On November 13, 2013, the House Financial Services Subcommittee on Insurance and Housing held a hearing entitled "The Future of Terrorism Insurance: Fostering Private Market Innovation to Limit Taxpayer Exposure."
Representative Randy Neugebauer (R-TX), Chair of the Housing & Insurance Subcommittee, said the purpose of the hearing was to discuss ways to increase private market participation in the terrorism risk insurance market, to improve the Terrorism Risk Insurance Program and to limit taxpayer exposure. Neugebauer stated that Congress will work on legislation based on the ideas presented at the hearing.
Testimony was presented by:
- Sean McGovern, Director, Risk Management & General Counsel, Lloyd's of London
- Kean Driscoll, CEO, Validus Reinsurance, Ltd.
- Ernest N. Csiszar, Former Insurance Commissioner, South Carolina and Past President, NAIC
- Dr. John Seo, Co-Founder & Managing Principal, Fermat Capital Management, LLC
- Dr. Robert P. Hartwig, President & Economist, Insurance Information Institute
Discussion topics included:
- Whether the Terrorism Risk Insurance Act (TRIA) should be renewed and, if so, for how long;
- Potential reforms to TRIA;
- Whether terrorism risks can be modeled;
- The potential for covering terrorism risk through insurance-linked securities (ILS);
- Regulatory reforms that could encourage insurers and reinsurers to offer terrorism insurance; and
- The impact of changes to TRIA or resulting from the nonrenewal of TRIA on smaller and mid-sized insurers.
While there was general agreement that TRIA should be renewed, there was considerable disagreement regarding what any renewal legislation should look like. Hartwig said that TRIA is "indispensable" and any dramatic changes to the current program "will be highly disruptive" to the insurance market. According to McGovern, sudden increases in the TRIA retentions or co-shares could cause reinsurers to shift their capital away from reinsuring terrorism risks. Csiszar suggested that TRIA's triggers should be increased to between $20 and $25 billion. He also suggested that the insurer deductible be increased from 20% to 40%, and the cost sharing increased from 15% to 25%.
The hearing included considerable discussion regarding whether terrorism coverage could be provided through ILS, which are financial instruments whose return depends upon the occurrence of a specific insurance event. Seo stated that at the current rate of growth, the ILS markets could provide $9 to $12 billion of terrorism risk capacity by the end of 2020. Several regulatory changes that could encourage further growth in the ILS market were suggested, such as addressing how ILS are treated with respect to credit for reinsurance.
Other potential changes to TRIA were discussed, including:
- Clearly indicating that cyber terrorism is covered;
- Charging insurers a premium for coverage;
- Establishing a definite period of time and a process for certifying a terrorist attack; and
- Special considerations for smaller insurers and workers' compensation insurers that might be disproportionately impacted by a terrorist attack.