The possible expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2015 could result in a potential rating downgrade in ratings for property and casualty (P&C) insurers, and therefore captives, according to A.M. Best.
The expiration date of TRIPRA 2015 is 31 December 2020 and A.M. Best has suggested that its extension “remains in doubt” due to the “hyper-partisan atmosphere pervading Washington and the difficulty of bringing legislative proposals to a vote and ultimately enacting legislation”.
TRIPRA 2015 extended the expiration of the original bill, referred to as the Terrorism Risk Insurance Act, which was passed in 2002 in response to the 9/11 attacks and was authorised to address the availability and affordability crisis for those commercial businesses in need of terrorism insurance.
A.M. Best noted that while the federal backstop aids with liquidity and reduces the financial impact of a terrorist event, overreliance on the mechanism “isn’t a substitute for sound risk management”.
The ratings agency added that while “the vast majority of catastrophe-exposed insurers typically rely on reinsurance to mitigate catastrophe risk, insurers that have substantial terrorism exposure might also rely on TRIPRA to stay within their stated risk tolerances”.
A.M. Best’s key concerns with regard to terrorism are: “insurers’ net loss exposures to terrorism excluding the benefit of TRIPRA; aggregate exposures of risks in certain geographic areas; the number of locations in those areas; and the impact on risk-adjusted capitalisation”.
The ratings agency will begin compiling a list of rated insurers with exposure to terrorism at mid-year 2019.
Companies which it deems to have a material terrorism exposure and a reliance on TRIPRA will be asked to present detailed plans on how they plan to mitigate this exposure in the event that the act is not renewed.
A.M. Best commented: “Although private terrorism reinsurance is currently available, a rating concern will be the future availability and affordability of reinsurance if the federal backstop is eliminated or changes significantly.”
“Insurers that currently would be materially affected by the absence of TRIPRA, and that cannot provide a sufficient action plan to reduce exposures to terrorism risks, likely will face negative rating pressure by year-end 2019.”
