TRIA

I’m impressed. Insurance Journal put out an article yesterday reporting that Congress will start having hearings on renewing TRIA today.

I didn’t expect that to happen until a month or two before the 12/31/07 expiration date of the current iteration of TRIA.

According to the article, a GAO report acknowledges that the perils of nuclear, chemical, biological, and radiological contamination are generally uninsurable, but it recommends that the federal backstop be dropped for more conventional forms of terrorism (e.g. flying planes into skyscrapers).

The insurance industry is, unsurprisingly, mostly against the idea. Already, a significant amount of effort is spent in managing aggregations to keep the risk of loss from terrorism within appropriate levels, even with the TRIA backstop available. This in turn leads to challenges in securing terrorism coverage in certain urban areas.

I suspect that the free market will provide a way to make coverage available if “conventional terrorism” is left in insurers’ hands to digest. However, I suspect that that way will be rather expensive, and the transition could be disruptive if there isn’t enough advance notice.

If there’s a serious chance of TRIA not being renewed for conventional perils, it would be best to get that nailed down in the next three months…preferably as soon as possible after the election…in order for insurers and investors to be able to go through the necessary gesticulations to compensate for the changes without disrupting property coverage for ‘08 and later.

P.S. - Can we get TRIA made permanent for at least the NBCR-flavors of terrorism while we’re at it?

When TRIA was reauthorized, I expected that Congress would allow the issue of insurance versus the threat of terrorism to sit until the next expiration date for TRIA approached.

It seems I may have been wrong, according to this Insurance Journal article:

Two U.S. House subcommittees — the Committee on Financial Services, Subcommittee on Oversights and Investigation, and the Homeland Security Subcommittee on Intelligence, Information Sharing, and Terrorism Risk Assessment — held a hearing today to examine the ongoing issue of insuring the U.S. economy against terrorist attacks. [...]

Terry Fleming of Risk and Insurance Management Society Inc. delivered testimony on behalf of RIMS and its membership. Fleming says that the potential inability for risk managers to purchase terrorism insurance in the event that the Terrorism Risk Insurance Act (TRIA) is allowed to sunset on Dec. 31, 2007, is particularly critical. “Without coverage, many companies will be vulnerable to bankruptcy and extreme financial losses, which ultimately could adversely impact the nation’s economy,” according to Fleming.[.]

[AIA director of federal affairs Drew Cantor] said that catastrophic terrorism is uninsurable by the private sector alone for other reasons, including the inability to model attack frequency and the interdependent nature of the risk. “These problems are exacerbated for the private market with regard to the possible use of nuclear, biological, chemical and radiological weapons,” Cantor continued. “It is vital the federal government remain a partner in insuring this risk.”[.]

[PCIAA SVP Ben McKay] said that terrorism is an uninsurable risk because of the industry’s inability to accurately predict the frequency or severity of future attacks, the broad range of possible targets for such attacks, and the potential that damages from some type of attacks could exceed the industry’s capital base and destroy insurers’ ability to provide a financial safety net to American businesses.

If TRIA went away, in all likelihood there would develop a private market for terrorism coverage (for a hefty price) and/or lenders would drop requirements that property owners maintain terror coverage on insured properties given an expectation that the feds would be forced to bail out victims in the event of another terror attack in the States. However the market disruption and uncertainty that would arise until those changes occurred would not be pretty, from an economic perspective.

It’s much better, I think, to have codified a mechanism that makes accepting some risk a bit more palatable, and involving the deep pockets of the feds at an early stage, rather than facing the prospect of huge, unplanned bailouts at some point in the future.

While I was slogging through my actuarial exam, the AAA (the actuaries, not the auto club or bail-bondsmen) released this letter to the White House regarding concerns on providing insurance for terrorism coverage.

The entire letter is 30 pages long, and my head’s still too numb from yesterday to fully parse it myself.

However, my quick look-through suggests that the primary argument is that the U.S. insurance industry is not sufficiently capitalized to withstand the potential claims arising from a major terrorist attack on (for example) New York.

Given the expense that would have to be passed on to the public if the industry were required to build surplus sufficient to handle such risk, given that terror coverage elections are high in high-risk areas and low out in the middle of nowhere (raising the specter of adverse selection), and given that most lenders require terrorism coverage be bought when financing property purchases…. this is a peril that federal involvement makes sense, at least on a high excess basis.

From a Business Insurance article this week:

A major terrorist attack on New York City using chemical, biological or radioactive weapons could cost $778 billion in insured losses, according to the American Academy of Actuaries.

Michael McCarter, chair of the AAA’s Terrorism Risk Insurance Subgroup, made the estimate at a hearing on terrorism held in the city Wednesday by the National Assn. of Insurance Commissioners.

Even a delivery truck stuffed with explosives could cause nearly $12 billion of damages in a city as dense as New York, he said. “It is possible that terrorists could cause losses larger than any we have modeled,” said Mr. McCarter.[...]

“Congress is in no mood for a straight extension of TRIA,” Mr. Mills warned. “But we must have continued federal involvement.”

Otherwise the stock and bond markets would see a “severe disruption” as property and casualty carriers stopped insuring real estate projects and other development in areas where terrorists were likely to strike, Mr. Mills said.[...]

Mr. McCarter estimated possible insured terrorist losses for other cities at $171.2 billion for San Francisco and $42.3 billion for Des Moines, Iowa.

Des Moines? Des Moines?! That’s not exactly a place you’d think of as being a prime terrorist target.

In my mind there are three classes of risks in insurance:

• Good risks (meaning the purchaser will accept a sufficiently profitable rate),
• Bad risks (meaning the purchaser will buy only at a less-than sufficiently proffitable rate), and
• Risks we don’t know how to price for, and should mostly be avoided until we learn how to price or underwrite the risk.

The entire peril of terrorism falls into that third bucket, I think

An AAA press release:

The TRIA subgroup of the American Academy of Actuaries issued a statement today that concluded that the “magnitude of potential insurance claims due to terrorist events makes permanent federal legislation necessary in order to make terrorism coverage widely and readily available.” The subgroup based its conclusion on its analysis of the potential impact of terrorist attacks and “how an insurer may react to a sudden change in its perceived exposure to catastrophes.”

The full report is here.

Personally, I wouldn’t expect any substantive action to be taken until after 1/1/08 renewals are out the door.

Big property insurance news of the day, as seen
on the wires:

WASHINGTON-Senate and House committees gave their approval
Wednesday to differing bills that would extend the Terrorism Risk Insurance
Act’s federal coverage backstop by two years.

The Senate Banking Committee moved first by approving on a unanimous
voice vote the Terrorism Risk Insurance Extension Act, which was unveiled
late Tuesday afternoon. That bill-S. 467-would extend TRIA for two years
beyond its current Dec. 31 expiration date. The measure increases the size
of a terrorist event needed to trigger the federal financial backstop to $50
million in insured losses in 2006 and $100 million in losses in 2007;
currently, the trigger can be as low as $5 million. The bill also removes
certain lines of insurance, such as commercial automobile and professional
liability, from TRIA’s protections and does not add group life insurance to
the lines covered.
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In addition, the bill calls for the President’s Working Group on
Financial Markets, in conjunction with the National Assn. of Insurance
Commissioners and various stakeholders including policyholders, to conduct
“an analysis regarding the long-term availability and affordability of
insurance terrorism risk,” including group life and chemical, nuclear,
biological and radiological risks.[...]

Meanwhile, the House Financial Services Committee Wednesday afternoon
passed the Terrorism Risk Insurance Revision Act, H.R. 4314. Unlike the
Senate bill, the House bill would create co-called “silos” that would
segregate coverages such as workers compensation and group life and subject
them to different deductibles before an individual insurer could tap the
backstop. It would raise the loss amounts needed to trigger the backstop by
the same amounts as the Senate bill, and it would also create a special
commission on terrorism risk insurance composed of representatives of all
aspects of the insurance business-including regulators, policyholders,
underwriters and producers-to make long-term recommendations about the best
way to provide terrorism coverage.

So, the TRIA renewal still has to go before a joint committee to get the
differences in the House and Senate versions worked out, but it’s progress.
It’s belated progress, since commercial lines writers should have 1/1
renewals well underway…but what would you expect coming from Congress.

I haven’t digested the details of the different versions to make an informed
opinion, but one aspect I do like is the call for a committee to find a
longer-term solution for the questions of providing terrorism coverage. At
least until the geopolitical climate changes, insurers are not going to be
willing to assume the risk from terrorism losses…at least not at prices
New Yorkers and Los Angelinos are going to be willing to pay.

When TRIA was originally passed post-9/11, there was an assumption that
“something” would be done to find a more permanent solution. Well, that
didn’t happen. Maybe this time…

It was a busy week at work this week, so I’m a bit behind on my reading.

However, here are a few items of news items from Insurance Journal in the
past week or so that have caught my eye:

Judge
Rules Insurer Must Pay $5.1 Million in Wildfire Dispute

An insurance company has been ordered to pay punitive damages of more than
$5.1 million to a couple who said they were underpaid on their claim for a
home destroyed during the 2003 wildfire season.[...]

Fidelity eventually agreed to pay $433,000, less than the couple said was
needed to return the home to pre-fire condition. They said the company
failed to consider all the rebuilding costs, including flooring,
architectural and engineering fees, mold testing, and contractor supervision
fees, said Ricardo Echeverria, the couple’s lawyer.[...]

On Wednesday, a jury found the replacement cost should have been $616,000.
With its verdict, jurors said Fidelity breached its contract with the couple
and that its conduct met the legal definitions of fraud, malice and
oppression.

Once again, I am peeved that an insurer would try to weasel out of its
obligations, assuming the IJ story is getting the details right. However, I
could just as easily shift my peevedness to the court if it came out that
the awarded replacement cost exceeded the policy terms.

Come on now people. We’ve become too much a society with a motto of “it’s
not my fault.” We need to exercise a certain amount of personal
responsibility for the messes we get ourselves into. If it came out that
$433k is the total limits under the terms of the policy (after considering
the Coverage C contents limit, and any limit on a guaranteed replacement
cost clause), then part of the loss should rest on the shoulders of the
policyholder, who had a responsibility to insure to value. Yes, it’s hard
to do, but that’s why there are fine Independent Agents around the country
to help you out. Extracontractural liability, be it from juries exceeding
the limits, or AG’s rewriting policy terms after a catastrophe, is a bad
thing, and it costs consumers money.

Of course that rant applies here only if the limits were under $616k.
Otherwise, I’m back to being pissed at an insurer giving those of us in the
industry a bad name by shirking its duties.

House Committee to Offer 2-Year Terrorism Insurance Extension Next
Week

The House Financial Service Committee has come up with what at least one
group is calling a “workable” proposal to renew the federal terrorism
insurance act for two years.

(The article goes on to discuss some of the proposed changes, several of
which will likely be tweaked as the bill moves through committees and both
houses of congress).

My $0.02 worth: How good of Congress to take up the matter after 1/1
post-TRIA renewals have already started to go out the door.

I have mixed thoughts here. On the one hand, without some federal coverage,
terror cover would either be unavailable in the private market, or it would
be extremely expensive. Conventional wisdom suggests that terror is
probably an uninsurable peril. There is a social benefit to insurance
coverage existing however, so government is left to fill the void (as it
does for, say, flood and crop).

Shifting some of the burden back to the industry is an interesting spin on
this philosophy. You’re obliging private insurers to get some skin in the
game, and you’re removing the federal government from day-to-day running of
an insurance business. However, a maximum rate is prescribed…which we
have no way of knowing whether it’s an actuarially appropriate rate,
particularly in high profile venues like midtown Manhattan, and you have
some insurers exercising some extra risk-averseness due to potential
concentration of risk.

I think TRIA is a net good, rather than a net bad thing. However, law
makers don’t seem to realize just how much lead time is required to have
everything operational in time to make a 1/1 effective date. Plus, the
moving target of what is or isn’t covered under TRIA is troubling. A
reasonably stable, permanent answer ought to be decided soon.

N.Y.
Readies ‘Common Sense’ Broker Commission Disclosure Rules

New York officials are not planning to ban contingent commissions for agents
and brokers but will issue regulations requiring them to disclose their
compensation to clients.[...]

“Our objective is to give the typical insurance consumer the information
they need to ensure that [agents] are acting in their best interest. Period.
And that is where we are going to go with regard to the contingent
commission question,” he remarked during the Professional Insurance Agents
of New York State Inc.’s third-annual Hudson Valley Regional Awareness
Program.

And that, ladies and gentlemen, is as it should be. Contingent
commissions…or, better yet, creative compensation schemes, are a good way
for insurers to gain space in an agent’s mind, and are a vital tool in
growing or developing an insurer’s book of business.

By the same token, consumers…especially in the land of personal lines and
small business insurance… ought to have some knowledge of why the producer
is making the pitch that he/she is making, so that the insurance purchaser
can make an informed decision about whether a particular carrier is being
presented because it is the best deal for the consumer, or because it is
generating the biggest commission check for the agency.

And one more story….

AXA Securitizes Auto Insurance

France’s AXA group announced that it has launched a securitization
transaction of part of its French individual motor insurance portfolio. AXA
indicated the move would transfer to the financial markets “the deviation of
the cost of claims above a certain level, in relation to AXA France IARD’s
motor insurance portfolio, which is characterized by high claims frequency
and low claims severity.”

Nifty! I was wondering when this was going to happen. I’m already aware of
some interesting experiments in the U.S. with insurers using some legal
constructs to shift the part of the actual costs and rewards of bearing risk
to agents or consumers, leaving the insurer to make most of its money on fee
income. However I’ve dreamed of one day seeing bundles of auto or home
policies traded in the markets much the same way that you can do now in the
securitized mortgage system.