Reauthorised TRIA to seek advice from ILS & alternative risk markets

Yesterday the Terrorism Risk Reauthorisation Act of 2015 (HR 26) passed the U.S. Senate, renewing the government backed terrorism insurance facility for six years. Part of the reauthorisation calls for advice to be sought from the ILS and alternative risk markets.

The future of the Terrorism Risk Insurance Act had been in doubt, after the U.S. government failed to pass its reauthorisation prior to the end of 2014. However it has been swiftly put through both House and now Senate to renew the act and send it to President Obama for signing into law for another six years.

Various changes have been brought in with the reauthorisation. The aggregate industry loss trigger for TRIA kicking in after terror events will rise from $100m to $200m, in $20m increments each year. At the same time the level of federal compensation and insurer co-pay will be reduced each year. Insurer retentions will also be increased and TRIA will seek to improve the trigger by setting a timescale for an event to be determined as an act of terrorism.

TRIA provides a government backed source of reinsurance coverage which kicks in at a specified aggregate industry loss level from terror events. The private reinsurance market also provides terrorism coverage and the changes in TRIA, which see insurers taking on increased risk, could ultimately result in greater demand for private market reinsurance protection.

However the piece of the reauthorised TRIA that seems most promising for the private reinsurance, alternative risk and also insurance-linked securities (ILS) market is one which calls for engagement and advice to be sought from private risk transfer markets regarding risk-sharing.

The renewal of TRIA calls for the creation of the ‘Advisory Committee on Risk-Sharing Mechanisms’ to assess the potential for greater participation in terrorism insurance risks by the private and capital markets. The text of the reauthorisation bill reads “Congress finds that it is desirable to encourage the growth of nongovernmental, private market reinsurance capacity for protection against losses arising from acts of terrorism.”

It’s encouraging that the U.S. government would seek to engage the private risk transfer markets to support TRIA, something that has been called for by many observers. With risk transfer capacity high and capital markets interest in insurance and reinsurance risks abundant it makes sense to address the sharing of terror risks with private markets now.

The bill explains that the Secretary of the Treasury should set up and appoint an advisory committee, the ‘Advisory Committee on Risk-Sharing Mechanisms’, to “provide advice, recommendations, and encouragement with respect to the creation and development of the nongovernmental risk-sharing mechanisms.”

Membership of the advisory committee will consist of “9 members who are directors, officers, or other employees of insurers, reinsurers, or capital market participants that are participating or that desire to participate in the nongovernmental risk-sharing mechanisms.”

The members will come from the insurance and reinsurance industry, representing areas such as commercial property insurance, commercial casualty insurance, reinsurance and also the alternative risk transfer market. It is to be assumed that any interested insurance-linked securities (ILS) fund managers and markets would also be welcome to participate.

Terrorism risks have been transferred to the capital markets in catastrophe bond form through a number of transactions covering extreme mortality risk due to terrorism events, such as Atlas IX Capital Limited (Series 2013-1) and Vita Capital V Ltd., among others. There has also been a case of event cancellation due to a terror event being transferred using an ILS with 2003’s Golden Goal Finance Ltd. So the ILS and catastrophe bond market has some pedigree in assuming terror risks.

A number of ILS investment managers also participate in some terrorism reinsurance renewals on a fully-collateralized basis, as this fits within the specialty risks bucket that a number of ILS managers are expanding into. Any effort to share more risk from TRIA with the private market would likely attract interest from the ILS market where the managers have the sophistication necessary to assess and price these terror risks.

Whatever happens, whether TRIA ultimately shares risk with private market insurers and reinsurers, or with the capital markets and ILS investors, it is positive that the government seeks to gradually reduce its role. Taxpayers are as ever at risk where the government stands as an insurance and reinsurance backstop, which given the (super)abundance of reinsurance, ILS and risk capital is simply not necessary.

Some of the terror risk assumed by the government through TRIA can be shared with the private risk transfer, reinsurance and ILS markets, if modelled and structured in the right way. Reducing the reliance on government and ultimately taxpayers is positive for TRIA and the involvement of the ILS market would be positive for any investors seeking diversification.

Also read:

– In TRIA’s absence no shortage of terrorism reinsurance capacity: S&P.

– Terrorism re/insurance availability helped by alternative capital inflow.

– S&P: Alternative reinsurance capital anticipated in terrorism risk.

– Experts forecast a bigger role for ILS in terrorism insurance.

– Is it time the capital markets helped out with terrorism risk transfer and reinsurance?

– Could the alternative risk transfer market provide a terrorism backstop?