Congress faces a packed agenda this year. Deficit reduction, immigration reform and gun control will dominate the agenda. But another issue must be added to the docket — reauthorization of the Terrorism Risk Insurance Act because of its importance to the nation’s economic security. The bombing in Boston — and the tragic loss of life and damage to property there — only reinforces that need.
Policyholders, insurers, brokers and agents must make clear to members of Congress that continuation of terrorism insurance is essential for businesses of all sizes.
The program was created with the Terrorism Risk Insurance Act in November 2002. It was reauthorized in 2005 and 2007, providing stability to an uncertain insurance marketplace in the wake of the horrific attacks of Sept. 11, 2001. If Congress does not act by the end of next year, the program will expire. While it may seem early to be talking about this deadline, time is of the essence. Insurance policies written as early as next January will be impacted if no resolution is in sight. Such uncertainty would be harmful to policyholders, the insurance market and the broader economy.
The program has worked. Over the past decade it has made it possible for brokers to sell — and for businesses to purchase — terrorism risk coverage which had previously been unavailable or severely limited. This coverage has become an unfortunate necessity in the modern world. While terrorism is usually thought of as a problem only for metropolitan areas, the ever-changing nature of the threat — and the increasing terrorist interest in military and infrastructure targets — has meant that Middle America must also be vigilant.
National security intelligence rightly remains in the hands of the government which means that terrorism does not meet the core characteristics of a privately insurable peril. For this reason, the terrorism risk insurance program has become fundamental to the long-term viability of businesses large and small. Without it, these enterprises would simply be unable to adequately protect their assets and investments against the threat of a major terrorist attack.
When the program was first established, Congress insisted on limiting the exposure of taxpayers to losses. The insurance industry agrees with that premise and over the years has assumed significant increased financial exposure, as its share of losses has risen and the program has shed insurance lines that could be effectively managed without federal government participation.
Currently, the program has an event trigger of $100 million in aggregate industry insured losses that must be met before federal funds can be used to cover losses — an amount that has grown substantially since the law was enacted. Beyond the trigger, each insurance company has a significant deductible of 20 percent of its program covered commercial lines premiums, as well as responsibility for 15 cents for every dollar of its insured losses above that deductible (up to the program’s $100 billion annual cap).
The industry aggregate retention is nearly $40 billion — a dramatic increase from the program’s initial retention. Additionally, if total insured losses do not add up to at least $27.5 billion, the federal government would be required to recoup the difference through a surcharge on covered commercial policies. While these details may seem arcane, they are important because they demonstrate the evolution of the terrorism risk insurance program, what the industry has learned, and the many taxpayer protections it now contains.
For the sake of our national economic security, the terrorism risk insurance program must be continued. Through the efforts of the Coalition to Insure Against Terrorism and other grassroots organizations, we look forward to working with members of Congress from both sides of the aisle to secure the extension of this successful program. The voice of policyholders, insurers, brokers and agents will be essential to these efforts.