S&P: TRIPRA’s Passage Keeps U.S. Commercial Lines Outlook Stable

January 8, 2008

On Dec. 26, 2007, President George W. Bush signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), thereby retaining the federal backstop for terrorism risk through Dec. 31, 2014.

The language of the new law, which was voted out of the House on Dec. 19, 2007, contains the more limited provisions of the Senate version, passed in November. The backstop was extended for seven years, and domestic acts of terrorism are now included in its scope. Other than those two elements, the backstop remains mostly unchanged from the 2005 renewal.

Neither coverage for group life nor the make-available requirement for coverage for nuclear, biological, chemical, or radiological (NBCR) events, which were in the House’s original bill, was included in the final version, although the bill includes a mandate that the General Accounting Office (GAO) conduct a study of the issue.

In addition, the aggregate industry loss trigger remains at $100 million. Smaller insurers and reinsurers had wanted to see the trigger pared back to $50 million, where it was in 2006. If a loss-producing terrorism event were to occur, a $100 million loss trigger could seriously deplete capital for many small insurers with coverage concentrations vulnerable to terrorism risk before the backstop could begin to provide a benefit.

The deductible remains at 20 percent of direct premiums written in affected commercial lines per occurrence, with no provision to reduce the deductible for second events, something several insurers had wanted. Insurers providing primary and reinsurance coverage in urban markets, which are perceived as more vulnerable to terrorist attacks, had pushed for what was being called a reset provision, which would have reduced the second-loss deductible one percentage point for each $1 billion in second-event losses (but not below 5 percent).

TRIPRA is also mandating that a GAO report be produced within 180 days on whether sufficient capacity is available in U.S. markets where higher levels of terrorism risk are perceived to exist.

The terrorism backstop, which has been in place for five years, has benefited insurance company ratings and market stability, according to Standard & Poor’s.

“We do not anticipate making any ratings changes as a result of this legislation,” S&P’s Amy Friedman wrote in a statement. “We said in 2006 that if the backstop were not renewed, we would expect to lower the commercial lines property/casualty insurance sector’s outlook to negative. As our current ratings already incorporate the benefit of a federal backstop, and TRIPRA makes only minimal changes to the existing federal backstop, we anticipate making no ratings changes at this time for the companies we rate.”

Source: Standard & Poor’s, www.standardandpoors.com

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