The price of terror


The price of terror

Since the attacks of September 2001 the threat of terrorism has been taken very seriously in the US, with the majority of hospitals taking out terrorism insurance cover. In December next year the government backstop for terrorism coverage, originally enacted in 2002, comes up for review. HRMR asks what effect this will have on hospitals’ insurance.

Increased media coverage of foiled attacks and the activity of known terrorist cells have influenced the recent uptake of terrorism coverage by healthcare facilities. So too does the insistence by a lender that coverage be bought. While terrorism coverage may not be a standard feature of insurance for healthcare facilities, it is now more than likely that this type of cover is obtained.

The ability and willingness of insurers to provide terrorism cover has, for over a decade, been linked to the Terrorism Risk Insurance Act (TRIA)—signed into law by President George W. Bush on November 26, 2002—and its most recent extension, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which is set to expire on December 31, 2014.

TRIPRA acts as a federal ‘backstop’ for claims related to terrorism, providing a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. US government-sponsored terrorism insurance has its origins in the fear and anxiety that followed the events of September 11, 2001. Insurers started excluding terrorism exposure from coverage and this uncertainty had a ripple effect on commercial property mortgage financing and construction in urban markets.

On September 19, Peter Beshar, executive vice president and general counsel of Marsh & McLennan Companies, testified before the US House of Representatives Committee on Financial Services on the future of TRIPRA/TRIA. Marsh & McLennan Companies strongly supports reauthorization and modernization of the act.

“We consider TRIA to be a model public-private partnership,” he said. “TRIA restored insurance capacity at a critical time after 9-11 and continues to be the backbone of a healthy terrorism insurance market.”

In April, Marsh released its 2013 Terrorism Risk Insurance Report, a comprehensive look at the terrorism insurance market. A survey of more than 2,500 Marsh clients demonstrated that demand for terrorism risk insurance remains strong and that the TRIA/TRIPRA program plays a major part in the availability and affordability of coverage. According to the report, 62 percent of Marsh’s clients purchased property terrorism coverage backed by TRIA in 2012.

“Our clients across the US—including real estate developers, media companies, healthcare organizations and educational institutions—need and want terrorism coverage and would be less likely to get it without TRIA,” it stated.

“In our judgement, the existence of a private terrorism insurance market, backstopped by TRIA, actually serves to protect the government and taxpayers from absorbing virtually all of the financial loss in the event of a terrorist attack,” said Beshar.

The company also offered three recommendations for refinement of the program including (i) specific clarification that coverage is provided by TRIA for all forms of terrorism, including nuclear, biological, chemical and radiological events, if coverage is afforded on the primary policy; (ii) modernization of TRIA to reflect new terrorist threats that have emerged—in particular, the risk of cyber terrorism; and (iii) establishment of a 90-day time period for determining whether an act of terrorism is covered by TRIA .

Beshar’s testimony came just one day after Marsh & McLennan Companies representatives shared their views on TRIA with the director of the Federal Insurance Office. At the meeting of the Federal Advisory Committee on Insurance (FACI), Christopher Flatt, leader of Marsh’s Workers’ Compensation Center of Excellence, and Aaron D. Bueler, managing director and leader of Guy Carpenter’s workers’ compensation practice and terrorism task force, presented the company’s views.

After addressing FACI, Bueler stated: “The continuation of TRIA is essential. Non-renewal or a major change in the program will negatively affect the affordability and availability of commercial lines insurance vital to the economy. Since TRIA’s enactment in 2002, the terrorism reinsurance market has become a critical component of risk management strategy for many insurers. A dramatic change in the federal backstop could lead to a contraction in both the insurance and reinsurance marketplace.”

Flatt stressed that TRIA affects the state-regulated workers’ compensation market, especially in the areas of pricing and capacity. “The uncertainty in the market is causing some carriers to reduce their available capacity and aggregate exposures in large cities, and workers’ compensation prices on these risks are certainly going up,” he told members of FACI.

Marsh’s views on TRIA/TRIPRA are echoed by Wendy Peters, senior vice president of Willis’ terrorism practice, writing on the Willis blog.

“It is important to recognize that terrorism is not a peril that can be reduced or avoided by traditional loss mitigation techniques, nor is the typical methodology for determining premiums for catastrophe exposures, eg, flood, applicable to the calculation of terrorism pricing models,” she said. “The ability to accurately predict frequency of events within a specific zone is essentially impossible.”

Terrorism insurance capacity is limited, she continued. With no demonstrable expansion of this specialist insurance market, much of the existing terrorism insurance capacity has already been allocated on a medium to long-term basis to existing buildings and projects under construction with little or no insurance capacity left available for new development.

“To compound the problem, construction costs have risen from $400/$450 per sq ft five years ago to $500/$550 per sq ft for new construction, further increasing the need for higher limits to insure to value and compounding the aggregation/capacity problems,” she said. “Additionally, it is estimated that up to 85 percent of all commercial mortgages require terrorism insurance.”

Peters believes that the economy will suffer without TRIPRA extension. Without adequate limits in place, projects may not be started, leading to a negative ripple effect throughout the economy.

“TRIA must be reauthorized and it must be reauthorized sooner rather than later to avoid disruptions in coverage,” she said. “Without the certainty of an extension of TRIPRA, we are beginning to see provisos written into new insurance contracts that limit or eliminate terrorism coverage after December 31, 2014. This will undoubtedly delay, if not scrap, major development plans, thereby jeopardizing an already fragile economic recovery.”

A similar point was made by Fitch in a report titled US Terrorism Reinsurance: Looming Uncertainty of Program Renewal. “Over the last decade, commercial property insurers have enhanced their ability to measure and model exposure to terrorism events,” it said. “Net exposures are managed currently through the availability of large reinsurance limits through TRIPRA. Withdrawal of TRIPRA reinsurance protection without readily available substitute coverage will likely move insurers to exclude terrorism from property coverage and to manage risk aggregations in concentrated geographic segments.”

The report also stated that workers’ compensation insurance could be negatively influenced by a discontinuation of TRIPRA: insurers are not allowed to exclude losses from terrorism-related perils in workers’ compensation policies. Workers’ compensation is statutorily required in almost every US jurisdiction and exclusions and limitations of this product line are generally prohibited.

“TRIPRA expiration or meaningful program changes may have significant effects on workers’ compensation insurance coverage availability and pricing,” it stated.

Fitch anticipates that although private market standalone terrorism coverage has increased modestly over time, it is unlikely that substantial private market capacity would arise as a substitute for TRIPRA coverage if the program is allowed to expire.
“Likewise, it is difficult to predict whether financial and property markets have a greater propensity to adapt to an environment without a government-sponsored terrorism insurance program compared with the reactions of insurers, lenders and investors before TRIA took effect in 2002,” states the report.

The consensus seems to be that TRIPRA needs to continue—the industry will watch debates around its future with interest, craving certainty one way or another. 

Terrorism, TRIA, TRIPRA, Willis, Marsh