Insurers will have to make tough public policy decisions regarding whether the Terrorism Risk Insurance Act (TRIA) should be extended beyond its sunset date of Dec. 31, 2005, attendees at the ExecuSummit Conference in New York were told this week.
“Estimated insurance losses of over $40 billion and more than 3,000 lives lost made the terrorist attack of September 11, 2001 the largest natural or man-made catastrophe in U.S. history,” said David Anderson, assistant vice president workers’ compensation, of the Property Casualty Insurers Association of America. “Prior to Sept. 11, most insurers considered terrorism a covered peril or a least not a specifically excluded peril. With the scope of the tragedy that took place on that day, most insurers and reinsurers individually realized the need to exclude or limit the terrorist exposure on their respective policies or reinsurance agreements because they knew they could not absorb another loss like Sept. 11 in the near future.”
Anderson provided background on TRIA explaining that it is a federally funded reinsurance or backstop mechanism for commercial lines property/casualty insurance policies for defined terrorist events. The law was enacted by Congress on Nov. 26, 2002 and will sunset on Dec. 31, 2005.
“TRIA provides a maximum cap of $100 billion and participating insurers have no liability for any amount of loss that exceeds this $100 billion,” Anderson said. “The aggregate damage from such a terrorist act for property/ casualty insurance has to be a least $5 million for TRIA reinsurance coverage to be triggered.” He added that even if triggered, the covered commercial insurer can only receive federal reinsurance for no more than 90 percent of the covered losses above an insurance marketplace retention of $10 billion in 2003, $12.5 billion in 2004 and $15 billion in 2005.
“The Congressional intent of TRIA was to establish a temporary federal program that provides for a system of shared public and private compensation of insured losses resulting from acts of terrorism,” Anderson said. Ultimately the goal was to protect consumers from market disruptions and allow for a transitional period for the private market to stabilize after a terrorist attack, he explained.
“The critical question now is whether to extend TRIA – or not?” Anderson asked. “Are there factors today to justify TRIA or some other form of a federal backstop protection extension to be established beyond the end of 2005?”
Some factors, including the impact on state insurance regulation, could affect the answer to that question.
“If we don’t know if TRIA will be extended then state insurance departments would have to prepare to deal with the implications of not having TRIA after December 31, 2005 when companies issue policies and renewals in late 2004 with 2005 effective dates,” Anderson said. “Non-workers’ compensation insurers and regulators will also have to address whether terrorism will be covered at all on individual policies in 2006?
Anderson also outlined the potential costs and implication workers’ compensation insurers would face if TRIA or another federal backstop did not exist in 2006.
“As we all know, workers’ compensation is a line of mandated insurance for employers for which any cap or exclusion for liability for a terrorism incident would not be available without some legislative approval. It is fair to say that many state legislatures may not allow caps,” Anderson said. “Also, workers’ compensation exposures in some areas will force business into residual markets and that begs the question of whether any book of business will really be safe here. These are just a very few of the factors specific to workers’ compensation that make the need for extending TRIA for workers’ compensation more critical.
“Looking at all the variables it is obvious the property/casualty insurance industry needs to establish a position on the need for an extension of TRIA or the creation of some other form of federal backstop. The sooner Congress and our industry step up to the plate to address this critical decision – the better,” Anderson concluded.
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