Originally published in Focus: On The Insurance Industry - Winter 2005

The Terrorism Risk Insurance Act of 2002 (TRIA) is currently set to terminate on December 31, 2005 unless it is extended by an act of Congress. As this article goes to press, it appears that TRIA is likely to be extended, although it may undergo significant changes from its current structure. This article provides a brief background on the debate over TRIA’s extension and discusses the current proposals for the extension of TRIA in the House and Senate.

Background of TRIA

The insurance marketplace was severely disrupted following the September 11, 2001 terrorist attacks. The threat of terrorism produced uncertainty as insurance underwriters and reinsurers limited or eliminated many forms of coverage for injuries and damage arising from terrorist attacks. This impacted a wide range of businesses that were not able to obtain adequate coverage for terrorism exposures arising from their commercial activities. In response, the federal government enacted TRIA, which was intended to stabilize the market and facilitate the development of a stand-alone private market for terrorism insurance and reinsurance.

TRIA requires insurers to offer terrorism coverage to their commercial policyholders and establishes a governmental reinsurance backstop for 90 percent of losses, to a cap of $100 billion, on events that cause total damage exceeding certain "insurer deductibles" that are based upon the insurer’s prior-year commercial property and casualty direct earned premium.

The TRIA Reauthorization Debate

There is little disagreement that TRIA worked, as capacity for terrorism insurance has increased and prices have decreased. The issues currently facing Congress and the industry are: (1) the extent to which the industry has the capacity to operate without a public backstop; (2) whether TRIA has interfered with the re-entry of reinsurers into the market; and (3) the appropriate role for the government in providing a backstop for insurance losses in the face of terrorist attacks.

With these issues in mind, industry members and associations began lobbying for the extension of TRIA last year in anticipation of January 2005 renewals. Although Congress failed to act at that time, industry representatives have continued to press for TRIA’s extension, arguing that the private insurance market cannot effectively operate without some form of public backstop against catastrophic terrorism losses.

Meanwhile, the United States Department of the Treasury (Treasury Department) emphasizes its position that TRIA is a temporary program, and opposes the extension of TRIA in its current form. In a report released on June 30, 2005, Treasury Secretary John W. Snow indicated the Treasury Department’s position that any reauthorization of the program must reduce the number of covered lines, increase industry deductibles, substantially increase the threshold for certifying an event as covered, and expire in a relatively short time. Specifically, the report suggested increasing the size of a triggering event to $500 million, and added that commercial auto, general liability, and other smaller lines should be excluded from the program.

The Senate Proposal

As this article goes to press, the Senate Banking Committee is preparing legislation for floor action in the Senate that would extend TRIA through December 31, 2007. The legislation would increase the size of a terrorist event needed to trigger the public backstop to $50 million in insured losses in 2006 and $100 million in losses in 2007.1 Similar to the existing TRIA program, the government would provide reinsurance for 90 percent of losses in 2006 (85 percent in 2007),2 to a cap of $100 billion, after the exhaustion of insurer deductibles equal to 17.5 percent of an insurer’s direct earned premiums over the immediately preceding calendar year in 2006 and equal to 20 percent in 2007.3 The bill also calls for an industry-wide aggregate retention of $17.5 billion in 2006 and $20 billion in 2007, such that any federal payments within this industry retention level exceeding insurer-paid deductibles and 10 percent quota shares (15 percent in 2007) would be subject to recoupment by the federal government in the form of premium surcharges.4

The House Proposal

The House Financial Services Committee also has drafted legislation renewing TRIA until at least December 31, 2007, and under certain circumstances, through December 31, 2008.5 Like the Senate bill, the House bill would increase the size of a terrorist event needed to trigger the public backstop to $50 million in insured losses in 2006 and $100 million in losses in 2007.6 The trigger would increase by $50 million per year in each successive year that coverage is provided under the program.7

Unlike the Senate bill, the House bill substantially changes the structure of the insurer-paid deductibles by creating "silos" in which individual lines of coverage are segregated and subject to different deductibles before the federally financed backstop is reached. The deductibles would be set based upon Congress’ perceived level of risk posed by the different lines of coverage. Thus, the insurer deductible for worker’s compensation would be 16 percent, property insurance would have a 20 percent deductible, casualty insurance would have a 25 percent deductible, and group life (not covered in the original version of TRIA) would have a 21.5 percent deductible.8 Deductibles would be lower across all lines for terrorism losses caused by an act of terrorism involving nuclear, biological, chemical and/or radioactive reactions, releases, or contaminations.9 The bill calls for deductibles on all lines to increase from two percent to five percent in each successive year that coverage is provided under the program.10

The actual federal share of insured losses above the insurer-paid deductible would be determined by the size of the terrorist event. The federal share would be based upon a sliding scale that would range from 80 percent for aggregate industry insured losses of less than $10 billion, 85 percent for losses between $10 billion and $20 billion, 90 percent for losses between $20 billion and $40 billion, and 95 percent for losses above $40 billion.11 As in the original version of TRIA, the government will not provide coverage for aggregate insured losses in excess of $100 billion.12 Insurers would have to recoup any payments they received from the backstop by charging a policyholder surcharge that would be capped at three percent per year.13

The Future of TRIA

As shown by the differences between the House and Senate proposals, the question of how best to facilitate a viable market for terrorism insurance and reinsurance is far from resolved. Both the House and Senate bills call for the formation of a commission/working group to consider the issue and to propose long-term solutions to terrorism coverage. However, for the present, it appears likely that the differences between the two bills will be resolved in conference, and that TRIA will be extended in some form for at least an additional two years.

Footnotes

1 S. 467, 109th Cong. § 3(a) (as reported by S. Comm. on Banking, Housing, and Urban Aff., Nov. 16, 2005).

2 Id. § 4.

3 Id. § 3(d).

4 Id. § 5.

5 H.R. 4314, 109th Cong. (as reported by H. Comm. on Fin. Services, Nov. 16, 2005).

6 Id. § 103(e).

7 Id.

8 Id. § 102.

9 Id.

10 Id.

11 Id. § 103(e).

12 Id.

13 Id.

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