Many insurers and businesses argue the absence of federal terrorism reinsurance beginning in 2015 could lead to a market breakdown and canceled coverage. But in the wake of Congress’s inability to extend the Terrorism Risk Insurance Act (TRIA) before it expires Dec. 31, some ratings entities said they’d watch things closely, but they don’t expect many changes in the market, at least initially.
“In the short term, Standard & Poor’s Ratings Services does not expect to take widespread ratings actions on U.S. insurers or on our outstanding commercial mortgage-backed securities ratings based on Congress’s inaction,” S&P said in a prepared response regarding the fallout. “We had already anticipated the possibility that reauthorization would not take place until early 2015.”
A.M. Best offered similar comments, pointing out that it “has determined that no rating actions for insurers previously identified as overreliant upon [TRIA] are necessary at this time.”
Explaining further, A.M. Best said “all of the rating units deemed overly reliant upon [TRIA] were brought before a rating committee to evaluate action plans that would be implemented in the event [TRIA] was not renewed or if its protection was materially altered. After a thorough review of these action plans, it was determined that sufficient mitigation initiatives were developed to avoid a material impact on a rating unit’s financial strength.”
Standard & Poor’s emphasized that it had already anticipated that TRIA reauthorization would not take place until early 2015, and it sees insurers as having adjusted to the market largely on their own. TRIA was passed in the wake of the Sept. 11, 2001 terrorist attacks in a bid to calm a commercial market that had become gummed up by the post-attack uncertainty.
“Although TRIA had been positive for commercial lines insurers and helped stabilize the insurance market, the perception of terrorism risk has evolved to where the industry is now comfortably assuming sizable conventional terrorism events…without federal financial assistance,” Standard & Poor’s said.
Even so, Standard & Poor’s said it sees insurers with “stronger enterprise risk management capabilities” as being better equipped to handle TRIA’s expiration than those that haven’t emphasized this aspect of their underwriting.
Insurers that have made enterprise risk management a priority have reduced terrorism risk exposures in 2014 to “less than their TRIA deductibles in anticipation of TRIA not being reauthorized or significantly scaled back,” S&P added.
At the same time, both Standard & Poor’s and A.M. Best emphasized that they see a renewal of TRIA as important—something that would be a valuable safeguard and prevent ratings downgrades.
“We feel a nonconventional event (e.g., nuclear, biological, chemical, radiological) without a federal backstop program could have systemic, economic, financial and legal ramifications and could severely hurt the industry,” Standard & Poor’s concluded.
A.M. Best said it will take drastic action based on evaluation of companies and how they’ve worked to reduce terrorism exposures in TRIA’s absence, as well as whether or not Congress takes action and renews TRIA in January.
“A.M. Best continues to monitor insurers’ data quality relating to terrorism exposures, the concentration of terrorism-exposed risks, as well as ensure that action plans have been followed through for these mitigation initiatives,” the ratings operation wrote. “Any rating units that have not successfully mitigated their terrorism exposures in the absence of [TRIA] or have increased their terrorism-exposed business to a level deemed overly reliant upon [TRIA] will be evaluated and rating actions will be taken when necessary.”
Meanwhile, another insurance market has responded to TRIA’s 2014 demise. ISO announced that TRIA’s impending end on Dec. 31 will activate its commercial policy contract language to address terrorism coverage. The terms, applicable on Jan. 1, 2015, were first introduced in 2004 and been available for use with policies issued earlier in 2014, those that extend beyond TRIA’s expiration and for policies that begin in 2015.
ISO participating insurers will gain several endorsement options, including exclusions for losses from acts of terrorism; terrorist acts involving nuclear, biological or chemical terrorism; and a means to cover terrorism losses not otherwise excluded up to a sublimit. ISO’s conditional terrorism endorsements are available in all states except Florida and New York, the Verisk Analytics business said in a release.