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Insurers Anticipate Various Terrorism Changes

Terrorism Question Marks 480x377
April 20, 2018

With the dramatic shift in the terrorism risk landscape, insurers with significant terrorism exposures are considering the expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) at year-end 2020. A.M. Best advises that insurers will soon need to consider the potential termination of the federal backstop for their longer-term policies and prepare their risk management practices.

A.M. Best also said that the lack of permanency and the decline in protection at each TRIPRA renewal remain a concern for many insurers. Insurers with large balance sheets typically have higher risk appetites for trophy buildings in so-called Tier 1 cities (e.g., New York or Los Angeles). These large insurers consider the government backstop an important component of their risk management.

Meanwhile, 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 is critical for these insurers.

These 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 should prepare.

Although TRIPRA could help minimize the loss impact on an insurer's capitalization, A.M. Best believes over-reliance on it is not a substitute for sound risk management. A.M. 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. When assessing an insurer's exposure to terrorism risk, A.M. 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. Those companies that rely heavily on TRIPRA should be prepared to present detailed plans to A.M. Best if the backstop is not renewed.

Copyright © 2018 A.M. Best Company, Inc. and/or its affiliates ALL RIGHTS RESERVED

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