New AM Best report looks at TRIPRA termination impact
A new AM Best special report claims that insurers soon will need to consider the potential termination of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) at year-end 2020, and prepare their risk management practices.
The report, entitled “Insurers Adjust to Changing Terrorism Risk Landscape,” states that the lack of permanency and the decline in protection at each TRIPRA renewal remains a concern for many insurers.
Insurers with large balance sheets typically have higher risk appetites for trophy buildings in so-called Tier 1 cities such as New York, Los Angeles. These large insurers would consider a government backstop an important component of their risk management. AM Best data shows that small-sized and some medium-sized insurers are unlikely to amass sufficient gross losses to satisfy the $160 million program trigger in 2018 ($200 billion in 2020). Given their smaller size and less room for error or reduced government involvement and support, establishing a conservative risk appetite backed by reinsurance and concentration limits becomes critical for these insurers.
According to AM Best these industry concerns come at a time when the scope of terrorism is changing. The focus of more-recent terror attacks has shifted from inflicting property damages and causing mass casualties to primarily causing loss of human life. Cyber threats continue to evolve, and combined with the ever-present potential for nuclear, biological, chemical and radiation attacks, insurers need to be prepared.
Although TRIPRA could help minimise the loss impact on an insurer’s capitalization, AM Best believes over-reliance on it is not a substitute for sound risk management. AM Best’s assessment of enterprise risk management (ERM) emphasizes stress-testing for any insurer with a significant exposure to terrorism risk to ensure that resources are adequate in the event of a terrorist attack.
The rating agency concludes by stating that when assessing an insurer’s exposure to terrorism risk, AM Best uses its ERM evaluation, stress tests and their relationship to capital, and expects insurers to use a similar process along with their analytical and experience-driven judgment to manage terrorism risk. As a result those companies that rely heavily on TRIPRA should be prepared to present detailed plans to AM Best if the backstop is not renewed.
