• ABIR Statement: 2016 FIO Report on the Terrorism Risk Insurance Program

    Statements / Letters | US Regulatory | 04.15.2016

    Via Federal Rulemaking Portal
    The Honorable Michael McRaith
    Director, Federal Insurance Office
    US Department of Treasury
    1500 Pennsylvania Ave., NW
    Washington, DC 20220

    Subject: 2016 FIO Report on the Terrorism Risk Insurance Program

    April 15, 2016

    Dear Director McRaith:

    On behalf of the commercial insurer and reinsurer members of the Association of Bermuda Insurers and Reinsurers (ABIR) we offer these comments for your consideration with regard to the Federal Register notice published on March 25 which listed six specific questions for consideration with regard to the operation and impact of the Terrorism Risk Insurance Program (TRIP).

    Our comments focus on question 6 which poses a general question about relevant responses with regard to terrorism insurance and reinsurance.

    ABIR members are active globally in commercial insurance and reinsurance markets. Our members are writers of terrorism risk insurance and reinsurance. Our members also supply terrorism reinsurance to certain government-run terrorism risk pools in various jurisdictions. In the US our commercial insurance subsidiaries receive the benefits of the TRIP program just as do other US commercial insurers.

    The TRIP program has a successful track record in stabilizing US insurance markets. It was an essential program when it was adopted and it has demonstrated its value in meeting a need in providing ceding insurers with a critical terrorism risk backstop when no other private reinsurance product was practically available. Particularly in certain mandated insurance coverage lines such as Workers Compensation and in certain high profile large urban areas TRIP offers a critical protection to insurers which would face unprecedented catastrophic losses based on certain type of terrorism events. Having said that, we believe the insurance industry’s successful management of the horrific 9/11 World Trade Center loss, coupled with 15 years of underwriting experience since that loss and our strong financial position argues that a well-capitalized insurance industry is poised to manage the largest losses which conventional terrorism attacks can cause.

    There are, however, unconventional terrorism attacks which would cause losses from which the industry would struggle to survive. Although there are limited amounts of coverage available for Nuclear, Biological, Chemical, Radiological and while there is growing coverage availability for certain Cyber risks we think each of these causes of loss could jeopardize the functioning of insurance markets and thus these are priority areas where the TRIP program should be refocused in the future. Experience with Biological and Chemical attacks such as Saran Gas in Japan and Anthrax in the US demonstrate the potential for rapid contagion in a concentrated area and quick dispersion to multiple sites of contamination – without an ability to deliver a reliable antidote in a timely fashion. Nuclear and Radiological contamination from Fukushima in Japan, Chernobyl in Belarus and Three Mile Island in the US continue to document the enormous loss potential from accidents which would be compounded in a deliberate terrorism attack. We haven’t yet experienced a systemic Cyber attack but reports on the enormous losses that would result from a terrorist attack designed to shut down the electric grid again point to the need for the market stabilizing impact of a program like TRIP. The current program lacks clarity with regard to protection for Cyber risks. A definition of covered Cyber events in a redesigned TRIP would be helpful. Evidence in the private market documents experimentation with Cyber coverages and growing consumer demand but there is ample commentary that insurers fear that certain catastrophic Cyber risks (including those sponsored by foreign governments) have characteristics of systemic losses (or war) and these exposures would likely be beyond the capabilities of the insurance industry. A TRIP definition of covered Cyber events would allow the private market to better shape its Cyber insurance coverages. We also note that the current TRIP design even imposes substantial insurer deductibles for these potentially crippling terrorism losses.

    We’d recommend the FIO and its terrorism advisory council consider redesign of the TRIP so that insurance companies are afforded substantial protection against Nuclear, Biological, Chemical, Radiological and systemic Cyber losses. At the same time the program can be redesigned so that conventional terrorism losses are ultimately managed by the private market. Any such program redesign would need to be launched with sufficient time for private insurers and reinsurers to adjust to the changed government program design so their underwriting, enterprise risk management and risk management programs can be reconfigured to appropriately protect their customers and their shareholders. And if TRIP protection is limited then the underlying corollary “make available” mandates need to be amended accordingly. Appropriate consultation and a multi-year transition time line would be necessary if this were to be successfully implemented; and it should be designed to be a long term extension.

    Currently the TRIP program, since it is initially a “free” coverage subject to payback via assessments does impede the market’s ability to sell private reinsurance. The difficulties of competing with such a free program are obvious; and the current make available mandates for insurance lines also distort private market functioning. Such government programs can also limit incentives for risk mitigation. Just as a policyholder’s purchase of insurance or underwriting conditions tied to that insurance, provide an incentive for an insured to take actions to reduce risk, so do the operation of private reinsurance markets.

    Finally, we have attached two slides from a recent Guy Carpenter report which document both the increased capacity and declining price of reinsurance available to public sector pools. We offer this as evidence of a continuing private reinsurer interest in providing terrorism cover.

    We look forward to an opportunity to discuss this matter further with you.

    Bradley L. Kading

    Guy Carpenter: Public Sector Risk: Terrorism

    A number of countries provide for government supported terrorism risk transfer solutions to manage global threats of terrorism. The actual mechanisms employed are a spectrum between loan and direct support, as illustrated in the chart here.

    One risk transfer solution, international terrorism pools, have been established to meet the needs of the specific individual country they support, often reflecting specific terrorist threats within each country. As is the case with The Terrorism Risk Insurance Act in the United States, coverage provided by international terrorism pools is typically triggered by a national governmental declaration of the occurrence of a terrorism event. Some pools purchased private reinsurance to protect their exposures, which has brought benefits. In 2014, pools that purchased private reinsurance experienced price decreases because capacity increased in the marketplace in the absence of major terrorism losses (1).

    Evolution of Market Price, Capacity, Limit for Terror Pools (Excludes Pool Re)

    See chart here.

    Source: Guy Carpenter, Public Sector: Terrorism. March 21, 2016.