Carriers Pass A.M. Best Terror Stress Test; Plans Include Not Writing Cover

Insurers that faced negative rating actions from A.M. Best for failing a terror risk stress test last year were able to convince the rating agency they could survive without a government backstop, an agency executive reported recently.

During a January interview with Carrier Management at the Property/Casualty Insurance Joint Industry Forum in New York, Matt Mosher, senior vice president of rating operations for A.M. Best, provided the latest update on Best’s October 2013 briefing about the potential rating consequences for insurers that failed the stress test designed to gauge their reliance on the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA, sometimes referred to as TRIA—an acronym for the original program name).

The briefing had reported that one-quarter of 889 rated units had material terrorism exposure, and that about 4 percent had failed the stress tests. That 4 percent—some 34 P/C groups—faced the possibility of having a negative outlook attached to their ratings if they didn’t lay out some kind of plan about how they were going to deal with the exposure.

Implicit in that stress test was the fact that “TRIA requires coverage in certain areas.”

“If there’s no TRIA, those coverages are not required. So a lot of the companies came back with, ‘Well, my plan is I’m not going to offer the coverage,'” Mosher reported.

Other companies that failed the stress test the first time around were able to provide better data than they had previously given to the rating agency to prove their cases, Mosher noted. “When we look at a stress test, we look at what’s your concentration in, say, New York City.” But with better data, the rating agency could drill down a little deeper to understand the concentration of exposure, he said.

“Are they writing in lower Manhattan? In the Bronx? New York City is a pretty big area,” with different exposures in the outer boroughs than in Manhattan, Mosher noted.

Other data clean-up activities related to building occupancy for some of the risks insured. “What type of building is it? How many employees are in the building at the same time?”

By answering those types of questions, carriers provided more detailed information to show that the situation wasn’t necessarily as stressful as it first appeared, Mosher said.

Mosher noted that none of the companies that failed the stress test originally had surplus over $1 billion. “It was primarily smaller companies, regional companies that had concentrated risks relative to their size, but had issues they had to address,” he said, during a panel discussion at the Forum. “All of them came back with a plan in terms of what they would do. In a lot of cases, it was to non-renew” coverage.

“At this point, they’re not going be able provide that much coverage without some form of backstop,” Mosher concluded.

He added that Best’s stress test does not consider NBCR—nuclear, biological, chemical and radiological terror exposure. “Without some form of backstop, there will be material issues to the insurance industry as a whole. I think they need something there,” he said, during the panel discussion.

Lawmakers “somehow they have to deal with that aspect,” Mosher told Carrier Management. “I don’t think the insurance industry nor the reinsurance industry is willing at this point—or likely able— to deal with the impact of a dirty bomb or some of the heavy level NBCR type losses.”

Best’s briefing last October explained that the A.M. Best’s stress test was implemented as part of its Supplemental Rating Questionnaire. In the SRQ, Best requested that all insurers with more than 10 percent of calendar year written premiums in terror-exposed commercial lines (excluding auto and professional liability, for example), supply an estimate of losses from a scenario similar to a five- or six-ton truck bomb attack occurring when buildings are at their highest occupancy.