Tags: TRIA | insurance | terrorism | natural

House Financial Services Subcommittee Performs TRIA Triage

By    |   Monday, 18 Nov 2013 02:14 PM

The House Financial Services Committee's Subcommittee on Housing and Insurance, chaired by Rep. Randy Neugebauer, R-Texas, held a hearing on Nov. 13 titled "The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer Exposure."

The issue is the terms under which the Terrorism Risk Insurance Act (TRIA), enacted in 2002 as a "temporary" program to provide government backing for terrorism insurance in the wake of the 9/11 attacks at the behest of the real estate and insurance industries, will be extended before this Congress adjourns next year. The industry is eager for Congress to get to work on this early, because without an extension, at some point real estate properties and projects will have difficulty getting insurance, and legislators for both parties seem equally eager to oblige.

The witnesses provided an assortment of views as to the ability and willingness of the industry to take a larger share of the burden so that the government can reduce its involvement.

Sean McGovern, director of risk management and general counsel of the legendary global insurer Lloyd's of London, stated that his firm is a major provider of standalone terrorism coverage and paid $70 million in claims arising from the September attack on Westgate Mall in Kenya.

He made the standard industry case that while it is regrettable that government intervention is necessary, the risk of terrorism is very difficult to model, and only the government has access to the necessary information, which it should not divulge. (The implication is that when terrorist attacks do occur, it is due to a failure of government, so this is another reason the government should pay.) McGovern added that TRIA could be improved by providing a clearer definition of what constitutes an act of terrorism, a determination yet to be made for the Boston Marathon bombing.

Validus Reinsurance, a company that syndicates terrorism risk insurance at Lloyd's of London, has 10 percent of the world reinsurance market for this product. Kean Driscoll, CEO of Validus Reinsurance, suggested that the government is encouraging mispricing of risk by assuming too much risk from conventional attacks, whereas it should be letting the private sector handle more of this risk, so that the government can concentrate on covering nuclear, biological, chemical and radiological attacks (NBCR), which are even more difficult to model.

Ernest Csiszar, former insurance commissioner for South Carolina, argued that failure to extend TRIA "would open a $100 billion hole in the industry's capital structure." Further, he explained that whenever there is a terror event, capital flows into the industry in expectation of higher profits that ultimately fail to materialize because of competition for the business.

John Seo, managing principal of Fermat Capital Management, described the workings of the catastrophic bond market, in which Fermat invests most of its $4.5 billion fund. This market was created in order to replenish industry reserves after the Northridge earthquake in 1994 and Hurricane Andrew in 1992. He suggested that terrorism risk should be bundled with natural catastrophes, but not with NCBR.

Robert Hartwig, president of the Insurance Information Institute contended that since taxpayers will pay for large events anyway, the effect of TRIA is to recoup some of these costs.

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Robert-Feinberg
The House Financial Services Committee's Subcommittee on Housing and Insurance, chaired by Rep. Randy Neugebauer, R-Texas, held a hearing on Nov. 13 titled "The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer Exposure."
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2013-14-18
Monday, 18 Nov 2013 02:14 PM
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