Author Archives: Nathan Bacchus

About Nathan Bacchus

Nathan Bacchus is senior government affairs manager at theRisk and Insurance Management Society (RIMS).
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Marsh Report Shows Continued Demand for Terrorism Coverage

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As the current Terrorism Risk Insurance Act (TRIA) moves closer to its scheduled expiration date of December 31, 2014, the debate is heating up over whether the federal backstop remains necessary and whether the market demand for terrorism coverage still exists. According to the Marsh 2013 Terrorism Risk Insurance Report, released April 30, demand for coverage has remained both steady and strong. These results only reinforce the need for a long-term extension of the terrorism backstop.

During the first full year of TRIA, only 27% of organizations obtained terrorism coverage as the market was still adjusting to the TRIA program and the fallout from the 9/11 attacks. Since that time, take-up rates have grown steadily. By 2005 the take-up rate for terrorism insurance was 58%. Today the rate is more than 60%—where it has been since 2009. The take-up rates are highest among companies with total insured value (TIV) over $500 million, but even those companies with less than $100 million in TIV obtained terrorism insurance at a 59% rate in 2012.

Take-up rates did vary amongst different industry sectors. Companies within the media, education, financial institutions, health care or nonprofit sectors obtained terrorism coverage at a rate above 70% during 2012, with the media sector leading the way with an 81% take-up rate. The food and beverage, manufacturing, chemical and energy and mining and sectors were at the low end with take-up rates of 50% or lower.

With regard to region, companies located in the Northeast were most likely to obtain terrorism insurance with a take-up rate of 77% in 2012. This is to be expected given the concentration of large metro areas with high population density.

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However, other regions are showing a strong need for coverage as well. Companies located in the South, West and Midwest regions obtained coverage at the rates of 63%, 53%, and 58% respectively in 2012.

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The threat of terrorism is not just a Northeast problem, and companies in regions with a less-perceived threat of terrorism are showing recognition of that fact.

If TRIA is allowed to expire, these numbers could change drastically as capacity would be significantly decreased. Without TRIA, insurers would no longer be required to offer terrorism coverage. The Marsh report shows that terrorism pricing, as a part of property premiums, has remained within the 3-5% range since 2010. Premiums would likely rise, however, without TRIA, and the certainty it provides insurers essentially subsidizes current rates.

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Additionally, companies with a high exposure concentration in central business districts or major metropolitan areas would likely not be able to purchase the necessary amount of coverage, forcing them to self-insure all or part of their terrorism risks.

The Marsh report covers many other issues surrounding the terrorism market that are not discussed here, including: considerations in using captives for terrorism coverage; the terrorism reinsurance market; the standalone terrorism market; and implications on workers compensation and general liability coverage if TRIA were allowed to expire.

Obama Budget Proposal a Mixed Bag for Risk Managers

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President Barack Obama released his budget proposal for the 2014 fiscal year on April 10. Media attention has focused on its plan to reduce the nation’s deficit. But for risk managers, the budget is also noteworthy for two other reasons: what it includes and what it doesn’t.

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As in years past, the administration’s budget includes a provision that would eliminate the current tax deduction for reinsurance premiums ceded by domestic insurers to foreign affiliates. Many in the industry, including RIMS, have expressed their opposition to this provision being included in any final budget.

In an April 15 letter to the House Ways and Means Committee, RIMS stated that the administration’s proposal would have “demonstrable negative implications for the global reinsurance market and the United States businesses that rely on this market” and would have a “chilling effect on the use of foreign reinsurance.” (View the full letter for a deeper explanation of the tax deduction.)

The Coalition for Competitive Insurance Rates (CCIR) published a study in 2009 (with an update in 2010) that found eliminating the tax deduction would lead to a 20% reduction in the overall supply of reinsurance available in the U.S. market.

This would in turn lead to consumer price increases of at least billion and up to billion annually.

A brighter spot for risk managers comes from an item not found in the administration’s proposed budget: a cut to the Terrorism Risk Insurance Act.

In President Obama’s first few budgets, support for TRIA was significantly reduced. In his proposed fiscal-year 2011 budget, for example, the administration called for eliminating nearly $250 million in federal subsidies to insurance companies for terrorism insurance; increasing deductibles and copays for insurers that participate in the program; and eliminating coverage for acts of domestic terrorism.

With TRIA set to sunset at the end of 2014, the industry looked to this year’s budget proposal for a sign on where the president stands on the issue.

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While not including a cut for the program in a budget proposal is not the same as support, it is viewed as a positive sign that the administration will get behind an extension.

It should be noted that government’s final budget rarely looks anything like the initial proposals put forth by the administration and Congress.

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While President Obama has included the reinsurance tax provision in the past, that provision has never been included in any final agreement. The same holds for years in which the administration included cuts to TRIA.

The administration’s initial budget proposal does still carry weight, however.

And what is — and is not — included remains notable for risk managers and worth keeping an eye on going forward.

TRIA Extension Faces Tough Fight

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On December 31, 2014 the Terrorism Risk Insurance Act, or TRIA, is set to expire. The program, originally enacted in 2002, provides a financial backstop by the federal government in the case of a large-scale terrorist attack. TRIA has been extended twice, in 2005 and 2007, but there is uncertainty as to whether the program will be extended again.

Legislation that would simply extend the program to 2019 has been introduced by Rep. Michael Grimm (R-NY) and Rep. Carolyn Maloney (D-NY). However, Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, has voiced opposition to extending the program in its present form. The House Financial Services Committee has stated its plans to examine the private sector’s capacity to assess and price for terrorism risk and to consider proposals that would phase out TRIA over time.

Others have expressed arguments against the program’s extension as well. David C. John, senior research fellow in retirement security and financial institutions at The Heritage Foundation, testified before the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity in September 2012 that “we have now reached a point where the private sector is increasingly capable of providing [terrorism] coverage at appropriate prices without government support.”

Maurice R. Greenberg, chairman and CEO of C.V. Starr & Co. and former CEO of American International Group Inc., stated at a press conference at the National Press Club in Washington that the “private market is capable of doing a heck of a lot more” in regards to terrorism coverage than it could at the time of the program’s original authorization. While he did stop short of calling for ending the program, Mr. Greenberg’s statement added to the argument that the private sector is capable of insuring terrorism risks without a federal backstop.

Proponents of the program, including RIMS, argue that a completely private solution is not feasible as terrorism acts are exceedingly difficult, if not impossible, to predict. Without a federal backstop in place, coverage capacity will be significantly reduced, driving prices much higher. This holds especially true in high-risk metropolitan areas such as New York City, Chicago, Los Angeles, etc. Without adequate capacity, many organizations will be forced to self-insure, leaving themselves exposed to an event that could possibly end in bankruptcy.

Supporters of the bill would like to see an extension passed by the end of 2013 so as not to negatively impact policies issued in 2014, but with Congress focused on other priorities, this debate could continue well into 2014 and potentially right up to the deadline of December 31, 2014. Supporters of the program, including RIMS members, are strongly encouraged to reach out to their member of Congress to express their support and need for the program.

NFIP, TRIA and FIO: Points of Focus for House Financial Services Committee

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The House Financial Services Committee has released its oversight plan for the 113th Congress. This is a nonbinding plan that each standing committee must submit at the start of each new legislative session spelling out the committee’s agenda for the session.

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While much of the House Financial Services’ plan includes review of Dodd-Frank implementation and other banking related issues, it also includes three issues of importance to risk management: extension of the Terrorism Risk Insurance Act (TRIA), the National Flood Insurance Program (NFIP) and the Federal Insurance Office (FIO).

On TRIA:

“The Committee will examine the private sector’s capacity to assess and price for terrorism risk. The Committee may also consider proposals that would phase out the Terrorism Risk Insurance Program by encouraging private industry to develop dedicated capital for underwriting terrorism risks, and significantly reducing the potential Federal exposure and participation in terrorism insurance over time.”

TRIA is set to expire on December 31, 2014 with many in the industry, including RIMS, pushing for an extension of the program to 2019. The committee’s plan signals that the fight for an extension will not be an easy one.

On the NFIP:

“The Committee will monitor the implementation of the Biggert-Waters Flood Insurance Reform Act of 2012, paying particular attention to the reforms that encourage more private sector participation in the flood insurance market. The Committee will also review and consider further reforms to the National Flood Insurance Program with the goal of ending taxpayer bailouts of the program and transitioning to a private, innovative, competitive and sustainable flood insurance market. Since 2006, the GAO has designated the NFIP as a high-risk program because of its potential to incur billions on dollars in losses and because the program faces serious financial, structural, and managerial challenges.

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Due to extraordinary losses incurred following the hurricanes in 2005 and Superstorm Sandy in 2012, the program carries a debt of well over $20 billion as of January 1, 2013.”

The debate over the NFIP, which many assumed was settled in 2012, was renewed following the destruction caused by Superstorm Sandy. Committee Chairman Jeb Hensarling (R-TX) has expressed his opposition to the NFIP in the past so it comes as no surprise that the committee plans to continually review the program’s viability and sustainability.

On the FIO:

The committee’s plan also scrutinized the FIO for missing deadlines on several reports to Congress related to the insurance industry. The FIO is being urged to release “these long overdue reports without further delay.” Two of the more anticipated reports include recommendations to modernize and improve the insurance regulatory system and a report on the global reinsurance market.

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Treasury Department Under Secretary for Domestic Finance Mary Miller recently testified before the Senate Banking Committee that the modernization report would be released soon and that the FIO will be releasing other reports in the coming months.

It’s going to be a busy legislative session.