Role of agencies key to future of terrorism cover

North America

The role of the rating agencies is likely to be the key to the future of terrorism risk transfer, whether TRIA (the Terrorism Risk Insurance Extension Act of 2005) expires at the end of 2007 or is extended or replaced by another terrorism backstop mechanism, according to Aaron Davis, director of property insurance at insurance broker Aon. Mr Davis was responding to the US Treasury’s most recent request for industry comment on the state of the US terrorism insurance marketplace. The increased cost of conducting business that would follow a lowered rating, or maintaining the higher capital requirements, will put off a large number of insurers from writing terrorism cover once the federal guarantee expires. Without mechanisms like TRIA, Standard & Poor’s has said it may lower its investment ratings of insurance companies that offer terrorism insurance. Mr Davis said the $100bn certified terrorism reinsurance provided by TRIA has effectively increased the total market capacity for terrorism coverage in the US by over 80% and has significantly lowered the cost of such coverage in the process. Since the passage of TRIA in 2002, Davis says premiums paid by US businesses for terrorism insurance have fallen by nearly 50%. Mr Davis also referred to the changes to rating agency capital adequacy requirements. “When this is coupled with forthcoming changes to natural catastrophe models that will raise expected loss severity and frequency assumptions, it will represent a fundamental change to the property insurance marketplace. These changes will result in long-term pricing and capacity constraints that will be further aggravated by the disappearance of TRIA at the end of 2007”, Mr Davis says.