Lloyd's America Issues Public Comment to Treasury Department

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WASHINGTON, May 24 -- Lloyd's America Inc, New York, has issued a public comment to the U.S. Department of the Treasury. The comment was written and posted on May 16, 2022:

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To: Richard Ifft, Federal Insurance Office, Room 1140 MT, Department of the Treasury, 1500 Pennsylvania Avenue, NW Washington, DC 20220

Re: 2022 Report on the Effectiveness of the Terrorism Risk Insurance Program

Dear Mr. Ifft:

This comment letter is submitted on behalf of Underwriters at Lloyd's, London ("Lloyd's") in response to the request by the Federal Insurance Office ("FIO") published in the March 30, 2022 Federal Register. 87 Fed. Reg. 18473.

Lloyd's views on terrorism risk, and the Terrorism Risk Insurance Program ("TRIP") in particular, are based upon extensive experience: Lloyd's paid almost $8 billion in claims resulting from the tragic events of September 11th, and led the development of the standalone terrorism market in the U.S. in the days following 9/11. Lloyd's has long been a significant participant in the U.S. commercial property-casualty insurance market, supporting the U.S. economy in the face of numerous catastrophes over the past 150 years. We are pleased to provide the following comments in response to FIO's specific questions:

Statutory Question 1. The overall effectiveness of TRIP.

TRIP has been and remains quite effective and successful since its enactment. It serves its purpose of stabilizing the insurance market and the economy in times of uncertainty and provides for a smooth recovery in the event of a future terrorist attack. Lloyd's has supported TRIA since its enactment and in each subsequent reauthorization cycle because it is designed to keep the private sector in the terrorism insurance market and provides a reliable mechanism for public-private burden-sharing in the event of a truly catastrophic terrorist attack.

Statutory Question 2. Availability and affordability of terrorism risk insurance, including for places of worship.

Terrorism insurance remains available and affordable due to TRIA's design. The "make available" requirement ensures that cover is available to commercial policyholders, and while affordability may vary due to a variety of different factors, the best measure of its affordability is seen in the take-up rates, which remain strong across most regions of the country and across most lines of cover.

Statutory Question 4. Any aspects of TRIP that discourage or impede insurers from providing commercial terrorism cover.

Lloyd's strongly supports TRIA and believes that the TRIP program is generally well-designed. We do not believe that any structural aspects of TRIA discourage private participation in the terrorism insurance market. We do believe, however, that the market would benefit from greater clarity about the certification process.

The current certification rules, promulgated by Treasury in accordance with the 2015 reauthorization legislation, do help give insurers and policyholders a sense of the timeline for potential certification of an event. However, due to the Secretary's unreviewable discretion in certifying an act, it remains problematic that Treasury could rule out even considering an event for certification, but insurers and policyholders would have no way of knowing it.

We therefore recommend that the certification rules be revised to include a mechanism for affected insurers or policyholders to petition Treasury to review an event for certification. Such a mechanism would allow stakeholders to be confident that the public notification procedures under the current certification regulations are being followed with respect to an event relevant to them.

Additional Questions 1-2. Lines Subject to TRIP.

Lloyd's believes that the reduction of eligible TRIP lines that was done as part of the 2005 TRIA extension legislation largely took care of those lines that typically cover more disperse risks, where the TRIP program may be less imperative. Since then, Lloyd's has not encountered any specific line that we believe should be removed from the program. Take-up rates for terrorism cover remain strong across most industry sectors and most eligible lines, an indication that the program's scope of eligible lines is fairly on target.

Additional Question 3. Impact of COVID-19.

Lloyd's has not seen much disruption in the terrorism risk insurance market as a result of the pandemic. We attribute the stability in this market to the effectiveness of the TRIA program, where the cost-sharing mechanism of a federal backstop gives insurers greater ability to manage exposure, and thus offer coverage at rates that policyholders are willing to pay. Certainly, the pandemic has impacted the availability of cover for losses related to communicable disease -- to the extent such cover was available even prior to the emergence of COVID-19 -- but this has not translated into any meaningful impact on coverage for terrorism, which remains broadly available.

Additional Question 4. Availability of NBCR Cover.

NBCR cover remains challenging for insurers to write due to a number of factors, particularly the difficulty to model the potentially catastrophic losses associated with such events. While coverage can be found in certain circumstances and in limited amounts, prudent underwriting restricts Lloyd's syndicates in their net NBCR exposure, and thus limits its availability more broadly.

Excluding NBCR terrorism is consistent with TRIA's make available requirement, since NBCR risk is typically excluded from policies regardless of whether terrorism caused the loss. This demonstrates that NBCR coverage is not a problem that is confined to TRIA or terrorism risk more generally, but rather remains an issue that is beyond the capacity of the private market to solve. Additional Question 6. Issues Presented by Cyber Terrorism.

Cyber insurance is an evolving market, to match an evolving risk, but as it relates to TRIA, there are generally two principal issues at play: first, whether the cyber cover is written in a TRIA- eligible line, and second, whether the cyber loss event would be eligible for certification as an "act of terrorism."

The guidance issued by FIO in 2016 on eligible lines was helpful, and further guidance may be warranted as the cyber insurance market matures and as new questions may arise. With respect to certification of an event, Lloyd's believes there remain several outstanding questions where guidance may be beneficial.

Additional Question 7. Potential Changes to Encourage Cyber Take-up.

As noted above, Lloyd's believes that guidance related to the potential certification of a cyber terrorism event would be beneficial. While we appreciate the need for FIO to have some flexibility with respect to certification decisions, guidance on potential cyber loss scenarios could help to give stakeholders greater comfort on certain questions related to TRIA's definition of "act of terrorism." For example, the Act's requirement that an act of terrorism be "dangerous to ... property, or infrastructure" may present different questions in the cyber context: would data loss and/or damage to computer systems be considered eligible? Would the destruction of financial accounts be considered "damage" per the definition? Additionally, what would Treasury's approach be in evaluating the intent of a perpetrator in a cyber event?

It would be helpful for FIO to provide guidance in regard to all of these questions, among others, so that the market can have greater comfort with respect to potential cyber exposure as it relates to TRIA.

Additional Question 8. Private Reinsurance for Cyber Losses.

As noted above, cyber remains an evolving market, and there also remain uncertainties surrounding what constitutes cyber-terrorism and what might be eligible for certification under TRIA. The private reinsurance market will value greater clarity on these questions, and Lloyd's believes that this presents another reason why FIO guidance on certification of potential cyber events, as mentioned above, would be helpful to the insurance marketplace generally.

Additional Question 12. Other Issues.

Lloyd's continues to believe that TRIA has been a success. Though it is always preferable that private markets handle risk when possible, the nature of terrorism necessitates some partnering of the public and private sectors to keep the market functioning and ensure that the economy is positioned to recover from a future attack. TRIA has served this purpose well since its enactment, as the private sector remains actively engaged in this space.

TARGETED NEWS SERVICE (founded 2004) features non-partisan 'edited journalism' news briefs and information for news organizations, public policy groups and individuals; as well as 'gathered' public policy information, including news releases, reports, speeches. For more information contact MYRON STRUCK, editor, editor@targetednews.com, Springfield, Virginia; 703/304-1897; https://targetednews.com