Advisory - TRIA’s Expiration - Thanks Congress

Next Steps for Terrorism Insurance Policyholders

When Congress adjoined earlier this week, they failed to reauthorize the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA or TRIA) and this has the potential to create disruption for many insurance buyers who depend on the backstop for Property, Liability, Workers’ Compensation and Captive insurance programs.

This is a critical development which requires your immediate attention.

This Advisory lays out important considerations and provides initial guidance for firms evaluating their options. Willis is actively working with the insurance marketplace to assess alternatives and secure solutions in what is currently a very fluid environment. We recommend that you review critical contracts, financing and real estate contracts for terrorism provisions.

Currently, there are several scenarios at play, depending on how your firm has organized its Terrorism risk transfer program:

1. Terrorism Coverage currently embedded in All-Risk Property, Liability and Workers Compensation Programs -three potential scenarios:

• 1. If there are no sunset clauses* or reservation of rights clauses related to TRIA expiration, the program will run until its natural expiry. Again, market disruption may impact renewal pricing if no action has been taken on TRIA.
• 2. If there is a TRIA-related sunset clause, then the Terrorism coverage will expire after December 31. You should assess your need for insurance coverage and seek stand-alone coverage or a sunset clause extension.
• 3. If there is a reservation of rights which allows carriers to modify the terrorism coverage as a result of TRIA expiration, then you should work with your Willis broker to negotiate a coverage extension if possible, and or seek stand-alone alternatives.

Some of these options may be provided with an additional premium charge

*Sunset clauses refer to contract provisions which may allow the Insurance carrier to exclude coverage for terrorism in the event that TRIA is not reauthorized

2. Stand-alone Terrorism coverage – In the case of stand-alone Terrorism coverage, we anticipate no change in the immediate term due to TRIA’s expiration. This is because most stand-alone placements have no sunset clauses or reservation of rights endorsements related to TRIA expiration. At renewal,
there may be market disruption to consider, but for the time being, TRIA is a non-issue for these placements.

3. Captives - In all cases where Willis places Terrorism reinsurance behind a captive program, the reinsurance arrangement this year has been organized to convert from quota share reinsurance of the captive to primary reinsurance of the captive (in anticipation of TRIA’s expiration). Read your reinsurance coverage agreements carefully to determine the new limit. The new primary limits are
likely to approximate their existing quota share capacity. We recommend that any capacity that converts should remain as reinsurance of the captive. This would maintain captive involvement should TRIA be reauthorized in early 2015 and avoid any direct self-procurement or frictional costs during this transition. Your program may also include excess capacity which, in many cases, should drop down to
provide excess over revised captive limits.

Other Considerations

It is important to note that rating agencies have already identified carriers that may have their ratings downgraded if TRIA is not reauthorized. However these are likely to be smaller carriers.

Stand-alone Terrorism insurance capacity will become a hot commodity during this transition time. It is imperative that consideration be given to your genuine needs for risk transfer. We recommend that you seek stand-alone capacity only where it is truly needed. This will require an honest assessment of your exposure and the avoidance of ‘sleep cover’ purchasing.

Willis is committed to delivering solutions and stands ready to advise Clients during this transition period. Potential solutions are Client specific, and clients are advised to work closely with their Willis Client Advocate.

Ongoing Uncertainty
There is no clear indication of when Congress will take up this issue in 2015, although House Speaker John Boehner has indicated that reauthorizing TRIA will be a priority early in the next Congress. Willis is engaged directly with policymakers and industry groups to stress the importance of this legislation.
We will continue to monitor developments and provide additional updates as information becomes available.

Contact me for further discussion or access to thought leadership on this subject if desired.