Perceptions about the Potential Expiration of The Terrorism Risk Insurance Act (TRIA)

Transcription

1 Perceptions about the Potential Expiration of The Terrorism Risk Insurance Act (TRIA) Sponsored by Property Casualty Insurers Association of America Independently conducted by Ponemon Institute LLC Publication Date: April 2014 Ponemon Institute Research Report

2 Perceptions about the Potential Expiration of The Terrorism Risk Insurance Act (TRIA) Ponemon Institute, April 2014 Part 1. Introduction Ponemon Institute is pleased to present the findings of a study conducted on behalf of the Property Casualty Insurers Association of America (PCI) to understand insurers perceptions of the Terrorism Risk Insurance Act (TRIA) and how they would respond if the law is allowed to sunset. Nearly 300 insurers were invited to participate in this research and a total of 128 insurers or 43 percent of the sample responded. PCI estimates that these insurers write up to 15 percent of the total direct written premium for all property casualty lines of business. The complete profile of respondents is described in the methods section of this report. The results of the study are intended to demonstrate to policymakers and regulators the significance of TRIA, how it has impacted the industry and implications if it is terminated. One conclusion of the study is that TRIA s reauthorization in 2014 would not crowd out the competitive opportunity in the private market to offer terrorism coverage. Only 10 percent of respondents strongly agree or agree that this would happen. According to the majority of respondents, the following are considered to be major consequences if TRIA is not reauthorized in 2014: A lack of capacity for terrorism coverage. There would be two main barriers to a company s ability to offer terrorism insurance. These are the limited availability of reinsurance capacity and the unpredictability of risk. Companies would reduce their exposure to TRIA-covered lines and place terrorism exclusions on policies. Further, most insurers would raise premiums, limit liability levels and coverage for terrorism insurance for industries perceived as high risk. A major terrorist event would impact a company s ability to obtain additional investor capital at an affordable cost. Other noteworthy findings include the following: A well-functioning insurance market for catastrophic terrorism risk insurance would not be possible without government participation. TRIA s capping of insured losses at high but manageable levels allows insurers and reinsurers to participate in offering terrorism coverage without threatening their financial stability. Companies represented in this study would not be interested in expanding terrorism coverage into the catastrophic insurance layer, which is now shared with the federal government and subject to recoupment under TRIA, according to 84 percent of respondents. TRIA s mandate that terrorism insurance be offered for covered lines increases the amount of terrorism coverage their company offers. Ponemon Institute Research Report Page 1

3 Part 2. Key Findings In this section, we present an analysis of the key findings. The complete audited findings are presented in the appendix of this report. The report is organized according to three major topics: The consequences to the industry if TRIA is not reauthorized How companies would respond if TRIA is not reauthorized Perceptions about TRIA s influence on the insurance industry The consequences to the industry if TRIA is not reauthorized If TRIA is not reauthorized, rates and renewal premiums are predicted to increase. As shown in Figure 1, 59 percent of respondents say there would be an increase in the rates charged for terrorism coverage. Thirty-seven percent predict there will be no change. Figure 1. If TRIA is not reauthorized in 2014, what would be the impact on the rates your company would charge for terrorism coverage? 70% 60% 59% 50% 40% 37% 30% 20% 10% 0% Increase No change Decrease 4% Ponemon Institute Research Report Page 2

4 Figure 2 reveals that 47 percent of respondents say the renewal premiums on existing policies would increase. Forty-four percent say the premiums would stay the same. Figure 2. If TRIA is not reauthorized in 2014, what would be the impact on the renewal premiums of your company s existing policies? 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 47% 44% 9% Increase Stay the same Decrease Figure 3 shows that 70 percent of respondents say their companies would reduce their exposure of TRIA-covered lines. Only 30 percent say there would be no change to their exposure. Figure 3. If TRIA is not reauthorized, would your company reduce its exposure of TRIAcovered lines? 80% 70% 70% 60% 50% 40% 30% 30% 20% 10% 0% Reduce No change Ponemon Institute Research Report Page 3

5 TRIA promotes economic stability. Figure 4 reveals the financial and economic consequences if TRIA is not reauthorized. Specifically, 61 percent say it would impact the company s ability to obtain additional investor capital at an affordable cost, 56 percent of respondents say their company would require additional reinsurance that includes terrorism coverage and 46 percent are concerned that their company would be at greater risk for a credit rating downgrade. Figure 4. What might happen if TRIA is not reauthorized in 2014? Percentage yes response If TRIA is not reauthorized in 2014, and a major terrorism event happens, do you believe it would impact your company s ability to obtain additional investor capital at an affordable cost? 61% If TRIA is not reauthorized in 2014, would your company require additional reinsurance that includes terrorism coverage? 56% If TRIA is not reauthorized in 2014, would your company be at greater risk for a credit rating downgrade? 46% 0% 10% 20% 30% 40% 50% 60% 70% Pct% Yes response Ponemon Institute Research Report Page 4

6 If TRIA is not reauthorized, companies face limited availability of reinsurance capacity and unpredictability of risk. When asked what the main barriers would be to offering terrorism insurance if TRIA ceased to exist, 70 percent say it would be the limited availability of reinsurance capacity followed by unpredictability of risk (66 percent of respondents) as shown in Figure 5. Of lesser consequence is the inability to obtain adequate rate approval (34 percent of respondents) or unattractive pricing (40 percent of respondents). Twenty-two percent say they will still be able to offer terrorism insurance if TRIA expires. However, the question is the extent of the coverage offered. Figure 5. If TRIA is not reauthorized in 2014, what would be the main barriers to your company s ability to offer terrorism insurance? More than one selection permitted Limited availability of reinsurance capacity 70% Unpredictability of risk 66% Pricing is unattractive to potential insured 40% Inability to obtain adequate rate approval 34% None (no barriers) 22% Other 11% 0% 10% 20% 30% 40% 50% 60% 70% 80% While not shown in graphs, another consequence if TRIA is not reauthorized includes companies having no interest in expanding terrorism coverage into the catastrophic insurance layer (84 percent of respondents). A similar percentage of respondents say there would be a lack of capacity issue for terrorism coverage (84 percent of respondents). Ponemon Institute Research Report Page 5

7 Companies response if TRIA is not reauthorized Companies would alter their approach to terrorism risk insurance. Figure 6 shows what actions the majority of companies would take if TRIA ceased to exist. These include: place terrorism exclusions on policies (73 percent), limit liability levels (53 percent), raise premiums (52 percent) and limit writings for industries perceived as high risk (52 percent). Figure 6. If TRIA is not reauthorized in 2014, would your company alter its approach to terrorism risk insurance in any of the following ways? More than one selection is permitted Place terrorism exclusions on policies 73% Limit liability levels Raise premiums Limit writings for industries perceived as high risk Tighten aggregate limits Increase the use of private reinsurance Increase policyholder deductibles Expand your company s portfolio to include more risks that are less susceptible to terrorism Reduce writings in certain geographical areas 53% 52% 52% 48% 48% 43% 38% 37% Participate in voluntary pooling arrangements Exit line(s) of business (in one or more states) 15% 12% Build surplus by tapping into capital markets 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% Pct% Yes response Actions they would not likely take include: build surplus by tapping into capital markets (89 percent), exit line(s) of business (in one or more states) (64 percent) and participate in voluntary pooling arrangements. Ponemon Institute Research Report Page 6

8 The ability to predict the likelihood of a terrorist event has become more difficult. According to Figure 7, 77 percent of respondents believe they are not better able to predict the likelihood of a terrorist event today compared to a decade ago ( percent). However, 54 percent say they are better able to quantify the severity of a terrorist event in terms of insured losses. Figure 7. Is your company better able today to predict or quantify the severity of a terrorist event today than 10 years ago? Percentage yes response Today, is your company better able to quantify the severity of a terrorist event in terms of insured losses than it was 10 years ago? 54% Today, is your company better able to predict the likelihood of a terrorist event in terms of insured losses than it was 10 years ago? 23% 0% 10% 20% 30% 40% 50% 60% Pct% Yes response Ponemon Institute Research Report Page 7

9 Perceptions about TRIA s influence on the insurance industry Government participation is critical. Sixty-six percent or respondents say a well-functioning insurance market for catastrophic terrorism risk insurance would not be possible without government participation. Twenty-three percent disagree or strongly disagree with this statement. Respondents believe financial ruin is avoided by capping insurer losses at high, but largely manageable levels. Eighty percent of respondents say TRIA allows insurers and reinsurers to participate in the middle and lower layers of terrorism risk without risking financial ruin. When insurers do provide cyber terrorism coverage, they write it under TRIA-covered lines. Figure 8 reveals that during the period since TRIA s last reauthorization in 2007, 77 percent of survey participants agree that their policies have not provided coverage for losses associated with cyber terrorism exposures under TRIA-covered lines of business. An even higher percentage of respondents agree that their policies have not provided coverage for losses associated with cyber terrorism exposures under non-tria-covered lines of business. Figure 8. Have coverage for losses changed since TRIA s last reauthorization in 2007? Percentage no response During the period since TRIA s last reauthorization in 2007, have your policies provided coverage for losses associated with cyber terrorism exposures under non-triacovered lines of business? 91% During the period since TRIA s last reauthorization in 2007, have your policies provided coverage for losses associated with cyber terrorism exposures under TRIA-covered lines of business? 77% 70% 75% 80% 85% 90% 95% Pct% No response These results indicate that when insurers do provide cyber terrorism coverage, they write it under TRIA-covered lines. Given that cyber attacks against government agencies and businesses worldwide are on the rise, it makes sense that insurers should provide cyber coverage and do so under TRIA-covered lines. Ponemon Institute Research Report Page 8

10 Part 3. Methods A sampling frame consisting of 298 executives from PCI-member companies was used to contact participants to this web-based survey. As shown in Table 1, 140 respondents completed the survey. Screening and reliability tests resulted in the removal of 12 surveys. The final sample consisted of 128 respondents or a 43 percent response rate. Table 1. Survey response Freq Pct% Total sampling frame % Bounce-back 14 5% Total returns (with four pings) % Rejected or screened surveys 12 4% Final sample % Table 2 reports the lines of insurance represented by respondents companies. All respondents and member companies are located in the United States. Table 2. Respondent companies lines of insurance Freq Pct% Aircraft 12 9% Allied lines 91 71% Boiler and machinery 57 45% Commercial multiple peril 88 69% Fire 94 73% Inland marine 72 56% Ocean marine 11 9% Other liability including excess workers compensation 55 43% Products liability 60 47% Workers compensation 81 63% Pie Chart 1 summarizes the respondents position level. As can be seen, 67 percent of respondents are senior executives or at the vice president level. Pie Chart 1. Respondents approximate position level 3% 3% 14% 13% 34% Senior Executive Vice President Director Manager/Supervisor Staff Other 33% Ponemon Institute Research Report Page 9

11 Pie Chart 2 shows the respondents reporting channel or chain of command. As shown, 50 percent of respondents report to the CEO or executive committee. Pie Chart 2. Respondents reporting channel 18% CEO/Executive Committee 4% 5% 50% Chief Financial Officer General Counsel Compliance Officer 23% Other Pie Chart 3 reports the total direct written premium volume of respondents companies. As shown, 51 percent of respondents 2012 premium is at or below $250 million. Pie Chart 3. Total direct written premium volume 13% 18% 51% Less than $250 million $250 million - $500 million $501 million - $1 billion 18% Greater than $1 billion Ponemon Institute Research Report Page 10

12 Part 4. Caveats There are inherent limitations to survey research that need to be carefully considered before drawing inferences from findings. The following items are specific limitations that are germane to most web-based surveys. Non-response bias: The current findings are based on a sample of survey returns. We sent surveys to a representative sample of highly qualified insurers, resulting in a large number of usable returned responses. Despite non-response tests, it is always possible that individuals who did not participate are substantially different in terms of underlying beliefs from those who completed the instrument. Sampling-frame bias: The accuracy is based on contact information and the degree to which the list is representative of insurers who are knowledgeable about The Terrorism Risk Insurance Act (TRIA). We also acknowledge that the results may be biased by external factors. Self-reported results: The quality of survey research is based on the integrity of confidential responses received from subjects. While certain checks and balances can be incorporated into the survey process, there is always the possibility that a subject did not provide accurate responses. For more information about this study, please contact Ponemon Institute by sending an to research@ponemon.org or calling our toll free line at Ponemon Institute Advancing Responsible Information Management Ponemon Institute is dedicated to independent research and education that advances responsible information and privacy management practices within business and government. Our mission is to conduct high quality, empirical studies on critical issues affecting the management and security of sensitive information about people and organizations. As a member of the Council of American Survey Research Organizations (CASRO), we uphold strict data confidentiality, privacy and ethical research standards. We do not collect any personally identifiable information from individuals (or company identifiable information in our business research). Furthermore, we have strict quality standards to ensure that subjects are not asked extraneous, irrelevant or improper questions. Ponemon Institute Research Report Page 11

13 Appendix 1: Survey Results The following tables summarize the survey responses of qualified respondents in 128 companies. All survey results were collected over a four-week period ending in December Survey response Freq Pct% Total sampling frame % Bounce-back 14 5% Total returns (with four pings) % Rejected or screened surveys 12 4% Final sample % S1. Please check the lines of insurance your organization currently provides. Freq Pct% Aircraft 12 9% Allied lines 91 71% Boiler and machinery 57 45% Commercial multiple peril 88 69% Fire 94 73% Inland marine 72 56% Ocean marine 11 9% Other liability including excess workers compensation (but excluding products liability) 55 43% Products liability 60 47% Workers compensation 81 63% None of the above (Stop) 0 0% Total 621 Q1. If TRIA is not reauthorized in 2014, would your company reduce its exposure of TRIA-covered lines? Freq Pct% Significantly 34 27% Slightly 55 43% No change 39 30% Q2. If TRIA is not reauthorized in 2014, what would be the impact on the rates your company would charge for terrorism coverage? Freq Pct% Significant increase 46 37% Slight increase 27 22% No change 45 37% Decrease 5 4% Total % Q3. If TRIA is not reauthorized in 2014, what would be the impact on the renewal premiums of your company s existing policies? Freq Pct% Increase 58 47% Decrease 11 9% Stay the same 55 44% Total % Ponemon Institute Research Report Page 12

14 Q4. If TRIA is not reauthorized in 2014, would your company require additional reinsurance that includes terrorism coverage? Freq Pct% Yes 69 56% No 54 44% Total % Q5. If TRIA is not reauthorized in 2014, and a major terrorism event happens, do you believe it would impact your company s ability to obtain additional investor capital at an affordable cost? Freq Pct% Yes 74 61% No 48 39% Total % Q6. If TRIA is not reauthorized in 2014, would your company be at greater risk for a credit rating downgrade? Freq Pct% Yes 58 46% No 69 54% Total % Q7. The TRIA deductible has increased over time and is currently 20% of TRIA-covered earned premiums. If the percentage is raised again, to an amount higher than 20%, would the higher deductible limit your company s ability to provide terrorism coverage? Freq Pct% Yes 56 44% No 70 56% Total % Q8. Please select only one choice to the following statement. TRIA s mandate that terrorism insurance be offered for covered lines... Freq Pct% Significantly increases the amount of terrorism coverage our company offers 44 35% Somewhat increases the amount of terrorism coverage our company offers 47 38% Does not significantly impact the amount of terrorism coverage our company offers 34 27% Total % Q9. If TRIA is not reauthorized in 2014, what would be the main barriers to your company s ability to offer terrorism insurance? Please check all that apply. Freq Pct% Unpredictability of risk 84 66% Limited availability of reinsurance capacity 90 70% Inability to obtain adequate rate approval 43 34% Pricing is unattractive to potential insured 51 40% Other (please specify) 14 11% None (no barriers) 28 22% Total 310 Ponemon Institute Research Report Page 13

15 Q10. If TRIA is not reauthorized in 2014, would your company alter its approach to terrorism risk insurance in any of the following ways? Yes No Unsure Increase the use of private reinsurance Participate in voluntary pooling arrangements Build surplus by tapping into capital markets Raise premiums Increase policyholder deductibles Place terrorism exclusions on policies Tighten aggregate limits Limit liability levels Reduce writings in certain geographical areas Limit writings for industries perceived as high risk Exit line(s) of business (in one or more states) Expand your company s portfolio to include more risks that are less susceptible to terrorism Q10. If TRIA is not reauthorized in 2014, would your company alter its approach to terrorism risk insurance in any of the following ways? Yes No Unsure Increase the use of private reinsurance 48% 25% 28% Participate in voluntary pooling arrangements 15% 56% 30% Build surplus by tapping into capital markets 1% 89% 11% Raise premiums 52% 36% 12% Increase policyholder deductibles 43% 43% 13% Place terrorism exclusions on policies 73% 24% 2% Tighten aggregate limits 48% 42% 10% Limit liability levels 53% 39% 8% Reduce writings in certain geographical areas 37% 49% 14% Limit writings for industries perceived as high risk 52% 38% 11% Exit line(s) of business (in one or more states) 12% 64% 24% Expand your company s portfolio to include more risks that are less susceptible to terrorism 38% 44% 18% Q11a. Today, is your company better able to predict the likelihood of a terrorist event in terms of insured losses than it was 10 years ago? Freq Pct% Yes 30 23% No 98 77% Q11b. Today, is your company better able to quantify the severity of a terrorist event in terms of insured losses than it was 10 years ago? Freq Pct% Yes 69 54% No 59 46% Ponemon Institute Research Report Page 14

16 Q12. If TRIA is not reauthorized in 2014, to what extent would your company be interested in expanding coverage into the catastrophic insurance layer (which is now largely covered by the federal government under TRIA)? Freq Pct% High interest 11 9% Some interest 9 7% No interest % Q13. Without TRIA reauthorization in 2014, there would be a lack of capacity issue for terrorism coverage. Freq Pct% Strongly agree 66 52% Agree 41 32% Unsure 9 7% Disagree 11 9% Strongly disagree 0 0% Total % Q14. TRIA reauthorization in 2014 would crowd out competitive opportunity in the private market to offer coverage. Freq Pct% Strongly agree 8 6% Agree 5 4% Unsure 26 20% Disagree 64 50% Strongly disagree 25 20% Q15. A well-functioning insurance market for catastrophic terrorism risk insurance would not be possible without government participation. Freq Pct% Strongly agree 41 32% Agree 44 34% Unsure 13 10% Disagree 26 20% Strongly disagree 4 3% Q16. By capping insurer losses at high, but largely manageable levels, TRIA allows insurers and reinsurers to participate in the middle and lower layers of terrorism risk without risking financial ruin. Freq Pct% Strongly agree 26 20% Agree 77 60% Unsure 13 10% Disagree 9 7% Strongly disagree 3 2% Q17. During the period since TRIA s last reauthorization in 2007, have your policies provided coverage for losses associated with cyber terrorism exposures under TRIA-covered lines of business? Freq Pct% Yes 29 23% No 99 77% Ponemon Institute Research Report Page 15

17 Q18. During the period since TRIA s last reauthorization in 2007, have your policies provided coverage for losses associated with cyber terrorism exposures under non-tria-covered lines of business? Freq Pct% Yes 11 9% No % Total % Your role and organization D1. What organizational level or title best describes your current position? (check one) Freq Pct% Senior Executive 43 34% Vice President 41 33% Director 4 3% Manager/Supervisor 18 14% Staff 16 13% Other (please specify) 4 3% Total % D2. Check the Primary Person you or your leaders report to within the organization. Freq Pct% CEO/Executive Committee 64 50% Chief Financial Officer 29 23% General Counsel 7 5% Compliance Officer 5 4% Other (please specify) 23 18% D3. Total years of relevant work experience Freq Pct% Less than 3 years 4 3% 3 to 5 years 3 2% 6 to 8 years 2 2% 9 to 10 years 4 3% More than 10 years % Total % D4. Total direct written premium volume (2012) of your organization: Freq Pct% Less than $250 million 65 51% $250 million - $500 million 23 18% $501 million - $1 billion 23 18% Greater than $1 billion 16 13% Total % D5. What is the worldwide headcount of your organization? Freq Pct% Less than % 100 to % 501 to 1, % 1,001 to 5, % 5,001 to 25, % More than 25, % Total % Ponemon Institute Research Report Page 16