US Treasury seeks comment on capital market support for NBCR/cyber terrorism

The Federal Insurance Office (FIO) of the United States Department of the Treasury is seeking industry input and feedback on how reinsurance and retrocession available in capital markets can be useful for terrorism-related risks.

This is the latest initiative to gather input and feedback from insurance and reinsurance industry players as well as other stakeholders, on the operation of the terrorism risk insurance program ( TRIP).

It was created under the Terrorism Risk Insurance Act of 2002 (TRIA), which requires participating insurers to offer insurance for losses resulting from acts of terrorism, as well as to provide a net federal government reinsurance-type security.

Now, a report on the effectiveness must be submitted to Congress by June 30, 2022, and FIO is seeking industry input on some key issues related to the Terrorism Insurance Program (TRIP).

Some of these questions are relevant to the insurance securities market (ILS), as well as sources of reinsurance capital in capital markets.

Specifically, FIO’s Steven E. Seitz is seeking industry input and feedback on two key areas of terrorism insurance risk, nuclear, biological, chemical, or radiological (NBCR) coverage and cyberterrorism coverage. .

FIO invites comments on:

The availability of terrorism risk insurance coverage for losses resulting from nuclear, biological, chemical or radiological (NBCR) exposures, and the availability of reinsurance or financial market support for such terrorism risk insurance;

and

The availability of reinsurance or capital markets support for cybersecurity-related losses resulting from acts of terrorism as defined by the TRIA.

The specific mention of capital market support in both cases is likely a direct reference to insurance-linked securities (ILS) structures, such as catastrophe bonds, and whether they can provide reinsurance capacity. and additional retrocession to support the TRIA and TRIP terrorism insurance programs to help provide more capacity and support to insurers underwriting these risks.

This is a topic that has come up in the past, with inquiries into how capital markets could provide additional capacity to support TRIA and TRIP having already taken place.

We have written many times about the challenges in providing adequate cyber insurance, with a lack of reinsurance and retrocession capacity, two issues that are holding back the development and growth of the cyber market.

This has also been true for NBCR terrorism exposures, where the traditional market has not always had the reinsurance or retroactive capacity to absorb all the risks that might be generated and insurers have therefore been prevented from offering as much coverage as they would like.

It appears that the FIO would like to see these terrorism insurance products become more readily available and recognizes the need for greater reinsurance capacity to support them, as well as the ability for capital market investors and ILS funds to play a role here.

Of course, we have priority here thanks to two catastrophe bonds sponsored by Pool Re, the UK government-backed terrorism reinsurer.

Pool Re has secured retrocessional reinsurance capacity in the capital markets through its Baltic PCC catastrophe bond deals, the second of which was issued this year.

These contain an element of exposure to cyber-terrorism and NBCR, or CBRN as Pool Re calls it, demonstrating that capital markets have an appetite for these risks in a well-structured and securitized format.