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TRIA Set to Expire on December 31
12/18/2014 6:00:00 PM
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First Posting 12/18/2014 6:00:00 PM  
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Posting Date: 12/18/2014 6:00:00 PM

TRIA Set to Expire on December 31: Implications and Risk Assessment Strategies

Efforts to reauthorize the Terrorism Risk Insurance Act (TRIA) fell apart late on December 16, 2014, after the Senate failed to extend the program prior to adjourning for the year. Without a renewal, TRIA is set to expire on December 31.           

Background

The tragic terror attacks on September 11, 2001, resulted in the second highest insurance loss in U.S. history[1] and impacted multiple commercial insurance lines of business simultaneously. Immediately following these attacks, the availability and affordability of terrorism coverage became increasingly scarce—especially for risks in terror prone areas. In 2002, Congress responded by enacting TRIA into law, putting a temporary federal backstop program in place that would allow for a public and private sharing of insured losses resulting from future acts of terrorism against the United States. TRIA has since been amended and extended twice and was last reauthorized through December 31, 2014, according to the Terrorism Risk Insurance Program Reauthorization Act of 2007. No acts of terrorism that have occurred since the initial passage of TRIA have met the requirements for coverage under the program. Even so, the ongoing threat of terrorism in the United States underscores the continued need for the federal backstop program to ensure the stability of the commercial insurance market.

Efforts made by Congress over the past year to avoid the impending expiration were widely expected to result in another renewal of TRIA. On December 10, signaling that a potential deal to renew the program was close, the U.S. House of Representatives voted 417-7 to approve a measure that would reauthorize TRIA for an additional six years. However, efforts fell apart soon after, on December 16, when the Senate failed to extend the program and instead adjourned for the year. Despite the strong bipartisan support for this measure in both chambers of Congress and despite the overwhelming support from the insurance industry and many other market sectors, the Senate failed to come to an agreement. Issues surrounding unrelated policy riders attached to the TRIA reauthorization bill ultimately blocked the possibility of bringing the measure to a vote in the Senate.

TRIA is now set to expire on December 31. With both chambers of Congress currently scheduled to adjourn for the remainder of the year, this presents the very real possibility that TRIA will expire at the end of this year. It remains unclear how quickly the next Congress could move to take up the matter again next year, if TRIA does expire.

Implications of TRIA Expiration

If TRIA expires, commercial insurers will no longer be required to offer terrorism coverage beginning January 1. Without a federal backstop, insurers may seek to limit underwriting for high concentrations of risks in major cities—causing terrorism insurance coverage to become unavailable or unaffordable. Insurers that do continue to offer commercial terrorism insurance would likely be required to maintain higher capital standards in order to avoid negative rating implications. Where coverage for terrorism-related events is still available, prices for this coverage will increase.

In the absence of TRIA, the workers’ compensation insurance market would be particularly vulnerable to terror attack losses. State workers compensation statutes offer insurers less flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions. With or without TRIA, it is mandatory for U.S. employers to provide workers’ compensation coverage. If coverage is not available, employers may be forced to purchase insurance in the residual markets or self-insure. This could result in large amounts of risk being transferred to the residual market in a few states. 

Allowing TRIA to expire would have widespread implications, not only for the insurance industry, but also for the broader economy. Construction and real estate business sectors may be unable to obtain financing without adequate terrorism coverage in place. If insurers limit underwriting following an expiration of TRIA, businesses with high concentrations of employees could have difficulty obtaining coverage for workers’ compensation, including higher education institutions, hotels, airports, hospitals, and financial services, among many others.

Terrorism Risk Assessment

Since 9/11, commercial insurers have become increasingly reliant on catastrophe models designed to quantify and manage the risk of losses from future terrorist attacks. The AIR Terrorism Model was first released in 2002 and is the most comprehensive terror risk model available to the commercial insurance industry today. The model has been extended across many applications in AIR’s Touchstone® platform and can be used to generate a clear picture of overall exposure to terrorism risk. In general, the goals and processes of terrorism risk modeling mirror those of natural catastrophe risk analysis.

To assist our clients who are preparing to evaluate and mitigate the impact of possible changes to or non-renewal of TRIA, we have prepared below a summary of methods that can be used for terrorism risk assessment using Touchstone. We recommend a three-pronged approach for producing a comprehensive terror risk assessment including exposure concentration analysis, deterministic loss analysis, and probabilistic loss analysis.

Insurers can apply the results of the terror risk assessment for further cost benefit analysis to determine if Enterprise Risk Management (ERM) strategies should be altered in the event that TRIA expires. Results of a comprehensive terror risk assessment in Touchstone can allow insurers to be better informed when making underwriting decisions, reinsurance purchasing decisions, and also when testing rating agency implications.

AIR also offers a wide range of consulting services that can help clients prepare for the potential impact.

Exposure Concentration Analysis

Insurers should first perform an exposure concentration analysis to identify the highest single-address and aggregate accumulations of risk in their book of business. Touchstone’s Geospatial Analytics Module can be used to perform a ring analysis to identify high value locations contributing to user-defined rings, or for accumulating aggregate exposure values within geographic zones. Ring analysis is particularly useful for analyzing accumulations of risk surrounding potential terrorist targets. The target for a ring analysis can be specified from high-value locations in your portfolio, from any user-defined location, or from AIR’s expansive U.S. terror landmark database. Touchstone users can also apply custom damage ratios within concentric rings to assess potential losses to properties and employees following a terrorist attack.

 

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Figure 1. Touchstone concentric ring analysis for accumulating exposure around a terror target in Lower Manhattan. The user has assigned building damage ratios to each ring of a specified radius.

Deterministic Loss Analysis

Touchstone also offers a more precise measure of terrorism risk that can be obtained by estimating losses from a single defined scenario, such as a truck bomb detonated at a particular location. Each customized terror attack scenario leverages AIR’s hazard propagation algorithms and vulnerability functions, in addition to Touchstone’s trusted financial module. The resulting losses account for weapon characteristics, as well as the construction type and distance of each exposure from the attack location. Using a physical damage and injury model, property damage, as well as injuries and fatalities, can be estimated at each location affected by the event. This type of analysis is not constrained by an arbitrary distance cutoff (as with the ring analysis). Deterministic loss analyses can be performed for a wide range of weapon types, including both chemical, biological, radiological, or nuclear (CBRN) and conventional attacks. User-defined terror attack scenarios can be analyzed at locations identified as high risk via Touchstone’s Geospatial Analytics Module, or at key targets in AIR’s U.S. terror landmark database. Results net of reinsurance and any expected TRIA recoveries can also be analyzed by entering the appropriate financial terms into Touchstone prior to loss analysis.

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Figure 2. Touchstone deterministic loss analysis result for a large truck bomb (25-ton TNT) attack at a terror target in Lower Manhattan.

Probabilistic Loss Analysis

Geospatial analysis and deterministic loss analysis provide estimated exposure to and losses from a realistic set of events, but are limited in that they do not consider the relative likelihood of different events, or the compound effect of locations being exposed to events at multiple targets. These limitations are addressed through the use of AIR’s fully probabilistic terrorism model in Touchstone, which contains hundreds of thousands of potential terror attack scenarios for insurers to test their portfolio against. Through probabilistic analysis, insurers can identify simulated event losses that are in excess of their company TRIA deductibles and also apply any expected federal recoveries to obtain losses net of TRIA. Financial terms related to TRIA, such as the company TRIA deductible and insurer co-share percentages can easily be applied in Touchstone prior to running a probabilistic loss analysis. Probabilistic loss analysis should be performed both with and without the application of TRIA to provide insurers with an understanding of the range of possible terror attack losses they are exposed to, and also the relative likelihood that they might occur.

 

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Figure 3. Touchstone terror loss exceedance probability curve

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Figure 4. Touchstone terror loss summary table for key exceedance probabilities

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Figure 5. Touchstone terror event loss summary table

 

AIR Consulting Services for Terrorism Risk Assessment

AIR can also provide consulting and analytical services for companies that do not currently license Touchstone or the AIR Terrorism Model. AIR’s experienced consultants, specializing in terror risk management, are available to work
one-on-one with companies to develop modeling solutions for a variety of business applications. For more information about terror risk analysis support, please contact an AIR client services representative at: (617) 267-6645. In addition, further information is available in AIR’s recent webinar on using Touchstone for terrorism risk management: http://www.air-worldwide.com/Publications/Presentations/Managing-Terrorism-Risk-in-Touchstone/.

 



[1] Almost USD 43 Billion in 2013 dollars. Source: Insurance Information Institute, 2013

TRIA Set to Expire on December 31
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