Rating pressure increases as the TRIPRA deadline approaches, warns AM Best

Terrorism

Rating agency AM Best has urged US insurers to prepare for the possible expiry or alteration of the Terrorism Risk Insurance Authorisation Act (TRIPRA).

The US House of Representatives has introduced legislation to extend TRIPRA, which provides government backing to terrorism insurance programmes. However, uncertainty remains as to whether Congress will allow the programme to lapse in December 2014 or, if it is renewed, what the backstop will encompass.

AM Best continues to request that insurers, especially those that are heavily reliant on TRIPRA, present detailed plans to be implemented in the event TRIPRA isn’t renewed or its protection is materially altered.

Although private terrorism reinsurance is currently available, a rating concern will be future availability and affordability of such cover if the federal backstop changes significantly.

Key concerns continue to be insurers’ net loss exposures to terrorism (excluding the benefit of TRIPRA) exceeding 20% of capital and surplus; high aggregate exposures of risks within certain geographic areas; the locations of exposures within those areas; and the impact on capitalisation.

The rating agency believes a comprehensive risk management process is crucial to the financial strength rating of any insurer with a material exposure to terrorism risk.

Although a federal backstop helps reduce the impact of terrorism on an insurer’s risk-adjusted capitalisation, overreliance on such a mechanism isn’t a substitute for sound risk management.

AM Best has been assessing the impact of terrorism risk on insurers’ balance sheets using confidential information gathered during rating discussions.

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, will likely face rating pressure as the expiration date approaches.