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Rating agencies take calm approach to TRIA expiration

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Rating agencies take calm approach to TRIA expiration

The lapse of the federal governments' terrorism insurance backstop program is unlikely to have any short-term impact on the ratings of insurance companies, according to rating agencies.

The program, created by the Terrorism Risk Insurance Act of 2002, will expire on Dec. 31 because the Senate failed to consider a measure passed by the House of Representatives that would have extended the program for six years. House leaders have indicated that reauthorization of the program is likely to be among the first issues dealt with when the new Congress convenes next month.

Major rating agencies adopted a wait-and-see attitude toward the looming expiration of the program.

A.M. Best Co. Inc. “has determined that no rating actions on insurers previously identified as over-reliant upon (the program) are necessary at this time,” the Oldwick, New Jersey-based rating agency said Wednesday after the Senate adjourned. It added that any rating units that have not successfully mitigated their terrorism exposures in the absence of the program “or have increased their terrorism-exposed business to a level deemed overly reliant upon” the program will be evaluated, and “rating actions will be taken, when necessary.”

Standard & Poor's Corp. said Thursday that in the short term, it does “not expect to take widespread rating actions on U.S. insurers or on our outstanding commercial mortgage-backed securities ratings” in the wake of congressional inaction.

“Although TRIA had been positive for commercial lines insurers and helped stabilize the insurance market, the perception of terrorism risk has evolved to where the industry is now comfortable assuming sizable conventional terrorism events (i.e., a two- to six-ton truck bomb) without federal financial assistance,” said S&P.

It warned, however, that an unconventional attack involving nuclear, biological, chemical or radiological weapons in the absence of a federal backstop program “could have systemic economic, financial and legal ramifications, and could severely hurt the insurance industry.”

Fitch Ratings Inc. in Chicago said Thursday that the end of the program “without readily available substitute coverage” is likely to lead insurers to exclude terrorism from property coverage so as “to manage geographic risk aggregations in large metro areas.”

Fitch noted, however, that workers compensation insurers are forbidden legally from excluding terrorism coverage in their policies. The expiration could cause insurers to withdraw from writing workers compensation in large cities that are thought to be targets for terrorism, according to Fitch.

“While there is a chance for legislative action in early 2015, insurers must prepare for managing risk exposures without the terrorism coverage that has been in place in various forms since 2002,” Fitch said.

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