Reinsurance Association Issues Public Comment to DOT

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WASHINGTON, May 23 -- The Reinsurance Association of America 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: Mr. Steven E. Seitz, Director, Federal Insurance Office, U.S. Department of the Treasury, 1500 Pennsylvania Avenue, NW, Washington, DC 20220

RE: RAA Submission in Response to Request for Comments on Treasury 2022 Report on the Effectiveness of the Terrorism Risk Insurance Program

Dear Mr. Seitz:

Thank you for the opportunity to provide input as part of the Treasury's process to develop its 2022 Report on the Effectiveness of the Terrorism Risk Insurance Program.

The Reinsurance Association of America (RAA) is a national trade association representing reinsurance companies doing business in the United States. RAA membership is diverse, including reinsurance underwriters and intermediaries licensed in the U.S. and those that conduct business on a cross-border basis. The RAA also has life reinsurance affiliates and insurance-linked securities (ILS) fund managers and market participants that are engaged in the assumption of property/casualty risks. The RAA represents its members before state, federal and international bodies.

The Terrorism Risk Insurance Program (TRIP) serves an important role in facilitating the private terrorism market. The RAA supported the initial Terrorism Risk Insurance Act (TRIA) in 2002, and its reauthorization in 2005, 2007, 2015 and 2019. After the events of September 11, 2001, reinsurers and insurers began excluding terrorism risks, causing problems for business that wanted or needed terrorism coverage and creating an impediment to economic activity. TRIA created the TRIP to provide an essential federal backstop that enabled insurance companies to provide terrorism coverage to our nation's businesses. The RAA believes that TRIA has fulfilled, and continues to fulfill, its purpose. By limiting insurers' exposure to catastrophic terrorism losses, TRIA has enhanced the private market for such coverage and has had a stabilizing influence on the economy. Under TRIA and its extensions, the availability of terrorism risk insurance has increased. There are clearly limits, however, as to the amount of private capacity due to the nature of the risk.

The RAA also supports the Treasury-established Advisory Committee on Risk-Sharing Mechanisms (ACRSM), which provides "advice and recommendations to the FIO with respect to the creation and development of non-governmental, private market risk-sharing mechanisms for protection against losses arising from acts of terrorism." The ACRSM has been tasked with investigating ways to shift terrorism risk insurance from the government to the private market. The RAA urges FIO to continue to consider the issues/recommendations set forth in the May 2020 report from the ACRSM.

Topics 3, 4: Market Trends

Some data suggests that terrorism risks have decreased. In 2021, deaths from terrorism decreased and there was also a reduction in the impact of terrorism, with 86 countries recording an improvement, compared to 19 that deteriorated. That said, the number of attacks increased by 17 percent, suggesting that terrorism has become less lethal./i

Terrorism is now dominated by political motivation, rather than religious motivation, with the latter declining by 82% in 2021./ii

Moreover, although terrorism remains a significant concern, terrorism has been eclipsed by other risks as the dominant global threats from an industry standpoint. The World Economic Forum's Global Risks Report in 2021 recognized terrorist attacks as a "clear and present danger" in the short-term, but infectious disease, extreme weather events, livelihood crises, digital inequality, cybersecurity failure and prolonged stagnation were all viewed as more significant threats by survey respondents./iii

The 2022 Global Risks Report did not include terrorist attacks as a top-10 risk at all, although cybersecurity failure remains a significant concern./iv

A Marsh McClennan analysis noted that environmental risks, including the risks of natural catastrophes and extreme weather events, has increased significantly as a regional risk for doing business, with economic and technological risks also increasing./v

That said, other risks that could lead to a terrorism event have been highlighted - such as social unrest, social cohesion erosion and geoeconomic confrontations,/vi so it may be more appropriate to think of these risks as redefined, rather than decreased.

The risks of nuclear, biological chemical, or radiological (NBCR) weapons continue to be significant. This is specifically problematic for workers' compensation insurance, which is prohibited from excluding such risks./vii

The overall U.S. terrorism insurance take-up rates remain over 60%, although smaller companies continue to have lower insurance take-up rates. The percentage of companies that purchase terrorism coverage continues to vary significantly by industry./viii

Since 2005, capacity for stand-alone property terrorism coverage has tripled, to a current theoretical maximum of approximately $4.3 billion. Estimates for companies with exposures in locations where insurers do not have risk concentration concerns is up to $2.5 billion in standalone capacity per risk and, for locations where insurers have aggregation concerns, estimated market capacity is $1.5 billion. The limits reflecting terrorism coverage that is embedded with other property and catastrophe coverages is substantially higher. According to Marsh research, 62% of U.S. companies in 2018 purchased coverage embedded in property policies under TRIP./ix

Topic 3: Impact of COVID-19 on Terrorism Risk Insurance Market

The effects of the COVID-19 crisis are widespread globally and include critical social and economic factors beyond the health impacts. Although there was a decline in terrorism events during the pandemic, this may be attributable to restrictions on freedom of movement, public gatherings, travel and an immediate threat to personal health. As the world begins to emerge from COVID-19, there is a possibility of an uptake in terrorism events./x

According to Aon, the crisis has furthered pre-pandemic instability in every region./xi

With respect to the terrorism risk insurance market, Aon noted that this has prompted clients to reassess their exposure and look to the terrorism and political violence markets for solutions.

Aon noted an increased demand for political risk cover during the pandemic, with an influx of new clients into the market, especially on the investment side.xii Pursuant to Marsh's Political Risk Map 2021, pandemic-induced economic stress will continue to exacerbate global political risk, necessitating political risk, credit insurance and surety solutions./xiii

That said, Willis

Towers Watson has noted that despite increasing threats and incidents, market capacity for terrorism and political violence remains steady, although anticipating that rates will trend upwards as losses accumulate./xiv

Topics 4, 8: Reinsurance Availability

Despite the experience of the past 20 years, and the evolution of the underwriting and modelling processes, the basic facts have not changed: terrorism risk poses great challenges as an insurable risk. Terrorism risk has characteristics regarding frequency, severity and correlation that make it unlike any other insured peril or risk. Reinsurance underwriters must consider these and other factors when deciding when and how much terrorism risk to assume. The result has been the slow but continued development of a defined market for terrorism reinsurance. As reported by Marsh, the inclusion of terrorism reinsurance coverage in many natural hazard property and workers' compensation catastrophe covers has resulted in traditional and alternative markets supporting existing relationships and diversification efforts./xv

Reinsurers have been willing to put a defined amount of capital at risk for terrorism-related losses due to the nature of the risk, insurer demand for risk transfer and the price they are willing to pay. In 2017, according to Guy Carpenter, the combined property and workers' compensation private conventional-only terrorism reinsurance capacity was estimated to be $2.5 billion percedent program./xvi

These amounts are well under the TRIP retention levels for many insurers. Terrorism coverage may also be included in other commercial reinsurance contracts. Favorable loss experience and surplus growth may moderately increase the supply of private terrorism reinsurance but not to the extent that it would meet the needs of the primary industry to fully meet their retentions under TRIP.

With respect to reinsurance capacity that includes NBCR, especially in Tier 1 cities and central business districts, such capacity remains challenging to secure because of accumulated aggregate constraints of some markets and is estimated by Marsh to range between $500 million and $1 billion per program./xvii

Market reports reflect that for the foreseeable future, based on limited demand (due in part to the backstop provided by TRIA), there will be an adequate supply of reinsurance capacity for coverage within the limits and deductible currently provided by the federal program. As discussed more fully below, although progress has been made in modeling terrorism loss scenarios, forecasts of the frequency and severity of terrorism losses remain problematic. Reinsurers can provide only limited capacity for terrorism because the magnitude of these potential losses could pose a solvency threat. Reinsurers' capital is necessary to support many other outstanding underwriting commitments, including natural disasters, workers' compensation and other casualty coverages. The role of private sector risk-bearing has increased over time, as Congress reduced the amount of federal government support to the terrorism risk insurance market. The 2015 and 2019 TRIP reauthorizations gradually increase insurer deductibles, co-shares, and industry retention.

Factor 5: Impact of TRIP on Workers' Compensation Insurers/Market

Maximum protection for workers' compensation under TRIPRA is vital though the significant challenge of unlimited/unaggregated workers compensation exposure remains. Therefore, any consideration by the NAIC and/or FIO to revamp the statutory workers' compensation system to allow for coverage and/or exposure limitations would be beneficial.

Topics 6, 7: Cyber-Terrorism Issues

As noted above, cyber risk, including coverage for cyber-terrorism events, is an evolving and unique line of business. The landscape for attacks continues to grow and cyber threats are becoming more and more sophisticated. The COVID-19 crisis intensified dependence on digital systems, and, at the same time, cybersecurity threats have grown substantially and outpace the ability of society (or the insurance industry) to respond to them. In 2020, malware and ransomware attacks increased by 358% and 435% respectively./xviii

Rapid digitalization in advanced economies as a result of COVID-19 has created new areas of cyber vulnerability that have a global impact./xix

As new technologies have become more pervasive, so has their use by terrorist organizations./xx

Given these developments and data-driven markets, cyber risk is an exposure that needs further clarity in the context of coverage under TRIP, particularly given the potential impact of a catastrophic cyber terrorism event. While Treasury has previously addressed the application of TRIP to policies covering cyber-related losses, open questions remain about the scope and nature of the program and how it would respond to cyber-terrorism written on a stand-alone basis. TRIP does not address how cyber-terrorism is defined (act/event) or how the loss trigger would work. The certification process under TRIP also poses issues given the difficulties arising out of attribution of cyber-related losses. These issues should be studied in relation to how they impact TRIP coverage and the evolving cyber market. Possible areas of study could include: (1) types of economic losses associated with cyber operations; (2) how problems with attribution and intent could impact certification, including for events occurring outside of the U.S. that impact U.S. citizens and companies; (3) definitions of cyber liability and insured losses; (4) impact of war exclusions on cyber coverage.

Topics 9-12, Other Issues

a. IMARA/Mandatory Recoupment

Recoupment is the post-event funding mechanism used to pass on the cost of the federal backstop to the P&C industry, primarily the policyholders. Mandatory recoupment is applicable to amounts below the Insurance Market Aggregate Retention Amount (IMARA) and discretionary recoupment is allowable for amounts above the IMARA. Under the 2007 renewal of TRIP, a surcharge of 33% was added to the mandatory recoupment amount, meaning that Treasury would recoup 133% of the amount it paid out in excess of the IMARA. The 2015 renewal increased the surcharge to 40%. Also pursuant to the 2015 renewal (and unchanged in 2019), beginning in 2020, the IMARA is no longer a fixed amount but rather is calculated using an average of annual premiums for the prior three calendar years. This means that the IMARA will continue to grow, assuming premium growth over time. With the purpose of TRIP in mind, FIO should analyze whether continuing to index the IMARA is appropriate, particularly in light of the impact on policyholders in the event of a loss subject to mandatory recoupment.

b. Alternative Carrier Mechanisms

Even if not designed specifically to avoid the deductible, alternative carrier mechanisms can be used to shift terrorism risk to other policyholders in the P&C market. As reflected in the recommendations of the ACRSM, FIO should consider a study that would examine possible ways to prevent unintended consequences from the use of alternative carrier mechanisms to access TRIP, including but not limited to the calculation of deductibles and increased transparency.

c. Terrorism Modeling

Although terrorism modeling continues to evolve and meaningful enhancements have been made, the last few years have not seen transformational changes to the state of terrorism models. They largely continue to focus on property loss scenarios of different magnitudes within the same core framework. The use of those models in the placement of terrorism risk insurance remains consistent with prior years. That said, modeling of cyber risks has improved in the last few years and, accordingly, such models may provide an enhanced ability to understand the impact of cyber-related terrorism events.

In addition, the modeling does appear to be much more robust by location for a variety of attack modes that are made available in the modeling firms catalogs of events and losses. This more granular data can be useful in understanding how concentration of loss among implicated insurers can impact individual carrier deductibles and how that intersects with the industry aggregate retention and potential mandatory recoupment. For widespread events, across multiple carriers, the industry aggregate retention is more easily met. For more narrow events, including events principally implicating a single captive, an individual carrier's deductible can be met without implicating the aggregate retention; thereby resulting in a recoupment assessment. Scenario modeling at a more granular level for different attack modes can provide additional understanding of how loss concentration can impact who ultimately bears financial responsibility for losses under the program.

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Thank you for the opportunity to provide comments on these important issues. We look forward to continuing to work with you with respect to TRIP issues.

Sincerely,

Frank W. Nutter, President

Karalee C. Morell, Senior Vice President & General Counsel

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Footnotes:

i Institute for Economics & Peace, Global Terrorism Index 2022.

ii Id.

iii World Economic Forum, The Global Risks Report 2021 (16th Edition).

iv World Economic Forum, The Global Risks Report 2022 (17th Edition).

v Marsh McClennan, Perspective: Regional Risks of Doing Business Report (October 2020).

vi World Economic Forum, The Global Risks Report 2022 (17th Edition).

vii Aon, Terrorism Risk Insurance, 2019 Report ("Aon Report")

viii Congressional Research Service, Terrorism Risk Insurance: Overview and Issue Analysis (March 8, 2022).

ix Marsh Report.

x Institute for Economics & Peace, Global Terrorism Index 2022.

xi Aon Risk Maps 2020.

xii Aon Risk Maps 2020 Webinar.

xiii Marsh Political Risk Map 2021 (April 2021).

xiv Willis Towers Watson, Insurance Marketplace Realities 2022 Spring Update (April 7, 2022).

xv Marsh, Insights, 2018 Terrorism Risk Insurance Report (May 2018) ("Marsh 2018 Report").

xvi Marsh 2018 Report.

xvii Marsh 2018 Report.

xviii World Economic Forum, The Global Risks Report 2022 (17th Edition).

xix Id.

xx Institute for Economics & Peace, Global Terrorism Index 2022.

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, [email protected], Springfield, Virginia; 703/304-1897; https://targetednews.com