New federal terrorism reinsurance differs from original

Right before going home for the holidays, Congress reconciled different House and Senate versions and approved an extension of the federal terrorism reinsurance program in the form of the Terrorism Risk Insurance Revision Act of 2005.

This extension of the original Terrorism Risk Insurance Act came just in time as the original terrorism insurance legislation was set to expire on Dec. 31, 2005. The bill (S. 467), which was overwhelmingly supported by members of both the Senate and House, will keep a federal terrorism insurance mechanism in place for 2006 and 2007.

The 2006-2007 program is not identical to the program it is replacing. Coverage will be somewhat scaled back. Commercial auto, burglary/ theft, surety and professional liability will no longer be covered.

Nuclear, chemical, biological and radiological (NCBR) coverage will not be required in property and liability policies.

Deductibles and triggers
Also, the industry’s deductible will increase. In 2005 it was 15 percent but in 2006, it rises to 17.5 percent, and in 2007, up to 20 percent.

The loss amount that is needed before the federal role is triggered will also increase. In 2005, it took $5 million in insured losses to trigger federal intervention. But in 2006, it will take $50 million in insured losses and in 2007, the trigger will be set at $100 million in insured losses.

The legislation provides for a presidential working group to review the effectiveness of the program and make recommendations for improvement. That replaced a provision preferred by the insurance industry that would have established a public-private commission to develop long-term solutions.

Insurance groups welcomed passage even though they were disappointed that the long-term solution commission and other provisions were left out. Rep. Michael Oxley, who chairs the House Financial Services Committee, also expressed disappointment with the final version.

“This timely, decisive action taken by Congress should bring comfort to businesses all over the country that rely on insurance to protect them from the potential financial devastation that could result if they become victims of a terrorist attack,” said Marc Racicot, president of the American Insurance Association.

According to Racicot, “lawmakers will now need to focus, with the same urgency, diligence and bipartisan cooperation, on finding a long-term solution to insuring America against the ongoing economic threat of terrorism. We stand ready to assist them with that effort every step of the way.”

Farm provisions
Charles M. Chamness, president of the National Association of Mutual Insurance Companies, said the new version of TRIA would no longer mandate coverage for farmowners multi-peril insurance, which his group advocated. Additionally, NCBR coverage will not be required in property and liability policies, a provision in the House-passed bill that NAMIC opposed.

Rep. Oxley criticized the final bill because it omitted some of the features of the House proposal under pressure from the Senate and the Bush Administration. “In this short-sighted legislation, we have missed a golden opportunity to frame the TRIA program more effectively and to move to a more market-based solution,” he said. “When members, inevitably, are asked again to renew this ‘temporary’ program, they will correctly conclude that in 2005 the can was simply kicked down the road without any real reform.”

Market-based solution
The Property Casualty Insurers Association of America said it will continue to work to find long term, market based solutions to the problem of insuring against terrorism risk. “A market-based approach means that Congress would not have to continually revisit this issue, providing the business community and the insurance industry with the certainty of financial security, which will foster job creation and economic growth,” said PCI President and CEO Ernie Csiszar.

Representing the insurance, construction, entertainment, manufacturing, real estate, retailing and transportation sectors of the economy, the Coalition to Insure Against Terrorism worked to secure extension of the terrorism insurance act. The coalition released a comparison (see chart) of the original and new terrorism insurance bills prepared by the law firm LeBouef, Lamb & MacRae LLP.