A.M. Best Special Report: Federal Protection for Terrorism -- Industry Awaits Final Decision.

OLDWICK, N.J. -- The Terrorism Risk Insurance Extension Act (TRIEA), signed into law by President Bush in December 2005, extended the Terrorism Risk Insurance Act (TRIA) of 2002. The original legislation was enacted in the wake of the September 11, 2001, attacks to provide a federal backstop for the insurance industry in the event of a "certified" act of terrorism.

Both TRIA and the TRIEA extension were intended as short-term solutions should additional terrorism related losses occur. The current extension provided additional time for discussion of a more permanent solution and is set to expire on December 31, 2007.

TRIA requires commercial property/casualty insurers to offer terrorism coverage to policyholders, although they can charge additional premium. The workers' compensation line presents a unique exposure to the industry, as primary carriers cannot exclude coverage under workers' compensation policies for losses arising from acts of terrorism.

Industry trade organizations indicate that given current industry surplus levels, terrorism related losses would be uninsurable without the benefit of a federal backstop. Although both capacity and take up rates for terrorism coverage have increased gradually since September 11, most industry groups feel that current industry capacity is significantly below what would be required if there were not a federal backstop.

With the potential nonrenewal of TRIEA, A.M. Best Co. will continue to take a more rigorous approach in its due diligence when evaluating a company's overall capital position, cycle management and risk management controls. Stress testing for terrorism on Best's Capital Adequacy Ratio (BCAR) began last year and will continue in 2007, using information provided from companies on A.M. Best's Supplemental Rating Questionnaire (SRQ) and from modeling companies.

Given the quickly approaching deadline for expiration of TRIEA and that policies written during 2007 are exposed to terrorism losses whether or not any federal terrorism protection is in place, A.M. Best is asking for a written terrorism loss mitigation plan from all companies with locations where a terrorist attack could significantly impair their capital position. Included in the plan should be what steps, if any, the company will take to mitigate the potential impact on surplus if TRIEA expires without any further federal protection.

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Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.