Uncertainty and partisanship over the likely form of a renewed TRIA is creating considerable ambiguity, leaving insurers to wrestle with contract wordings and rates in an evolving terrorism market.
That is the word from Larry Mirel, partner at Nelson Levine de Luca & Hamilton and former Commissioner of Insurance, Securities, and Banking for Washington D.C., who tells Bermuda:Re that while there is general consensus that TRIA was a “beautiful thing”, there are different conclusions being drawn about its likely heading.
“Free marketeers view it as being only a temporary measure, there to allow the markets to adjust and that it now should be abolished. Those that are supportive of government programmes, argue that if it works, why fool with it,” says Mirel.
TRIA has certainly helped the private market develop, while making terrorism coverage available and more affordable, he says. But it is apparent that there are political and philosophical divisions over its future form.
The current Democratic bill in the senate proposes increasing the trigger for TRIA from $27.5 billion to $37.5 billion and an increase in the deductible, says Mirel.
He describes this as a nod towards bi-partisanship as Republicans in the house tend to be more strongly opposed to a renewal of the bill in its existing form than their Democrat peers.
Congressman Hanserling, who is the head of the committee handling the vote in the House, voted against the two previous renewals and has indicated that he believes that the government should not be involved in the provision of insurance.
“He has said that he is willing to renew it one more time, provided there are substantial increases in the trigger and deductibles so that taxpayer involvement is more remote.”
While the naysayers may come onboard, it is apparent that further negotiations over the trigger and deductibles will likely occur.
There is however “the basis for compromise”, says Mirel, with a five to seven year extension likely. “It is really a matter of negotiating the numbers”.
There is nevertheless the remote prospect of TRIA expiring, which together with changes to the trigger and deductible is creating uncertainty for terrorism writers.
How to price uncertainty
Uncertainty over the future of TRIA means many insurers are “worried that they have priced business according to existing rules, and that if those rules change, they will not have charged enough”, says Mirel.
Many have already written policies for 2015, assuming that the bill will pass in its current or a substantially similar form.
In response to the developing landscape, many have written contracts stipulate that they will cover for terrorism risk if TRIA is renewed, but won’t if it isn’t, explains Mirel.
“Conditions are resulting in a rise in contingent contracts, but the question is what do you charge for such coverage and do insurers intend to issue refunds if TRIA expires?”
The issue grows more complicated if you consider changes to the trigger and deductibles. Factoring still uncertain outcomes into contract wordings further complicates matters.
“There are so many variables when it comes to US terrorism risk, it is almost impossible to draft a contract that makes sense,” Mirel concludes.
Insurers will need to re-examine their contracts with care when the form of a renewed TRIA is finally reached. In the meantime, many are muddling through.
TRIA, TRIPRA, terrorism, US, insurance, Nelson Levine