House Approves Terrorism Insurance Backstop Extension

September 20, 2007

The House of Representative approved by a vote 312-110 H.R. 2761, the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA), legislation that extends and revises the federal terrorism insurance backstop for 15 years. The current federal terrorism insurance backstop is set to expire at the end of the year.

Although the bill received bipartisan support in the House, its fate in the Senate is less certain and the White House has threatened a veto.

The bill, sponsored by Rep. Michael Capuano (D-Mass.) and House Financial Services Committee Chairman Barney Frank (D-Mass.), is critical to maintaining affordable and available terrorism coverage, according to industry supporters.

“The Big ‘I’ strongly supports the continuation of a terrorism insurance backstop,” says Independent Insurance Agents & Brokers CEO Robert A. Rusbuldt. “This legislation is crucial for the business customers of independent agents and brokers and for our nation’s economic security.”

The bill would extend the federal backstop on a long-term basis (15 years) and lowers trigger levels for federal aid to kick in to $50 million. Under the current TRIEA, federal aid is triggered at $100 million. In addition, the new legislation would add coverage for nuclear, biological, chemical and radiological (NBCR) events. The bill also extends coverage to so-called “domestic events” for the first time, meaning terrorism acts perpetrated by U.S. citizens as well as those from foreign countries and adds protection for group life insurers. The bill also provides for the creation of a blue-ribbon commission to propose long-term solutions to covering terrorism risks.

“This is a very significant step toward extending the terrorism backstop on a long-term basis – a priority for our members,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “We applaud the House for taking action and urge the Senate to take action on extension legislation as soon as possible.”

PIA National President Donna Pile says that insuring terrorism risk is not a task that the private market can handle on its own. “Terrorism insurance is an important part of our nation’s economic safety net because it allows insurers to manage terrorism risk in a cost effective manner,” Pile said. “It remains difficult, if not impossible, for underwriters to accurately determine premiums based on sound actuarial calculations. Insurers are unable to accurately predict the frequency or severity of loss to effectively spread risk.”

Pile noted that it is important for Congress to act soon to extend TRIEA past its scheduled Dec. 31, 2007 expiration date, especially since insurance renewals for next year are already being sent out.

Presidential veto promised
The Bush Administration has said that the federal backup for terrorism reinsurance should be phased out in favor of a private market for terrorism insurance and “strongly opposes efforts to expand the federal government’s role in terrorism reinsurance.”

The Office of Management and Budget said that if the Terrorism Risk Insurance Revision and Extension Act of 2007, H.R. 2761, is sent to President Bush as currently written, his senior advisors would recommend that he veto the bill.

The administration has set forth three conditions for the White House to accept an extension of TRIA: the program should be temporary and short-term; there should be no expansion of the program; and private sector retentions should be increased.

The OMB said that extending the program and adding “insurance coverages to the federal reinsurance backstop sends the wrong signal to the marketplace, which instead should be encouraged to find new ways to diversify the risks of doing business.”

The administration also opposes the bill’s increase of the government’s share of private insurance losses from nuclear, biological, chemical, and radiological (NBCR) events by reducing insurance industry deductibles and reducing co-payments for NBCR losses. In addition, the OMB says that the “make available” mandate for NBCR coverage “could have a negative impact on the provision of terrorism risk insurance coverage for non-NBCR acts of terrorism.”

Furthermore, the administration believes that private sector retentions should be increased, not decreased. The administration opposes provisions that lower the program trigger level from $100 million; maintain or decrease insurance industry retention levels; and restructure the program’s cap in a way that increases the federal government’s share without a matching increase in the private sector’s share.

“These provisions would have the effect of reducing or limiting private participation in the program while at the same time increasing taxpayers’ exposure,” OMB maintains.

The administration also opposes the bill because of the potential cost of the legislation. In 2006, the Congressional Budget Office scored the previous two-year extension of the program at a 10-year cost of $1.4 billion and has recently scored H.R. 2761 at a 10-year cost of $10.4 billion.

OMB said the administration is “willing to work with the Congress as the bill moves through the legislative process so that H.R. 2761 meets the critical elements of an acceptable extension.”

Source: IIABA, PIA

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