Congress Overwhelmingly Passes TRIA Bill

After a last-minute failure by the Senate to pass the Terrorism Risk Insurance Act (TRIA) in December, the bill was overwhelmingly passed by the Senate on Jan. 8, with a vote of 93 to 4. The House of Representatives had voted 416 to 5 to pass TRIA in December. The bill now awaits President Obama’s signature.

H.R. 26, which is the same as last year’s amended S. 2244, reauthorizes TRIA through the end of 2020. Under the six-year extension, starting in 2016, there will be phased-in increases to the program’s trigger, raising it from $100 million to $200 million in annual aggregate insured losses, and the insurer co-share will be raised from 15% to 20%. The bill also phases in an increase in the aggregate amount of insured terrorism losses that must be borne by the private sector from the current $27.5 billion to $37.5 billion. Taxpayer dollars to fund those losses would be recouped post-event.

Several industries were quick to praise TRIA’s passage, as the Senate’s failure to reauthorize the Terrorism Risk Insurance Act in December left insurance buyers facing renewals on terrorism coverage with unanswered questions.

The Commercial Real Estate Development Association (NAIOP) praised the bill’s passage, saying, “This is sound policy because it enables insurers and private sector capital to provide coverage for losses that otherwise would fall upon the taxpayer. This vital security blanket could help save billions of dollars that would otherwise be spent in the aftermath of a terrorist attack. Renewing TRIA for six years represents a major victory for the commercial real estate industry and the millions of jobs and economic growth it supports. Today’s vote gives developers the peace of mind to invest in an industry that contributed $376 billion to GDP last year, supported 2.8 million jobs, and produced $120 billion in personal earnings.”

The Coalition to Insure Against Terrorism (CIAT) said in a statement, “CIAT members are pleased the Senate has acted quickly to approve TRIA reauthorization as one of the first orders of business in the new Congress. We commend Majority Leader McConnell and Minority Leader Reid for their leadership in seeing this critical legislation through to completion, and are encouraged by the strong bipartisan support for reauthorization in both chambers.”

Marsh & McLennan said it “applauds the new Congress for its swift reauthorization of this critically important public-private partnership, which will help to ensure a reliable marketplace for terrorism coverage in the event of attack. We are pleased that TRIPRA directs the Treasury Department to review the protocols for certification which would help to protect the nation’s economic security in the event of a terrorist attack.”

Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA), said in a statement that the “terrorism risk insurance program will remain in place protecting our nation’s economy, policyholders and taxpayers. Congress’ timely reauthorization of TRIA will preserve a well-functioning private terrorism insurance marketplace.” She added, “As with previous TRIA reauthorizations, the primary responsibility for financial recovery is placed on the private sector in all but the most catastrophic of events.

“Congress’ bipartisan action on TRIA this week will help ensure the continued availability of terrorism risk insurance, providing stability for the broad range of businesses of all sizes that depend on this essential coverage,” noted the National Association of Real Estate Investment Trusts (NAREIT). “We strongly urge President Obama to sign this legislation into law at the earliest opportunity.”

ISO announced that it is filing revised terrorism forms in response to passage of the act. The revised forms will be for insurer use in most states shortly after President Obama signs the bill, known as the Terrorism Risk Insurance Program Reauthorization Act of 2015.

Key Differences Remain Between House and Senate on TRIA Extension

As the December 31, 2014 expiration of the Terrorism Risk Insurance Act inches closer, both chambers of Congress are moving forward with their version of a long-term extension. The Senate is expected to pass its version of an extension as early as Thursday while the House Financial Services Committee approved its version of an extension along party lines on June 20th. The House proposed extension would make substantial changes to TRIA that can be seen in the following table:

House Republicans Draft TRIA Proposal Could Mean Big Changes to Come

Last week, Rep. Randy Neugebauer (R-TX), Chairman of the House Insurance Subcommittee, released to his fellow Republicans a draft proposal to extend the federal terrorism insurance program. That proposal, now made public, would bring drastic changes to a program that has helped to stabilize the market since its 2002 creation. At this point, the proposal is only in outline form with bill language expected over the next few weeks.

The proposal, entitled the Terrorism Risk Insurance Modernization Act of 2014, would extend the TRIA program for only three years while significantly increasing the program trigger limit to $500 million from $100 million, for non-NBCR events, and reducing the annual government assistance cap from $100 billion to $75 billion. The government’s co-share of losses would decrease from its current 85% to 75% beginning in 2017, for non-NBCR events. The government’s responsibility and trigger would remain the same for NBCR certified acts.

The industry has been expecting adjustments to be made to TRIA, upon its extension; however, the numbers included in the Republican proposal are more drastic than many envisioned. Beyond concerns with the changes to the program trigger and co-share percentages, there are additional concerns with language in the proposal allowing for small insurers to opt-out and an implication that domestic terrorism events would no longer be covered by the program. The requirement that insurers offer terrorism coverage is the backbone of the program, and allowing some insurers to opt-out of offering such coverage could lead to reduced capacity and higher prices for consumers. Excluding domestic terrorism would also be a mistake, as history has shown us that terrorists can come from inside and outside the United States.

If there is a positive in the House Republican proposal, it is in changes to the certification process. Many industry groups, including RIMS, have been asking for a timeline for events to be certified as “acts of terrorism.” The proposal includes a deadline of 90 days.

The House Republican proposal is a far cry from the recent Senate agreement. That bi-partisan legislation, S.2244, would extend the program for seven years while making much smaller adjustments to the program. If both chambers pass bills along current lines, then the conference committee would have a lot of work to do in order to rectify the two pieces of legislation into a compromise extension.

TRIA Is Not a Government Bailout

The following is an excerpt from the RIMS executive report “Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective.” The report is available for download here.

Much of the skepticism surrounding the need for the Terrorism Risk Insurance Act (TRIA) stems from nega­tive perceptions of the government bailouts handed out to various finan­cial institutions in 2008-2009 and the view that TRIA is a similar bailout for the insurance companies; TRIA, however, differs significantly in that the government’s role in TRIA is to act as a reinsurer, and not as a major creditor as was the case with the financial institution bailouts.

Reinsurance is a risk management tool that allows the primary insurer to shift certain risks to the reinsurer to reduce volatility, allow coverage of large risks and to free up capacity for the insurer. With TRIA the govern­ment is essentially acting as reinsurer. The government assumes some of the market terrorism risk and agrees to pay a portion of the losses over the $100 million threshold discussed earlier. The ability of the private market to shift some of the risks to the government in the event of a loss frees up capacity for the insurers, which is then made available to the consumer. Without the government acting in a reinsurance capacity, the private market would be forced to assume the entire risk, which would likely lead to little or no capacity at higher prices, particular in high risk areas.

It is important to note that the program only costs the government money in the event that the $100 million + 20% deductible threshold is reached. If losses remain below this level in any given year, then the private market is responsible for the entirety of those losses. Since TRIA’s enactment in 2002 the government has not made any expenditures outside of minimal administrative costs associated with setting up the program.

If the $100 million + 20% deductible threshold is reached, and the gov­ernment begins to pay its share of losses, there is a mechanism in place for the government to recoup those expenditures. In the years follow­ing the federal sharing of losses, but prior to September 30, 2017, the Secretary of the Treasury is required to institute a surcharge on insur­ers to recoup 133% of the claims paid by the government. This man­datory recoupment does not apply if the insurance industry’s aggregate uncompensated losses exceed $27.5 billion; however, the Treasury Secre­tary does retain the authority to apply a surcharge at his/her discretion.