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TRIA’s Impact on Workers Comp

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Because of the significant financial impact of the Sept. 11, 2001 terrorist attacks, Congress created the Federal Terrorism Risk Insurance Act (TRIA). Its purpose is to provide a financial backstop to the insurance industry that would cap losses in the event of another large-scale terrorist event. TRIA was initially set to expire at the end of 2005, but it has been extended twice and is now set to expire Dec. 31, 2014.

When most people think of TRIA, they think of property insurance. Without TRIA, many high-profile properties would be difficult to insure in the commercial marketplace. However, TRIA also plays an important role in workers’ compensation coverage, and its pending expiration is already impacting some renewals.

Workers’ compensation insurers are particularly concerned about large accumulations of employees in small areas, also known as employee concentrations.

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When carriers model employee accumulations, they not only look at a single employer’s concentrations, but also their aggregate accumulation exposure for all their policyholders in a particular zip code or city and in some cases across multiple correlated lines of business. Because workers’ compensation underwriters are required to provide terrorism coverage by law, the only way to limit their exposure is to reduce the amount of capacity they offer.

If TRIA is allowed to expire or is modified significantly, employers in certain cities and industries with large employee concentrations will likely experience capacity shortages.

In fact, the uncertainty around TRIA’s reauthorization is already leading some workers’ compensation carriers to decline or non-renew risks in certain geographical areas, or ask for large rate increases.

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The healthcare, public entity, higher education, and financial sectors are particularly affected by employee concentration issues at the moment.

To mitigate the impact of TRIA’s uncertainty, employers should differentiate their risk. Since both insurers and reinsurers use catastrophic models to estimate their loss potentials, it is critical that employers provide the highest quality of exposure data to help distinguish their risk profiles from their peers.

Additionally, companies with multiple shifts or those that operate in a campus setting should make sure to report both the total number of employees and the number of employees working during peak shifts—as well as the actual buildings where the employees are located. The number of employees working during peak shifts is the actual exposure to a terrorist event, not the total number of employees.

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Also, companies with a large percentage of their workforce in the field or telecommuting, rather than in the office where their payroll is assigned, should give this information to insurers. Providing very detailed information can help overcome some potential pitfalls of the catastrophic models and better reflect an employer’s exposure to catastrophic losses.

Employers with a large concentration of workers, especially those in major metropolitan areas, should be prepared to provide the following information to underwriters:

  • Employee marital or dependency status, including dates of birth for dependents.
  • Employee telecommuting/hospitality practices and impact on concentration.
  • Physical security of the building, including information about guards, surveillance cameras, parking areas, and HVAC protections.
  • How access to the building is controlled.
  • Construction of the building and location of the offices.
  • Management policies around workplace violence, weapons, and employment screening.
  • Employee security procedures.
  • Emergency response/crisis management plans and procedures.
  • Fire/life safety program.
  • A list of security staff.

As we move into 2014 without Congressional action on TRIA, the reaction of the marketplace is expected to become more pronounced. It is imperative that employers prepare to address the concentration issues with their carriers. This will help lessen the impact of these concerns and position employers to receive optimal terms on their risk management programs.

Difficulty in Modeling for Terrorism

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The following is an excerpt from the RIMS executive report “Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.” The report is available for download here.

For any insurer to operate successfully and avoid going out of business, it must be able to accurately estimate the probability of its losses, the severity of those losses, and then determine the amount of premium that must be charged to cover those losses should they occur. Historical data from past events is used to predict the losses from future events and pric­ing is set accordingly.

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Even extraordinary events like Hurricane Sandy or the recent tornadoes in Oklahoma, while harder to accurately estimate, can be predicted to a certain degree based on historical data and experi­ence. Terrorism risk, however, differs substantially from these other risks in several different ways.

Terrorism risks lack certain elements possessed by other types of risk. Typically insurable risks will include the following elements: losses must be due to chance (accidental) and the risk must be predictable. The first element is lacking with terrorism risk because losses from terrorist attacks are not accidental, but rather the result of deliberate human behavior and action. For a terrorist attack to occur a plot must be hatched and then executed by one or more individuals. The motives, targets and actions of plotters are constantly changing and their motives are frequently affected by government actions that modelers and insurers are not privy to. These factors make modeling nearly impossible.

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Terrorism risk is also inherently unpredictable. Insurers can accurately predict which parts of the country will be hit by hurricanes or tornadoes and also what the anticipated losses will be based on the severity of an event. They are able to do this based on historical experience and data that thankfully does not exist for terrorism risk because of the rarity of terrorist events occurring.

The accuracy of weather predictions is enhanced by studying the “near misses” and variances in weather that resulted in a storm missing a tar­get or having its impact minimized. Information about “near misses” or foiled attacks is highly classified and not available to modelers. This lack of data, and the randomness of where terrorist events have occurred or were planned to occur, makes predicting such events impossible.

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Predicting the severity of losses from such an event is also difficult as losses vary significantly based on the scale of the attack. For example, losses from the 9/11 attacks have been estimated to be $35 billion while preliminary estimates of business losses from the Boston bombings are closer to $10 million. There are some recent attempts to model terror­ism events, however, they require making specific assumptions about the method of the attempt, the volume or size of chemicals or weapons and the specific site that will be attacked. While this information may be use­ful for strengthening a specific property’s risk of loss, it is not useful in attempting to assess potential risk exposures for a wider geographic area.

TRIA: Not Just a Big City Issue

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The following is an excerpt from the RIMS executive report “Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.” The report is available for download here.

Opponents and skeptics of TRIA express concern that the program is tailored to benefit only major metropolitan cities such as New York City, Chicago, San Francisco, etc.; however, major cities are not the only ar­eas facing the very real threat of terrorism, as the 1995 Oklahoma City bombing made evident. Additionally, while the recent attacks in Boston occurred in a major city, they did not occur in a major financial center or area that would be seen as exclusive to such a city. They occurred during a marathon race and city celebration; similar events take place throughout the country on almost a daily basis.

On January 31, 2012, the National Consortium for the Study of Ter­rorism and Responses to Terrorism (START) released its “Hot Spots of Terrorism and Other Crimes in the United States, 1970 to 2008” report to the Department of Homeland Security. This report found that more than 2,600 terrorist events, defined as “the threatened or actual use of il­legal force and violence by a non-state actor to attain political, economic, religious, or social goal through fear, coercion, or intimidation,” occurred in the United States during those years.

On April 29, 2010, the Heritage Foundation published a list of thirty known terrorist plots that had been foiled in the United States following 9/11. These plot targets included a shopping mall in Columbus, Ohio; gas pipelines in Wyoming; and a federal building in Springfield, Illinois. This again shows that major cities are not the only targets of terrorists.

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On September 8, 2011, The Daily Beast published 10 additional foiled plots that had occurred after April, 2010, one of which was a plot to target Christmas tree lighting in Portland, Oregon.19

These lists and studies are highlighted because they show that major cit­ies are not the only terrorist targets in the United States. Any venue that brings together a large group of people is a potential target for terrorism whether it be a sports venue, a hospital, a school or university, a large commercial building, a utility, place of worship or Christmas tree light­ing.

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Businesses and organizations, whether in New York or Columbus, Ohio, need adequate terrorism coverage and the market stability TRIA provides to manage that risk.

Hiscox Introduces Terrorism Insurance for Hospitals

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In 2007, Congress extended the Terrorism Risk Insurance Act, which was first introduced in 2002 in response to the concern of subsequent attacks after 9/11, for seven years. So although the federal backstop that complements the private insurance market for terrorism insurance will be around in its current form until at least 2014, this risk is still one that many feel needs to be better addressed by insurers.

Enter a new product from specialty insurer Hiscox. The company’s press release introducing its new health care terrorism liability coverage calls hospitals soft targets for terrorists to attack “due to their relatively low level of protection, a high throughput of people, and the knock-on effect that one successful attack could have on the entire U.S. health-care system.” The policy offers $50 million in liability (including evacuation costs, surge costs, safe notification expense, and triage costs) with nuclear, chemical, biological and radiation attack coverage also available.

Ian Thompson, senior vice president for Hiscox’s health-care business, says that is the first terrorism liability for U.S. health-care companies, which “have a genuine vulnerability to the terrorist threat whether perpetrated by single issue, direct action groups such as animal rights or anti-abortion organisations, disturbed/disgruntled individuals, or religious extremists.”