The Terrorism Risk Insurance Act, which was initially enacted in 2002, and amended by the Terrorism Risk Insurance Revision and Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) (collectively, including both amendments, TRIA), is currently set to expire on Dec. 31, 2014.
John P. Dearie, Jr. and Brian J. Green, two insurance attorneys with global law firm Edwards Wildman Palmer LLP, provided Insurance Journal with updates about these closely-watched developments.
What is the likelihood that TRIA will be extended?
There are many in the industry who believe that an extension of TRIA is necessary because the private insurance market does not have the capacity, or the interest, in reinsuring terrorism risk. They cite to the difficulty of modelers to gauge the risk of terrorism, which makes it difficult, if not impossible, for the market to properly underwrite the risk.
There are others, however, who believe that the private insurance market can properly underwrite terrorism risk, especially in light of the recent growth in alternative means of transferring risk such as catastrophe bonds and collateralized-reinsurance markets.
An extension may become a political issue as well. Although a bill was recently proposed by Rep. Michael Grimm (R-N.Y.) and Rep. Carolyn Maloney (D-N.Y.), both of whom sit on the House Financial Services Committee, extension legislation may face an uphill battle along party lines similar to other federal spending decisions.
Interestingly, though, an extension itself only has minimal costs (mostly administrative related to the maintenance of the Terrorism Risk Insurance Program Office) until there is an “act of terrorism” that would trigger TRIA’s federal backstop.
If TRIA is extended, when do you expect that we will see an extension?
Although we have already seen one proposal to extend TRIA, we doubt it will get sufficient attention in Congress over the coming months. It would obviously be very helpful for both insurers and policyholders if Congress decides this year what to do about TRIA so that one-year policies issued as of Jan. 1, 2014 can properly address TRIA.
Unfortunately, President Bush did not sign TRIPRA into law until Dec. 26, 2007 — five days before the program was due to expire. Both houses of Congress have more immediate issues to deal with over the coming months, so it would not be surprising if we do not have a definitive answer about TRIA before the end of next year and, just as in 2007, it goes down to the wire before a decision is made.
If TRIA is extended, is it possible that the extended program is different than the current program?
Yes, that is entirely possible. Although the recently-proposed bill did not change any of the program’s terms beyond extending it through 2019, we anticipate that other bills will include substantive changes to the program. Before TRIPRA was passed, several proposals called for lowering the threshold for triggering the federal backstop under the program from $100 million to $50 million, and the attachment point could become an issue again.
The program could also be amended to require insurers to provide coverage for attacks with nuclear, biological, chemical or radiological (NBCR) weapons, which can all be excluded under the current statutory framework. Similarly, the program could be amended to provide coverage for terrorism risk insurance in group life insurance policies, which it currently does not.
What about cyber coverage – will that be included under an extension?
The landscape has changed since TRIPRA was enacted in 2007. We now know that cyber terrorism is not just a topic for science fiction writers and techies to worry about, but is a reality. Stuxnet demonstrated that a computer virus could cause physical damage.
Under the current statute, a cyber-terrorist attack could trigger TRIA’s federal backstop if the Secretary of Treasury, Secretary of State and U.S. Attorney General declare it an “act of terrorism.” There is, however, nothing in the current statute that explicitly states than an act of cyber-terrorism would fall under the scope of TRIA so there is some hesitancy as to what would happen if there is a large-scale cyber-terrorist attack. Congress can clarify the issue in an extension.
John P. Dearie, Jr. is a partner in the insurance and reinsurance department at Edwards Wildman. He has over 30 years of experience in the insurance and reinsurance industry, including service as U.S. regulatory counsel and tax advisor for numerous overseas insurers. Brian J. Green is counsel in Edwards Wildman’s insurance and reinsurance department. He advises insurers and reinsurers on coverage and claims handling issues, and works with insurers and reinsurers to draft policies and contract wordings.