The World According to TRIPRA

Passage of federal terrorism insurance extension buys another seven years for industry to find a long-term solution

Many in the insurance industry breathed a cool sigh of relief when just five days before the Terrorism Risk Insurance Act was set to expire on Dec. 31, 2007, President George Bush signed into law legislation that reauthorizes the federal backstop for another seven years.

Supporters of extending the federal terrorism insurance program launched a dutiful campaign throughout 2007 as two versions of the extension legislation made their way through Congress. While the White House had threatened a veto of an earlier House-passed 15-year extension of the program, it said it would support the scaled-back Senate version of the program. The Congressional Budget Office estimated the House version would cost the government more than $8 billion over 10 years.

Key provisions of passed legislation, HR 2761 or the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007 will:

• Extend the current program for seven years;
• Eliminate the distinction between foreign and domestic acts of terrorism by removing the requirement that such acts be committed on behalf of any foreign person or foreign interest;
• Retain the insurer deductible level of 20 percent of direct earned premium for insured terrorism losses;
• Continue the current “make available” provision for acts of terrorism as defined by the act;
• Continue the current level of federal compensation and insurer co-pay at 85 percent and 15 percent, respectively;
• Maintain the current $100 million aggregate industry loss to trigger coverage; and
• Require the U.S. General Accountability Office (GAO) to conduct two studies. One study will address the issue of providing terrorism insurance coverage for nuclear, biological, chemical or radiological (NBCR) events and how best to expand such coverage; and the other study — to be completed in six months — will examine the issue of high-risk areas in the United States that are faced with unique capacity constraints.

The bill also makes adjustments to the current mandatory recoupment requirements of the TRIA program through the use of accelerated policyholder surcharges during the first four years of the seven-year extension (2008-2012).

Other provisions that did not make it into the final bill but were originally in the House version were the inclusion of NBCR coverage within the “make available” provision; inclusion of group life as a covered line of insurance; a provision for a “reset mechanism” for significant attacks that would have lowered the deductible for insurers affected by an event exceeding $1 billion in insured losses; and a reduction of the aggregate loss required to trigger coverage to $50 million instead of $100 million.

Industry trade groups praised the bill’s passage and said had the back-stop expired that businesses and the economy overall would have suffered.

“This seven-year extension brings unprecedented certainty and stability to the terrorism insurance market and keeps in place an extremely successful and important public/private partnership that helps commercial insurance buyers and the entire economy protect themselves from the financial devastation of a future terrorist attack,” said Joseph Annotti, senior vice president of the Property Casualty Insurers Association of America, in a written statement.

Gov. Marc Racicot, president of the American Insurance Association, in a written statement, said: “Since its enactment in 2002, TRIA has been critical to businesses throughout the nation that have relied upon the program for the stability and certainty it provides the private marketplace. The seven-year extension included in this bill will help remove the risk, uncertainty and instability in the market and will foster long-term investment and economic growth.”

World Without TRIA

Prior to TRIA, terrorism insurance pricing was non-competitive and it was very difficult to manage terrorism risk in such an environment, said Janice Ochenkowski, Risk and Insurance Management Society (RIMS) president and managing director of Jones Lang LaSalle Inc.

“The market conditions were not good,” Ochenkowski said. “The coverage limits were lower than required by most businesses,” she added. If the extension had not passed, Ochenkowski feared the market would return to those pre-TRIA days. “I can’t say with any certainty that that would have happened again but that’s what happened after 9/11 when we didn’t have TRIA.”

Sharon Emek, past chair of the board for the Independent Insurance Agents and Brokers of New York, and partner at New York City-based CBS Coverage Group, said a failure to have a federal terrorism insurance program would have negatively affected the economy.

Without TRIA, “construction would stop in major cities or it would have become even more expensive,” Emek said.

“First of all, a lot of business would become in violation of their covenants with their banks which requires them to have terrorism insurance,” she noted. In addition, there continues to be very little capacity in the marketplace for terrorism coverage so without the federal terrorism program businesses would be forced to pay very high prices for coverage, or would not be able to purchase coverage at all.

“That would stop some long-term construction, and once that stops, less people work, there’s less money in the economy … it has a whole ripple effect,” Emek added.

While small businesses, especially those in areas of the country not typically thought of as a high-risk target for terrorist attacks, may view TRIA as a non-issue, they are still at risk, Emek said.

“It might not affect small businesses immediately,” she said, “but for those businesses who want to have terrorism, for small- and medium-sized businesses, they wouldn’t be able to get it at all because they wouldn’t be able to afford to buy it; it probably wouldn’t be available.”

Emek noted that a world without TRIA would affect much more than construction risks. Terrorism coverage impacts any business in terms of business interruption coverage, she said.

“One of the biggest issues that became more clear after 9/11 was that if you have a terrorist act, you might not have your physical property destroyed but it doesn’t mean that you are able to do business,” Emek said. “It took years for people to move back to downtown Manhattan. It could take months until you could get back to work, or your client base doesn’t move back.”

Businesses across the country could be impacted as well.

“You may have a supplier whose goods you rely on, and they are in the area of the terrorist attack and they can’t get you your goods; that could affect your business income,” Emek added. “So it really could reverberate across the entire country. … It really affects small business, any size business across the country.”

A World With TRIA Costs Less

At least one major study says that taxpayers save money and businesses are better protected with the Terrorism Risk Insurance Act (TRIA) in place than if the act were to expire.

“Overall, TRIA improves the functioning of private insurance markets and ultimately saves the taxpayers money because it transfers risk for the largest terrorist attacks to the government,” said Lloyd Dixon, a RAND Corp. economist and co-author of the study, “The Federal Role in Terrorism Insurance.”

“In return, the insurance industry is able to play a larger role in compensating losses caused by smaller, and more likely, attacks,” said Dixon.

The RAND analysis found that TRIA allows the insurance industry to play a larger role in compensating losses caused by smaller — and presumed more likely — terrorist attacks.

The study, which was published in October 2007, was the first to consider the effect of TRIA on government assistance for uninsured losses after an attack. The study claimed that taxpayers are better served if TRIA remains in effect.

The RAND study compared the performance of the TRIA program and several alternative government interventions in the market for terrorism insurance over a wide range of scenarios.

For conventional attacks resulting in less than $40 billion in property and workers’ compensation losses (which is larger than 9/11), TRIA typically reduces taxpayer cost because government outlays through the program are more than offset by reductions in government compensation for uninsured losses after an attack. TRIA also increases the role the insurance industry plays in providing compensation for such attacks, as opposed to the role of insurance without TRIA in effect, according to the study.

Because the probability of a large attack is assumed to be far lower than the probability of smaller attacks, that is, those below $40 billion in damages, TRIA can offer benefits while reducing average annual taxpayer costs, RAND reported.

The study also found that taxpayers and policyholders could also benefit if the law were expanded to better address nuclear, biological, chemical and radiological (NCBR) attacks. Dixon said a gap remains in the nation’s ability to manage terrorism risk because the coverage for nuclear, biological, chemical, and radiological attacks is rarely available even with the current TRIA program.

However, insurers have been divided on the issue of whether to mandate “make available” coverage for NBCR attacks, a provision that was hotly debated in the House version of the extension legislation, but was ultimately removed from the passed bill.

PCI stated that such a requirement would inhibit participation by many small- and medium-sized insurance companies, and limit competition and consumer choice.

The AIA and the Coalition to Insure Against Terrorism (CIAT), a group of large policyholders, had supported NBCR coverage in the House bill.

Ochenkowski added that while RIMS’ members supported the expanded House version, “we can certainly live with the Senate version.” She noted that among the more interesting provisions that didn’t make it into the Senate bill was the provision that required a blue ribbon study panel to explore the long-term availability of coverage and the impact of the TRIA program itself.

“We felt it would be an excellent way to help craft a long term response to the terrorism issue,” Ochenkowski said.

Nevertheless, she added that the distinction between foreign and domestic terrorism was one very important provision in both the House and the Senate bill that made it into the final legislation.

“I think that was a very important step forward and a very positive change from the previous bill,” Ochenkowski said.

Even so, she added, “we were happy with the previous bill and we are happy with the extension. And we think as it continues to add stability to the insurance marketplace and allow our members to manage corporate risks in a responsible fashion.” That’s precisely what the country needs from the government, she said.

Topics Catastrophe Legislation Profit Loss Market