The US Terrorism Risk Insurance Act 2002 (TRIA)

Article by Simon Cooper and Carmel Walsh

Although Reinsurers are excluded from the provisions of TRIA, they will be indirectly affected, particularly on reinsurances of existing policies affected by TRIA.

In general terms, TRIA requires any insurer providing primary or excess insurance in a US State to offer coverage (via disclosure notices) in its property and casualty policies for losses from terrorism in the US on the same terms applicable to losses from other risks. Any terrorism exclusions in relevant policies are nullified. The insurer may charge additional premium.

The insurer is however eligible for compensation under the federal terrorism insurance programme, which provides a 90% quota share reinsurance cover for TRIA terrorism losses in excess of the insurer’s deductibles. The deductibles are expressed as an increasing annual percentage of the insurer’s directly earned premium from the prior year. The deductible is 1% of 2001 premiums for the balance of 2002, increasing to 7%, 10% and 15% in subsequent years.

Under TRIA, an act of terrorism is one which, in the aggregate, causes damage of $5million or more. An annual aggregate cap of $100 billion applies. Although participation is mandatory, an insurer can reinstate terrorism exclusions if the policy holder declines the cover or fails to pay the additional premium.

Various problems have been identified with TRIA, some of which have implications for the reinsurance market. These need to be ironed out by insurers (receiving some guidance from US Treasury bulletins) whilst the notification compliance period runs. The following are but a few that we can identify;

• There is expected to be a lack of experience in rating US terrorism risk which may not be assisted by new terrorism pricing models which have received some criticism.

• Federal compensation is only for 90% of the insured losses, after each insurer has paid a hefty deductible. The deductible is calculated by deeming qualifying affiliates and subsidiaries as one insurer. A small insurer which is part of a major group may therefore face an enormous deductible leaving it with serious exposure.

• It is possible that the AP charged by insurers can be deemed excessive by the US Treasury. Even if not excessive, any increase in TRIA premium will increase total premium which would inflate the insurer deductible for the following year.

• The AP may lead some Lloyd’s Syndicates to exceed their premium income limits and in their aggregate, will form substantial exposure to US terrorism losses for the Lloyd’s market.

• Capacity for reinsurance of the deductibles and 10% compensation shortfall is not certain.

• Each reinsurance contract for underlying contracts affected by TRIA will need to be analysed to determine whether it contains specific provision for a change of law/nature of risk or whether general wordings (incorporation clauses, follow the settlements/fortunes) will be sufficiently wide to include underlying TRIA coverage.