Category Archives: Insurance

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A Race against the Clock to Address TRIA Issues

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Failure by the Senate to reauthorize the Terrorism Risk Insurance Act (TRIA) has left unanswered questions for insurance buyers facing renewals on terrorism coverage—which some in the insurance industry are scrambling to answer.

Because TRIA renewal was recently passed by a majority in the House of Representatives, the industry was optimistic about its renewal before its expiration. But at this point, the Dec. 31 deadline looms large.

AIR-Worldwide explained in an email notice that commercial insurers will no longer be required to offer terrorism coverage beginning Jan. 1. Without a federal backstop, they said, insurers may seek to limit underwriting for high concentrations of risks in major cities. This could cause terrorism insurance coverage to become unavailable or unaffordable.

AIR continued:

Insurers that do continue to offer commercial terrorism insurance would likely be required to maintain higher capital standards in order to avoid negative rating implications. Where coverage for terrorism-related events is still available, prices for this coverage will increase.

In the absence of TRIA, the workers’ compensation insurance market would be particularly vulnerable to terror attack losses. State workers compensation statutes offer insurers less flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions. With or without TRIA, it is mandatory for U.S. employers to provide workers’ compensation coverage. If coverage is not available, employers may be forced to purchase insurance in the residual markets or self-insure.

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This could result in large amounts of risk being transferred to the residual market in a few states.

Allowing TRIA to expire would have widespread implications, not only for the insurance industry, but also for the broader economy. Construction and real estate business sectors may be unable to obtain financing without adequate terrorism coverage in place. If insurers limit underwriting following an expiration of TRIA, businesses with high concentrations of employees could have difficulty obtaining coverage for workers’ compensation, including higher education institutions, hotels, airports, hospitals, and financial services, among many others.

In an advisory to its clients, Willis addressed considerations and offered preliminary guidance.

The broker noted several scenarios, depending on how a company has organized its terrorism risk transfer program:

• For terrorism coverage that is currently embedded in all-risk property, liability and workers compensation programs there are three potential scenarios:

1. If there are no sunset clauses–contract provisions which may allow the insurer to exclude coverage for terrorism in the event that TRIA is not reauthorized–or reservation of rights clauses related to TRIA expiration, the program will run until its natural expiration. Market disruption may impact renewal pricing if no action has been taken on TRIA.

2. If there is a TRIA-related sunset clause, the terrorism coverage will expire after Dec.

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31. Policyholders should assess the need for insurance coverage and seek stand-alone coverage or a sunset clause extension.

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3. If there is a reservation of rights which allows carriers to modify the terrorism coverage as a result of TRIA expiration, a coverage extension should be negotiated if possible, and stand-alone alternatives should be sought.

• Stand-alone Terrorism coverage – In this case, Willis said it does not anticipate immediate changes due to TRIA’s expiration. This is because most stand-alone placements do not have sunset clauses or reservation of rights endorsements related to TRIA expiration. While there may be market disruption to consider at renewal, for the time being, TRIA is a non-issue for these placements.

• Captives – In all cases where it places terrorism reinsurance behind a captive program, Willis said the reinsurance arrangement this year has been organized to convert from quota share reinsurance of the captive—when a primary insurer and reinsurer establish a fixed percentage for sharing amounts of insurance, premiums and losses—to primary reinsurance of the captive (in anticipation of TRIA’s expiration). Reinsurance coverage agreements should be read carefully to determine the new limit. The new primary limits are likely to approximate their existing quota share capacity. Willis recommends that any capacity that does convert should remain as reinsurance of the captive. This would maintain captive involvement, should TRIA be reauthorized in early 2015, and avoid any direct self-procurement or frictional costs during the transition. A program may also include excess capacity which, in many cases, should drop down to provide excess over revised captive limits, Willis advised.

Insurance Industry ‘Disappointed’ by Senate’s Non-Renewal of TRIA

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Last week’s optimism about the possible reauthorization of the Terrorism Risk Insurance Act was replaced by “disappointment” today, as the insurance industry sounded off about the Senate’s failure to pass the House-approved TRIA bill before adjourning. TRIA, the federal insurance backstop that requires insurers to offer terrorism insurance coverage to policyholders, is set to expire on Dec. 31, 2014. More than 60 percent of all U.S. businesses purchase terrorism insurance coverage, according to Marsh USA.

“A major terrorist attack occurring without a TRIA law on the books will be far more disruptive to the U.S. economy than one where TRIA is in place,” Robert Hartwig, Ph.D., president of the Insurance Information Institute and economist said in a statement. “Terrorism insurance policies are going to lapse in 2015, and insurers will be under no obligation to renew them, adversely impacting the construction, energy and real estate industries, among others. For instance, a theatre owner hosting a controversial movie premiere on Christmas Day may have insurance coverage for losses triggered by an act of terrorism but this same business might not have it if a comparable attack were to occur on New Year’s Day.”

The Coalition to Insure Against Terrorism (CIAT) spokesperson Marty DePoy said, “CIAT is incredibly disappointed that the Senate chose to adjourn without reauthorizing the Terrorism Risk Insurance Act, a program that since 9/11 has provided critical stability to the marketplace against another terrorist attack. This is a bipartisan failure; the 113th Congress has let down American workers, American businesses and jeopardized U.S. economic and national security. CIAT urges the new Congress to make TRIA reauthorization its top priority in January and immediately vote to extend the program for the long-term.”

RIMS President Carolyn Snow echoed disappointment. “We are extremely disappointed that Congress failed to pass an extension of TRIA, despite strong bipartisan support.

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The program’s expiration will have many negative repercussions for commercial insurance consumers, the countless organizations they represent and the U.S. economy as a whole.”

She noted that since its inception, “TRIA has stabilized the marketplace by providing adequate capacity at affordable rates. Its expiration will almost certainly cause rates to rise, placing many lending agreements in jeopardy and forcing some organizations to self-insure or simply go without.”

Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA), said AIA is “incredibly disappointed,” adding that by letting TRIA lapse, “Congress has failed to protect taxpayers and the economy.”

She said, “Without TRIA in place on Jan. 1, insurers will be forced to assess their exposures. The program’s lapse will significantly jeopardize the terrorism insurance marketplace that currently protects our nation’s economy against major acts of terrorism. We strongly urge the new Congress to take up the House-Senate negotiated TRIA reauthorization package as its first item of business when it returns in January in order to minimize marketplace disruptions.

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”

Global risk advisor, Willis expressed disappointment as well, noting that its biggest concern is that Clients “will need help in reevaluating their risk exposures according to the changed environment where TRIA is no longer available as a back stop for the insurance market place. Of particular concern is where clients have loan covenants that determine the type and amount of terrorism insurance coverage that is required.”

Mike Becker, executive vice president and chief executive officer of the National Association of Professional Insurance Agents observed, “Disagreement won the day and politics took precedence over protecting the American people. There was overwhelming bipartisan support to renew TRIA, with both parties showing strong leadership to get a compromise deal done in recent weeks. That support was nearly unanimous, with the House approving the TRIA renewal deal 417-7 last week, and the Senate having already passed a similar version 93-4 last July.”

Snow concluded, “RIMS and many other organizations have been pushing Congress to pass an extension for the past two years but Congress senselessly ignored those concerns and waited until the very last moment. This delay has ultimately led to the worst possible outcome.”

Lessons Learned from Data Breaches

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Recent data breaches have left some large organizations reeling as they deal with the aftermath. They include the Target data breach, compromises at Home Depot, JP Morgan, USPS (which exposed employee Social Security Numbers and other data) and, most recently, Sony Pictures. The Sony hack also proved to be embarrassing to some of the company’s executives, as private email correspondences were exposed.

Collateral damage from data breach is significant: one in nine customers affected by a data breach stopped shopping at a particular retailer. According to LifeLock, a recent survey of corporate executive decision-makers found that while concern for a breach is 4 or 5 on a 5-point scale, only 10% to 20% of their total cyber security budgets go to breach remediation. Establishing an incident response plan in advance can reduce the cost per compromised record by $17.

While strengthening cybersecurity is important, the impact on breached organizations shows that preparing a response must be part of the breach-management equation. These breaches present an opportunity for business leaders and risk professionals to learn important lessons about how to protect their companies, customers and employees if a breach should occur.

Below are steps companies can take to establish a response plan, as well as information on the data breach landscape.

 

 

 

Risk Managers of ERM Least Satisfied with Brokers, Insurers, Study Finds

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While most risk professionals are satisfied with their insurers and brokers, those from of organizations with enterprise risk management (ERM) programs were the least content, according to the inaugural J.D. Power and Risk and Insurance Management Society (RIMS) 2014 Large Commercial Insurance Report.

The full report, based on findings of the J.D. Power 2014 Large Business Commercial Study, slated for release in February 2015, examines industry-level performance metrics among large business commercial insurers and brokers.

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The study, which interviewed almost 1,000 risk professionals, highlights best practices that are critical to satisfying them.

The 2014 Commercial Insurance Report is based on surveys of organizations with $100 million or more in annual revenue that have purchased a commercial property, workers’ compensation, or auto policy with a profiled insurer or broker. The report represents organizations from more than 20 industry sectors and provides comparisons of the nine largest industry segments:

  • Accommodations, Food Services, Arts, Entertainment, Retail, and Recreation
  • Administrative Services, Education, and Real Estate
  • Financial Services
  • Government
  • Information Technology, Professional, Scientific, and Technical Services
  • Healthcare and Social Assistance
  • Manufacturing and Wholesale Trade
  • Telecom and Utilities
  • Transportation, Warehousing, and Waste Management

ERM is steadily becoming a more prevalent function for risk management at many organizations—with nearly 40% of risk professionals indicating that ERM falls within their area of responsibility—but the survey found that risk professionals who are not responsible for their organization’s ERM function are generally more satisfied with their insurers and broker than those who are. In fact, overall satisfaction is lowest among risk professionals responsible for their organization’s enterprise risk management.

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“A slice in the data showed that any time they might have any particular role in ERM, the satisfaction levels for those that did not have an ERM role was much higher than those who did,” said Timothy Bebout, commercial insurance practice leader at J.D. Power. “Their interaction and their satisfaction with either the broker or the insurer, whether by product line or by particular key indicators, was lower.”

Why was this the case? “The study shows there is more expectation for ERM from a strategic role in companies,” Bebout continued. “Some of the risks are not easily quantifiable and if tied to the need for reliance upon a broker to understand their business, I can imagine that if the risk professional was having difficulty describing or quantifying the risk and the broker was unable to take any sort of action, that would be viewed as a lack of knowledge of their needs.”

The brokers that did well did so because “they clearly understood the risk professional’s business and how to prepare for that renewal, or perhaps a new business proposal to an underwriter. They understood the key things that would make a difference in terms of pricing, limits and specific coverages and deductibles,” Bebout said. As for their communications, “If the average broker interaction outside of a claim is one or two times, risk professionals are saying that is not enough.”

Satisfaction with insurance brokers was based on four factors: ease of contacting, reasonableness of fees, advice and guidance in selecting program offerings and timeliness of resolving contact.

The survey found that overall satisfaction was highest for brokers. This was followed by property insurers, auto and workers compensation. Risk management customers of large commercial insurers were significantly more satisfied with their commercial property, workers compensation and auto insurance providers based on five factors: interaction, program offerings, price, billing and payment and claims.

Billing and payment was found to be the lowest scoring factor in the areas of auto and workers compensation, and among the lowest scoring in the property index. However, billing and payment satisfaction was significantly lower among workers compensation customers than among property and auto customers.

Mary Roth, RIMS executive director noted, “Whether the results of the survey were surprising or expected, we hope that it encourages a meaningful dialogue and actionable performance initiatives.

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The primary objective is to foster improved customer satisfaction throughout the large commercial insurance industry.”

The 146-page, J.D. Power and RIMS Commercial Insurance Report is available for purchase by clicking here. RIMS members can receive the 13-page J.D. Power and RIMS Commercial Insurance—Special Report Snapshot for free as well as a discount on the full report.