The recent move by Congress to extend the Terrorism Risk Insurance Act (TRIA) did not provide the industry with the long-term solution it needs according to experts.
Kim Prather, underwriting risk leader for commercial insurance, GE Insurance Solutions, said at a recent webinar: "The problem with the TRIA extension is that it further dilutes the protections provided by the original act. The industry's per-event threshold was raised, several lines of business were excluded and deductibles were increased. What we didn't end up with was a long-term solution."
Prather added that with the diminishing involvement of the government as a provider of a federal financial backstop, the TRIA extension could raise potential solvency concerns in the event of a terrorist act.
"We're still left with an inability to underwrite and price for the exposure - due to largely insufficient data," Prather said (terrorism is viewed by many in the insurance industry as an unquantifiable, unpredictable risk and, as a result, it is difficult to set a proper premium price for terrorism exposures.)
Prather explained that the industry still doesn't have the ability to adequately reserve against terrorism losses. "We don't have domestic terrorism included in the coverage either," he said.
GE Insurance Solutions believes the industry must continue to improve its modelling capabilities in order to develop an adequate price for this exposure, Prather said. Since the TRIA extension does not provide adequate insolvency protection for the industry, insurers and reinsurers must continue to manage terrorism exposures aggressively.
TRIA was originally enacted in November 2002 and was extended by the US Congress in December 2005 until 31 December 2007. It was designed as a federal backstop for the exposure the insurance industry faces as a result of an attack in the United States by foreign terrorists.
In his presentation, Frank Nutter of the RAA noted that Congress and the administration will increasingly resist another straight extension of TRIA.
Nutter commented that the attitude of some Republican members of Congress is to raise the industry's involvement by increasing the industry's role in providing protection against a terrorist attack. He added that this could be accomplished by increasing the size of events covered by the act, increasing deductibles, increasing co-payments and perhaps excluding more lines of insurance covered.
"By 2007, hopefully the industry will have an agreement on a proposal because I would not expect the administration or the Republicans in Congress to initiate a proposal on their own," Nutter said.
This reality is leading a variety of groups to try to develop "a workable long-term solution" - long before the 2007 deadline, said Joanne McMahon of GE Insurance Solutions. McMahon said there are a variety of solutions being discussed, noting that most involve a combination of private market and government participation in some type of a pooling concept.
The aim is to avoid being forced to return to the US Congress for more assistance at the end of 2007, she said. Another aim is avoid a repeat of year-end 2005 when stakeholders faced eleventh-hour negotiations right before TRIA's scheduled expiration on Dec. 31, she emphasised.
It would be desirable as an industry to have more clarity well before that time, McMahon advised.
