and growing consistently at 1.5 percent each year, events like Superstorm Sandy “barely caused a blip. If anything, reinsurance rates have gone down,” Csiszar said “The industry almost as a natural course, almost ritualistically every year, pays out $15, 20, 25 billion” in catastrophe losses, he said, providing one argument for boosting the TRIA loss trigger.
In his prepared remarks, Csiszar, who delivered his testimony on behalf of the R Street Institute, a public policy think tank devoted to a free market economy for which he serves as an associate fellow, also recommended:
- Raising the deductible from its current 20 percent to 40 percent of the past year’s direct earned premium for the commercial lines subject to TRIA.
- Raising the quota-share cost-sharing arrangement for insurers from 15 percent to 25 percent of losses that exceed an insurer’s deductible.
- Charging the industry a risk-based price for providing the backstop.
During the question-and-answer period, Rep. Randy Neugebaurer, R-Texas, chair of the subcommittee, asked McGovern if TRIA is too generous as currently structured, prefacing his question by quoting industry executives.
“John Doyle, CEO of Global Commercial Insurance, has said he could see a market emerging fairly quickly for property risk absent a backstop, and the CEO of Global Corporate at Zurich [Dan Riordan] also said his company would continue to offer coverage to his clients without a backstop,” Neugebaurer reported. (Editor’s Note: Carrier Management reported the remarks in a March 27 article.)
McGovern responded by noting that the standalone terror market at Lloyds’ in premiums terms for U.S. risks is $460 million. “Compare that to overall premium at $12 billion for the United States. I think that tells you something about the capacity of the market to allocate capacity to major U.S. terror risks,” he said.
“It’s clear that capacity is growing [but] what we worry about is the aggregation of risk in key urban centers,” he added, noting that the capacity of the industry to absorb this type of aggregation “is always going to be somewhat limited.”
Driscoll offered a different numerical comparison when Ed Royce, R-Calif., Chairman of the Committee on Foreign Affairs, referred to Driscoll’s assertion that there is adequate reinsurance capacity to cover the insurance industry’s current $27.5 billion retention under TRIA. “How do we gauge capacity? What numbers and sources should we be looking to,” Royce asked.
“The notional limit purchased on a global basis for natural catastrophe is over $300 billion currently. The capital base of the industry is close to half a trillion dollars. Terrorism within the United States on a standalone basis is $7-8 billion,” Driscoll offered, noting that the figure is higher if terrorism insurance purchased on a bundled basis with other traditional insurance coverage is included in the tally.
McGovern interjected. “You’re probably sensing that there is some difference of opinion on what reinsurance industry could cope with. The problem is that the reinsurance industry is very well capitalized unquestionably, but that doesn’t necessarily lead to an increase in the reinsurer’s ability to provide reinsurance capacity, particularly in major urban areas with large accumulations of asset values,” he said.
“It’s not my place to throw out numbers without understanding what the implications would be,” he said, suggesting that lower policyholder take-up rates are among the potential impacts to TRIA changes. “Then actually you have reduced the amount of insurance capital at risk rather than increased it.”
Rep. Scott Garrett, R-N.J., quoting a pronouncement by Validus Holdings Chairman and CEO Ed Noonan, stating that “the industry doesn’t service itself well claiming that terrorism risk can’t be priced and modeled effectively,” asked McGovern about his view of terror models.
“It’s true to say that terrorism risk modeling does exist but it’s in its infancy,” he responded. “Models are at their most reliable when they have lots of real-life world events inputted,” he said, explaining why catastrophe modeling is so much more advanced and why insurers must have a cautious approach to the value of terror models.
Responding to a very different question from Rep. Emanuel Cleaver, D-Missouri, asking industry representatives whether they viewed the TRIA program as “corporate welfare,” Robert Hartwig, president of the of the Insurance Information Institute, referred to the fact that the federal government is armed with the most information about real-life terror events.
“It’s been alluded to a number of times on this panel—that we have to look at the unique nature of terror risk,” Hartwig said. “Ultimately, the bearer of the risk should be the entity that possesses the greatest information associated with that risk. And that is certainly not anybody at this table,” he said, referring to the insurance industry representatives lined up to testify. “That is the federal government,” he said. “It is absolutely appropriate in a circumstance like this that risk be shared in a public-private sector manner,” he said.
Later, Hartwig also noted that one of the important facets of TRIA is that it provides a “delivery mechanism” for terror insurance. Without TRIA, which piggyback on insurance industry pariticipation, “the federal government doesn’t have a structure” to deliver terror insurance. ”
“In the absence of TRIA, you wind up with a post-Sandy FEMA situation where people are still waiting for their federal government aid,” Hartwig suggested.