Terrorism Risk

More Time for TRIA?

Will Congress act to protect the insurance industry from a major terrorist attack?
By: | December 1, 2013 • 9 min read

It’s that time again. More than 12 years after 9/11, terrorism remains the most emotive of topics and it will soon take center stage once more, as the third Terrorism Risk Insurance Act (TRIA) is set to expire on Dec. 31, 2014.

Opinion is divided over the future of this federal backstop that protects the U.S. insurance market against a major terrorism loss.

Most believe the Act should be renewed, albeit with amendments. Yet, there remains a valid argument that TRIA has served its purpose and is no longer necessary. Terrorism risk, some say, is no different than any other catastrophe peril and should be insured entirely by the private market.

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Under the existing TRIA program, a federal payout would be triggered by a terrorism loss of $100 million or more — a scenario fortunately yet to be tested since the Act was first implemented in 2002 and subsequently extended in 2005 and 2007.

Corporate insurance buyers and their brokers are certainly in favor of a federal backstop remaining in place in some form or other — after all, without TRIA, there is no way terrorism property cover would be as accessible and affordable as it is today.

“Since 2002, there has been a dramatic increase in terrorism property capacity in the marketplace and rates have decreased year on year,” said Rob Cruz, senior vice president of Hiscox USA, noting that the enactment of TRIA successfully brought an end to the price hikes and withdrawal of carriers from the market that occurred in the immediate aftermath of 9/11.

R12-13p43-45_12terror2.inddPeter Beshar, general counsel of Marsh & McLennan and a vocal advocate for TRIA, said that removing TRIA could have a destabilizing effect.

“If the backstop and the requirement of carriers to make this cover available were removed, we believe a substantial number of P&C carriers would simply decline to underwrite the risk,” he told Risk & Insurance®.

Impact on Workers’ Comp

“We have already begun to see the uncertainty over TRIA prompt some workers’ compensation carriers to pull back from certain parts of the market where they feel they have aggregated risk — large urban areas with high concentrations of buildings and employees,” he added.

Indeed, while the U.S. insurance industry now boasts a healthy surplus of P&C capacity, there is less confidence in the ability of the industry to foot potentially enormous workers’ compensation losses. Workers’ comp cover is mandatory, and most states, including New York, do not exclude terrorism. As such, capacity is stretched in dense urban areas containing many employees.

Will Farmer, terrorism underwriter for reinsurer Catlin, said that while property terrorism risk for a large office building is usually syndicated, the workers’ compensation policy covering the staff in the same building is often written by a single carrier.

“It’s hard to see small carriers continuing to write very large lines of workers’ compensation without TRIA,” he said.

Lloyd’s — the reinsurance market which carries more than half of the world’s stand-alone terrorism risk — was unavailable for comment, but stated in 2010 that it did not believe the private market would have the capacity or risk appetite to fill the void that would be created if TRIA was to expire in 2014.

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“A significant loss event could act as a market turning event, causing the price of terrorism risk insurance to rise, or capacity to withdraw,” Lloyd’s said, noting that a number of underwriters had indicated they would exclude terrorism altogether if TRIA was allowed to expire.

David Frediani, president of Ironshore International, which offers a stand-alone terrorism policy with a limit of $300 million, said TRIA serves a purpose as a last line of defense against catastrophic losses that could arise from unprecedented events such as biological or nuclear attacks.

“This is something the insurance market simply cannot model or reserve for,” he said.

Meanwhile, Cruz said it may be time to analyze whether TRIA is needed on a line-by-line basis.

“I think the market is in a great position to handle property terrorism — theoretically, there is around $3 billion stand-alone terrorism capacity in the market. As far as workers’ compensation and liability are concerned — I’m not sure if we’re ready yet to be without TRIA,” he said.

R12-13p43-45_12terror2.indd“If there were a future attack, we would want as much clarity as possible so we know what would be supported by the federal government and what would be supported by the private market.”
— Peter Beshar, general counsel, Marsh & McLennan

An Industry Bailout?

But there are vocal quarters of the insurance and academic communities that say TRIA has run its course, and should be removed altogether.

David C. John, senior research fellow at the Heritage Foundation think tank, last year called on the House of Representatives for a “firm and short phase-out” of the Act, which he described as a “pre-approved bailout” for insurance companies.

He argued that, by allowing insurers to collect premiums without facing the true value of losses, terrorism risk is being underpriced and insurance buyers have no incentive to reduce their risk.

“There was a good reason to establish TRIA, but those days are gone,” he said.

In September 2013, Professor Robert Rhee reinforced that argument on behalf of the Cato Institute think tank, which released a detailed policy analysis of TRIA.

“If there was some ambiguity about the program’s need before, there is none now. Terrorism risk is not more severe than other insurable risks such as natural catastrophes. The private market is capable of underwriting this risk,” he said.

Natural catastrophes cost the U.S. insurance market $45.7 billion in losses between 2003 and 2012. Terrorism cost just $433 million.

Of the 20 most costly worldwide insurance losses between 1970 and 2012, 9/11 ranks fifth at $24 billion (according to Swiss Re) and the rest are natural disasters. Ten of the 20 costliest catastrophes were weather events occurring post-2000, yet these natural perils remain insured by the private market with no federal backstop, Rhee pointed out.

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“It does seem strange that terrorism is the one peril that people feel needs to be fully insured,” said Catlin’s Farmer, who believes the private market is well equipped to handle a major terrorism loss.

“If insurers just want to write predictable risk, that’s not always helpful to the clients; the insurance market needs to step up and deal with unpredictable and difficult risks too,” he said.

Difficult to Model

TRIA advocates argue that although U.S. terrorism losses have been negligible since 9/11, it is impossible to know when, how and to what extent the next major attack will affect the United States, making the risk very difficult to model.

Even Rhee said that “without good data and reliable modelling, premiums must incorporate a substantial mark-up to ensure proper reserving for losses.” However, he argued, conclusions can be drawn from existing data to help insurers price the risk — such as the fact that high value economic targets tend to be concentrated in certain geographic areas.

Few would disagree that the current $100 million trigger for TRIA appears disproportionately low given the market’s ability to absorb multibillion dollar natural catastrophes each year with few problems. “There is no reason why the private market can’t cope with events that are much larger than $100 million — all that’s doing is giving corporate welfare to smaller insurers,” said Farmer.

Each amendment to TRIA to date has seen increased private market participation and the consensus is that the $100 million trigger point will be scrutinized if TRIA is renewed.

While Farmer speculated a new trigger loss would be around $500 million or $1 billion, Rhee suggested raising the private market deductible to as much as $50 billion — effectively reserving TRIA for a truly industry-shaking event.  However, raising the trigger would be bad news for small carriers and particularly captive insurers, many of whom could not afford to take higher deductibles and rely heavily on TRIA.

Cruz also pointed out that, for major insurance carriers, the point at which the government participates in a loss would actually most likely be far higher than $100 million, because insurers have a 20 percent direct earned premium deductible on the prior year’s earnings on all applicable TRIA lines.

“Losses have to be huge before some insurers would see money back from the government. A higher retention would equate to no TRIA at all for some companies,” he said.

Certification Required

One element of TRIA most parties would agree on is that if it is to be renewed, more clarity is needed on the definition of coverage as the nature and scope of terrorist methods continue to evolve.

At present, any terrorist event over $5 million must be certified as such by the government, and the fact that the Boston bombing in April 2013 has yet to be certified is a cause for concern in the industry.

“Boston was the defining moment — we know the perpetrator went overseas, trained and made friends there; I doubt there’s a citizen in the U.S. who would argue that was not an act of terrorism,” said Joe Boren, chairman, Environmental, at Ironshore.

“If you’re a small or mid-sized business, you can’t afford to wait around for seven months or more while bureaucrats in Washington, D.C. make a decision — you will go out of business,” he said.

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In his testimony to the House of Representatives on Sept. 19, Marsh’s Beshar called for a 90-day time period in which to determine whether an attack is covered by TRIA; clarification that TRIA will backstop nuclear, biological, chemical and radiological events if coverage is provided in the underlying policy; and modernization of TRIA to reflect new terrorist threats including cyber terrorism.

“If there were a future attack, we would want as much clarity as possible so we know what would be supported by the federal government and what would be supported by the private market,” he said.

“The certification of an event as terrorism is still very political,” added Cruz. “I feel this judgment should be made by an independent body, not bodies employed by the president.”

Indeed, it is ultimately politicians who will decide TRIA’s fate, and all three scenarios — renewal, amendment and expiration — are still very much on the table.

Cruz said he has spoken to Washington D.C. insiders who suggest the next renewal debate will see a “clean slate look at the Act.” Yet, according to Farmer, “even some of the most ardent TRIA supporters say you can’t rule out inertia in the government and polarization of Congress leading to the program lapsing.”

Although TRIA’s expiration date is still more than a year away, insurers need an indication of the Act’s fate sooner rather than later. After all, policies that renew in early 2014 will start their term with TRIA in place but could end up without any TRIA as of Jan. 1, 2015.

“Insurers writing terrorism lines could be caught in an awkward situation and put their balance sheets at risk if they continue writing this coverage without terrorism reinsurance or TRIA,” warned Cruz.

While there are no clear biases along party lines that could lead to TRIA being held hostage in Congress, Cruz said the geographical make-up of the decision-making panel could have an influence.

Beshar, however, said: “TRIA is not just a Northeast phenomenon; terrorism insurance is growing faster in the West than anywhere else in the country. This is a cross-sector issue that affects the whole country, and lawmakers realize the significance of TRIA to their constituents.”

Despite some compelling economic arguments for the removal or scaling down of the Act, the very nature of terrorism breeds extreme caution — fear of the scale and nature of the next attack; fear among politicians of appearing complacent; fear among insurance buyers over how the insurance market will respond to life without the TRIA safety blanket.

Indeed, psychology — perhaps even more so than economic risk itself — will be crucial in determining whether, and in what form, TRIA endures.

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]