Aon Corp. Responds to U.S. Treasury’s Request for Comment on Future of Terrorism Act

Chicago-based Aon Corp. has responded to the U.S. Treasury’s request for comment on the state of the U.S. terrorism insurance marketplace, warning of the danger of allowing the Terrorism Risk Insurance Act of 2002 (TRIA), or its successor legislation, TRIEA, to expire without a replacement reinsurance backstop.

Aon Property Director Aaron Davis says the potential expiration of TRIA at the end of 2007 continues to be a major concern for the property terrorism marketplace, even more so now given the current state of the property insurance marketplace following the natural catastrophes of 2005.

Insurance rating agencies have recently taken action, imposing “fundamentally higher” capital requirements and loss thresholds on insurance carriers. Davis says the agencies made their decision to ensure that another catastrophe as severe as Hurricane Katrina, followed closely in time by another terrorist strike on the scale of 9/11, would not exhaust industry surpluses available to pay claims.

“The significantly higher cost of conducting business that would follow a lowered rating, or maintaining the higher capital requirements, would provide a momentous disincentive for a majority of insurance carriers to write terrorism insurance once TRIEA (the Terrorism Risk Insurance Extension Act of 2005) expires at the end of next year,” Davis said.

As the gatekeepers of risk capital for the insurance and reinsurance industries, Davis says the role of rating agencies will be a key factor in the future of terrorism risk transfer — whether TRIA expires at the end of 2007 or is extended or replaced by another terrorism backstop mechanism. Davis says the last two active hurricane seasons plus terrorism coverage concerns may have prompted the rating agencies to take a second, hard look at permanently changing how the rating agencies determine capital adequacy for the insurance industry.

Without mechanisms like TRIA, Standard & Poor’s has said it may lower its investment ratings of insurance companies that offer terrorism insurance.

Davis says the $100 billion certified terrorism reinsurance provided by TRIA has effectively increased the total market capacity for terrorism coverage in the U.S. by over 80 percent and, to the benefit of policyholders in the U.S., significantly lowered the cost of such coverage in the process. Since the passage of TRIA in 2002, Davis says premiums paid by U.S. businesses for terrorism insurance have fallen by nearly 50 percent.

Moreover, the changes to rating agency capital adequacy requirements, when coupled with forthcoming changes to natural catastrophe models that will raise expected loss severity and frequency assumptions, represent a fundamental change to the property insurance marketplace, Davis says. These changes will result in long-term pricing and capacity constraints that will be further aggravated by the disappearance of TRIA at the end of 2007.

“Within the context of these property insurance pressures,” Davis says, “we hope that the U.S. Treasury and all parties with a vested interest in maintaining affordable and available terrorism insurance capacity will reconsider their positions on the issue of TRIA’s future and work diligently to provide a long-term solution to terrorism insurance in the U.S.”

Copies of Aon’s response to the U.S. Treasury are available at http://aon.com/tria .

Aon Corp., ( http://www.aon.com/ ) is a provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 46,000 employees working in Aon’s 500 offices in more than 120 countries.

Source: Aon Corporation