What TRIPRA’s Approaching Expiration Means for Workers’ Compensation Programs

Uncertainty surrounding the future of the Terrorism Risk Insurance Program Reauthorization Act is expected to cause significant pressure to employers as TRIPRA’s expiration date approaches.

Businesses with large concentrations of employees in major cities, with high amounts of public exposure, or in certain industries are expected to be the most affected, with challenges expected to range from price increases to doubt about their renewal status.

TRIPRA, which was renewed for the third time in 2015, extended the original Terrorism Risk Insurance Act (TRIA) that was passed in 2002 to maintain stability in the insurance market following the attacks of September 11, 2001. But the federal terrorism insurance backstop is set to expire on December 31, 2020. And as of this writing, there is still a lack of clarity surrounding the timetable for its renewal, which could present challenges for insureds. While there has been talk about the possibility of a draft bill before the end of the year, and hearings have already commenced, historically an extension or reauthorization has only been addressed by Congress close to the expiration date.

Many members of Congress agree that TRIPRA remains essential to the health of the insurance market and Marsh & McLennan Companies colleagues continue to advocate for its reauthorization. However, the closer we get to TRIPRA’s expiration without an extension or reauthorization commitment, the more we expect that insureds could start to feel repercussions as they renew their workers’ compensation programs.

Given the uncertainty about TRIPRA’s future, insurers are expected to start evaluating their books of business, and we anticipate that some will start considering limiting their underwriting of workers’ compensation. Unlike other lines of business, insurers cannot exclude terrorism-related losses from their workers’ compensation policies and in most states employers are required to purchase these policies. Thus, the closer we get to TRIPRA’s expiration, the more limited the options available to buyers become as rates for available programs increase.

Employee Concentrations Potentially Problematic

The issue of employee aggregation — an insurer’s cumulative insured employee concentration in a particular geographic area — is of particular importance and affects any business with a large number of employees in a single location or campus. Hotels, hospitals, financial institutions, higher education entities, professional services firms, defense contractors, and nuclear power companies often face this challenge.

Before the September 11, 2001, attacks, insurers monitored workers’ compensation aggregations to determine the potential impact of an earthquake on their book of business. However, after the terrorist attacks, workers’ compensation insurers and reinsurers shifted their focus on employee concentration in large cities that were considered high-risk terrorism targets. Insurers remain focused on this issue, using increasingly sophisticated modeling tools to produce detailed worst-case loss scenarios. These include modeled losses so large that they would prompt insurers to reconsider writing specific risks without the federal backstop provided by TRIPRA.

All this has increased underwriting scrutiny. Insurers that are writing multiple lines of business — for example, workers’ compensation and property — must consider the impact from a potential terrorist attack across all correlated lines.

Due to their state-regulated and statutory nature, workers’ compensation policies differ from other commercial insurance policies. They do not include policy limits or limitations or exclusions for terrorism losses, so potential insurer exposure to large workers’ compensation incidents is unlimited. However, insurers can reduce their aggregate terrorism exposure by limiting the amount of capacity they deploy in certain geographical areas.

Preparing for Potentially Challenging Renewals

For policies effective on or after January 1, 2020, insurers are underwriting workers’ compensation policies that contemplate coverage without the potential financial protections provided by the federal backstop. This presents challenges for some buyers, especially ones in high-profile industries, with large employee concentrations, or in some major cities. These employers are more likely to experience increased rates and premiums if uncertainty surrounding TRIPRA’s renewal persists in 2020.   

In the past, insurers have attached endorsements to their policies, including NCCI endorsement WC000114, which states in part that:

“The premium charge for the coverage your policy provides for terrorism or war losses… may continue or change for new, renewal, and in-force policies in effect on or after December 31, 2014, in the event of TRIPRA’s expiration, subject to regulatory review in accordance with applicable state law.

We expect some insurers to take similar action as TRIPRA’s expiration date looms. Others might take it a step further and set their policy expiration dates to coincide with the December 2020 expiration date.

In view of the current situation, it is imperative for insurance buyers to start the renewal process early — at least 120 days prior to the policy or program’s effective date. Risk professionals should also work with insurance advisors to develop communication strategies and presentation tactics surrounding key risk exposures in a bid to provide insurers with a differentiated view of their organizations’ terrorism risk profiles.

When discussing real estate plans — for example, consolidating multiple locations within a city or closing satellite locations and relocating employees in major metropolitan areas — employers should consider how increased employee numbers in fewer locations could affect workers’ compensation program pricing and capacity.

TRIPRA remains crucial for the health and stability of the terrorism insurance market. Employers will know more about the future of the federal backstop in 2020, but given the current uncertainty about its fate, it’s imperative that they prepare for potential challenges in renewals and consider ways to effectively manage their workers’ compensation risk.

SIDEBAR: Risk Data Crucial During Renewals

Before entering renewal negotiations, employers should make sure they have accurate and detailed information regarding their exposures and operations, and be prepared to provide this data to underwriters. Among other items, employers should present information about loss trends, safety programs, and risk management practices.

It’s important to keep in mind that insurers are already asking questions about terrorism risks, and are expected to increasingly do so amid uncertainty about TRIPRA’s future. Employers facing aggregation issues should expect to be asked for even more detailed information regarding:

• Employees’ marital and dependency status.
• Employees’ telecommuting and hospitality practices and their impact on concentration.
• Physical security measures, including the presence of guards, surveillance cameras, and information on parking areas and HVAC protections.
• Means to control access to the building.
• Details on the location of offices and their construction.
• Management policies on workplace violence, weapons, and employee screening.
• Employee security procedures.
• Emergency response and crisis management plans and procedures.
• Fire and life safety programs.
• Security staff.

Insurers and reinsurers are paying particular attention to catastrophe models. Organizations that have employees working multiple shifts or those operating in a campus setting can provide additional data to better reflect their actual exposure to a catastrophic loss at a specific time, thus helping to differentiate their risk. Information should include:

• The total number of employees working during peak shifts, which amounts to the actual exposure to a terrorist event.
• The actual buildings where employees are located.
• The percentage of workers who are outside of the office where payroll is assigned — either in the field or telecommuting. This information can significantly reduce the potential exposures associated with employee concentration.

For more information, visit marsh.com or contact your Marsh representative.