Underwriters at Lloyd Issues Public Comment on Treasury Department Notice

WASHINGTON, June 21 -- Timothy W. Grant, associate general counsel at Lloyd's America Inc., New York, has issued a public comment on behalf of Underwriters at Lloyd's, London, on the Department of the Treasury's notice entitled "2020 Report on the Effectiveness of the Terrorism Risk Insurance Program". The comment was written on June 11, 2020, and posted on June 12, 2020:

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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 April 27, 2020 Federal Register. 85 Fed. Reg. 23435.

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:

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.

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.

With respect to places of worship specifically, Lloyd's remains a significant provider of terrorism insurance capacity. In 2019, Lloyd's wrote over $76 million in TRIA-eligible direct earned premium for places of worship, as well as over $23 million for religious organizations more generally.

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.

Question 6. 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.

Question 7. Market for Standalone Terrorism Cover.

The "standalone" market has developed alongside TRIA for policyholders who wish to secure cover that may differ from TRIA-mandated cover; for example, coverage that is not dependent upon certification as an "act of terrorism." Such cover has been available at Lloyd's since before TRIA was enacted, and remains relatively robust, with one of the major contributors being the benign loss environment since 9/11. The existence of this market, however, should not be viewed as any particular gauge of TRIA's effectiveness or necessity: capacity in the standalone market is extremely limited compared to the broader insurance market, and it has matured during a time that the TRIA backstop has existed. While in certain circumstances policyholders may find standalone cover to be a favorable alternative to a TRIA-backed policy, the standalone market is no substitute for the TRIA backstop as a whole.

Question 8. Availability and Affordability of Private Reinsurance

The global reinsurance market has seen expanded capacity for terrorism risk since TRIA's original enactment, and perhaps the largest single contributing factor is the benign loss environment in the United States -- i.e., no certified acts of terrorism since TRIA's enactment, no major terrorism loss events in recent years. Still, as reinsurers continue to grow more comfortable with terrorism exposure being a part of their portfolios, TRIA's design helps foster that growth through increasing retention levels and consistently broad take-up among policyholders.

Question 9. Catastrophe Reinsurance Programs.

As noted in our comments prepared for the 2018 Effectiveness Report, the limited provision of terrorism coverage in catastrophe reinsurance programs has generally been offered to cedents writing personal lines (i.e., homeowners insurance), and is therefore outside of the scope of TRIP.

Question 10. Any Factors Impeding Private Reinsurance.

Lloyd's continues to believe that the structure of the TRIP program effectively puts the private insurance market front and center in protecting against terrorism exposure. While private reinsurance capacity for terrorism risk has grown over the years, there is no "crowding out" of the private market by the backstop because reinsurance capacity remains well below the private market retentions under TRIA. With the private market's retention continuing to grow due to the indexing of the insurance marketplace aggregate retention amount (IMARA), we believe TRIA is structured to prevent such "crowding out" from ever being an issue.

Question 11. 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.

Question 12. 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.

Question 13. 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.

Question 14. 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.

Question 15. 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.

Very truly yours,

Timothy W. Grant

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The notice can be viewed at: https://www.regulations.gov/document?D=TREAS-TRIP-2020-0010-0001

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