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.

A Race against the Clock to Address TRIA Issues

Failure by the Senate to reauthorize the Terrorism Risk Insurance Act (TRIA) has left unanswered questions for insurance buyers facing renewals on terrorism coverage—which some in the insurance industry are scrambling to answer.

Because TRIA renewal was recently passed by a majority in the House of Representatives, the industry was optimistic about its renewal before its expiration. But at this point, the Dec. 31 deadline looms large.

AIR-Worldwide explained in an email notice that commercial insurers will no longer be required to offer terrorism coverage beginning Jan. 1. Without a federal backstop, they said, insurers may seek to limit underwriting for high concentrations of risks in major cities. This could cause terrorism insurance coverage to become unavailable or unaffordable.

AIR continued:

Insurers that do continue to offer commercial terrorism insurance would likely be required to maintain higher capital standards in order to avoid negative rating implications. Where coverage for terrorism-related events is still available, prices for this coverage will increase.

In the absence of TRIA, the workers’ compensation insurance market would be particularly vulnerable to terror attack losses. State workers compensation statutes offer insurers less flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions. With or without TRIA, it is mandatory for U.S. employers to provide workers’ compensation coverage. If coverage is not available, employers may be forced to purchase insurance in the residual markets or self-insure. This could result in large amounts of risk being transferred to the residual market in a few states.

Allowing TRIA to expire would have widespread implications, not only for the insurance industry, but also for the broader economy. Construction and real estate business sectors may be unable to obtain financing without adequate terrorism coverage in place. If insurers limit underwriting following an expiration of TRIA, businesses with high concentrations of employees could have difficulty obtaining coverage for workers’ compensation, including higher education institutions, hotels, airports, hospitals, and financial services, among many others.

In an advisory to its clients, Willis addressed considerations and offered preliminary guidance.

The broker noted several scenarios, depending on how a company has organized its terrorism risk transfer program:

• For terrorism coverage that is currently embedded in all-risk property, liability and workers compensation programs there are three potential scenarios:

1. If there are no sunset clauses–contract provisions which may allow the insurer to exclude coverage for terrorism in the event that TRIA is not reauthorized–or reservation of rights clauses related to TRIA expiration, the program will run until its natural expiration. Market disruption may impact renewal pricing if no action has been taken on TRIA.

2. If there is a TRIA-related sunset clause, the terrorism coverage will expire after Dec. 31. Policyholders should assess the need for insurance coverage and seek stand-alone coverage or a sunset clause extension.

3. If there is a reservation of rights which allows carriers to modify the terrorism coverage as a result of TRIA expiration, a coverage extension should be negotiated if possible, and stand-alone alternatives should be sought.

Stand-alone Terrorism coverage – In this case, Willis said it does not anticipate immediate changes due to TRIA’s expiration. This is because most stand-alone placements do not have sunset clauses or reservation of rights endorsements related to TRIA expiration. While there may be market disruption to consider at renewal, for the time being, TRIA is a non-issue for these placements.

Captives – In all cases where it places terrorism reinsurance behind a captive program, Willis said the reinsurance arrangement this year has been organized to convert from quota share reinsurance of the captive—when a primary insurer and reinsurer establish a fixed percentage for sharing amounts of insurance, premiums and losses—to primary reinsurance of the captive (in anticipation of TRIA’s expiration). Reinsurance coverage agreements should be read carefully to determine the new limit. The new primary limits are likely to approximate their existing quota share capacity. Willis recommends that any capacity that does convert should remain as reinsurance of the captive. This would maintain captive involvement, should TRIA be reauthorized in early 2015, and avoid any direct self-procurement or frictional costs during the transition. A program may also include excess capacity which, in many cases, should drop down to provide excess over revised captive limits, Willis advised.

Insurance Industry Encouraged About TRIA Renewal

The House Republicans’ proposed bill to extend the Terrorism Risk Insurance Act (TRIA), set to expire at the end of this year, is “encouraging,” but there are also concerns, insurance industry experts say.

Representative Randy Neugebauer (R-Texas) introduced the TRIA Reform Act of 2014 on June 17, which would modify and extend TRIA. TRIA provides a government backstop for insurers and reinsurers in the event of a catastrophic terrorist attack. The proposed bill would extend the program for five years and make insurers more active participants in the market, according to American Banker. The proposed bill also distinguishes attacks that are nuclear, chemical, biological or radiological (NBCR) from other terrorist attacks and increases the industry’s cost for conventional attacks.

Earlier in June, the Senate Banking Committee approved a bill that would extend TRIA for seven years, increase insurers’ co-pay for all attacks from 15% to 20% after a deductible, and increase the threshold for mandatory recoupment from $27.5 billion to $37.5 billion.

“The House bill is a very encouraging sign, especially because it comes on the heels of the Senate bill (S.B. 2244) a few weeks ago,” said Robert P. Hartwig, president and economist of the Insurance Information Institute. “Though the bills contain substantive differences, I think a compromise can and will be reached. Time is of the essence as the uncertainly in the markets is already causing disruptions in the form of exclusionary language and because it is an election year there are relatively few days left on the Congressional calendar.”

American Insurance Association (AIA) President Leigh Ann Pusey lauded introduction of the bill, saying that it “adds to the growing momentum behind TRIA’s reauthorization in both the House and Senate. We urge the Committee to swiftly mark up the TRIA Reform Act and move it to the House floor for a vote before the August recess.”

The new law would progressively raise the program’s threshold following conventional attacks from $100 million to $500 million. Insurers would make a 20% copayment after a deductible in the wake of a conventional attack, compared to 15% for NBCR attacks.

Hartwig noted that the insurance industry has some concerns related to the “bifurcation” of NBCR and non-NBCR risks. “Under the bill, non-NBCR risk would be subject to the increased trigger which would rise from its current $100 million to $500 million by 2019,” he said. “Likewise, there’s concern about the increase in the industry’s co-share from 15% to 20%. In both instances, the increase in the industry exposure to potential loss could result in reduced capacity, particularly capacity originating with smaller insurers. The bifurcation also adds an unnecessary layer of complexity to the process.”

In a statement, Pusey also expressed concern “with certain provisions of the bill that could lead to decreased market capacity. Most notably, the creation of a bifurcated approach for nuclear, biological, radiological and chemical (NBCR) attacks vs. conventional attacks falsely assumes that the insurance market operates based on the same distinctions.” She said that differentiation based on the type of event introduces “needless complexity, creating potentially adverse consequences under the program and insurance market capacity. We are also concerned about the steep increase in the program trigger and co-share, which could also lead to a reduction in capacity.”

Hartwig concluded that while the success of TRIA is “unambiguous, providing continuous benefits to the American economy at essentially no cost to taxpayers, the current resurgence of terrorism in Iraq reminds us that the threat of terrorism is omnipresent.”

He added that some TRIA opponents cite that the bill was originally designed as a temporary measure. “While that may be so, the past 13 years have demonstrated that the U.S. remains under constant threat. Last year’s Boston Marathon bombing made that crystal clear. Prior to the Marathon bombing there had been many unsuccessful terrorist plots—ranging from efforts to bring down airliners to bomb plots in several US cities.”

Neugebauer said he believes the TRIA Reform Act of 2014 will lead to a stronger private market, preventing U.S. taxpayers from making ongoing payments to support another federal program. The House banking committee will vote on the bill on June 18.