TRIPRA and buyer’s market obscure the dangers of aggregation
While it is expected a slightly revised TRIPRA will be signed into law, the government backstop and the bundling of risk is causing some US insurers to lose sight of potentially dangerous aggregations.
That is the view of Jeff Clements, executive vice president and chief underwriting officer at Validus Re who tells Bermuda:Re that over-reliance on the government backstop and a drive to have terrorism coverage included in property catastrophe excess of loss policies may lead to troubling aggregations.
“There has been something of a push in property cat XOL to include terrorism coverage, with some success among clients in doing so and a corresponding push back from the market.”
The trend is being driven by soft market conditions in property catastrophe says Clements, with “brokers and clients looking for any way they can to get additional coverage thrown in for very little additional premium or even for free”.
Such a trend has undermined interest in stand-alone terrorism coverage, while creating potentially dangerous aggregations, particularly in urban areas like Manhattan and Chicago where property and terrorism risks collide.
“Adding terrorism risk into property XOL has a knock-on effect if you are aggregating your terrorism exposure as you should. You are going to fill up many of your geographical exposures quite quickly and in some respects the market will run out of coverage, because reinsurers will soon figure out they are not getting paid what they should for this risk.”
Clements also cautioned against insurers assuming that aggregate coverage under TRIPRA-backed policies would act the same as in per occurrence property policies. He argues that doing so may lead to a serious mismatch in coverage, with the potential to open up a Pandora’s Box of litigation.
Matters aren’t being helped by the likely reauthorisation of TRIPRA, says Clements, describing “things going status quo for the next seven years” as the “worst case scenario” for the reinsurance industry.
While Clements anticipates a slight contraction in TRIPRA coverage, he predicts that it will be “modest” and unlikely to significantly change demand for reinsurance.
While rising deductibles and insurers’ desire to retain their net positions may yet help to spark an increase in demand, Clements views the issue as one of perception—one that is not helped by the presence of the government backstop.
The best case scenario for the private market is the drawing back of TRIPRA, greater recognition of the threat posed by terrorism, and a push by the rating agencies for insurers to pay closer attention to terrorism risk, says Clements.
“Presently, many insurers don’t understand the aggregations of terrorism risk they have on their books and shouldn’t simply be falling back on TRIPRA”, warns Clements.
Reinsurers like Validus will be hoping that realistion will bring with it appetite for reinsurance buying, particularly as the rate on line for terrorism coverage has grown increasingly competitive.
As Clements explains, “terrorism is one of those classes that has experienced exceptional performance in recent years, so everyone is trying to get that risk on their books. As a result, rates are feeling pressure”.
This pressure is further exacerbated by terrorism risk’s place as an attractive diversifying peril for property catastrophe players such as Validus.
Discussions over TRIPRA have helped to galvanise some interest says Clements, be it on a stand-alone basis, as an option should TRIPRA expire, or as part of catastrophe XOL policies—but rated separately—but it is evident that a sea change is not on the cards.
“People feel the US government will continue with the backstop in a meaningful way. In an industry that is reactionary, I don’t anticipate any marked change in buying appetite while it remains.”
