In a recent special report, A.M. Best has predicted that insurers will increasingly rely on reinsurance as the nature of terrorism changes and expands, and as the future of federal backstops become uncertain.
In recent years, the nature of high-profile attacks has shifted from property damage to ‘lone wolf’ attacks designed to inflict large numbers of deaths and injuries.
The threat of cyber terror is also looming, with Russian hackers threatening U.S sensitive infrastructure facilities and political stability, compelling re/insurers to consider risks like nuclear, biological, chemical, and radiation (NBCR) attacks.
Insurers with significant exposures to terrorism are also anticipating the expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) in 2020, with longer-term policies factoring in the potential termination of the federal backstop.
International ratings agency A.M. Best predicts that demand for reinsurance will rise as insurers attempt to minimise their participation in the event of an attack when TRIPRA is triggered.
Reinsurance also provides insurers with more stability than TRIPRA, which is subject to political uncertainty and budgetary constraints, and which is in danger of being discontinued or reduced in December 2020.
However, the report also noted that terrorism risk models are less well-developed than many other risk models, and suggested that a healthy terrorism risk management approach should take into account an insurer’s capital, reinsurance options, and TRIPRA, as well as stress testing and limits management.
Prices for terrorism risk have decreased in recent years due to the absence of a large-scale attack and the general softness of the reinsurance market for catastrophe risk, although prices are now flattening in response to the disappointing rises that followed an extremely costly year for natural catastrophes in 2017.
A.M. Best observed that U.S insurers typically purchase reinsurance to cover them until the TRIPRA retention kicks in and until after the TRIPRA retention is exhausted.