Rating agency A.M. Best has warned U.S property and casualty (P&C) insurers with exposure to terrorism risk that they could face potential rating downgrades if the Terrorism Risk Insurance Program Reathorization Act (TRIPRA) of 2015 is left to expire in 2020.
The Act provides a federal backstop to insurers to help increase the availability and affordability of cover for commercial businesses in need of terrorism insurance.
It has been renewed periodically since its introduction in 2002 following the 9/11 attacks, but with the intensely partisan atmosphere in the U.S government, there are concerns that the legislation could be left to expire in 2020.
Although most catastrophe-exposed insurers typically rely on reinsurance to mitigate their risk, insurers with substantial terrorism exposure might also have a heavy reliance on TRIPRA to stay within their stated risk tolerances.
Additionally, A.M. Best has rating concerns about the future availability and affordability of private reinsurance if the federal backstop is eliminated or changes significantly.
“Although a federal backstop helps with liquidity and reduces the financial impact of a terrorist event, overreliance on such a mechanism isn’t a substitute for sound risk management,” A.M. Best stated.
Key concerns for the rating agency include insurers’ net loss exposures to terrorism excluding the benefit of TRIPRA, aggregate exposures of risks in certain geographic regions, the number of locations in those regions, and the impact on risk-adjusted capitalisation.
Beginning mid-year 2019, A.M. Best will ask insurers with material terrorism exposure and reliance on TRIPRA to present plans on how they will mitigate this exposure in the event that TRIPRA is not renewed.
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, analysts explained.