NAIC Emphasizes Need for Federal Terrorism Backstop

July 8, 2005

National Association of Insurance Commissioners (NAIC) warns that significant market disruptions could develop with the Federal Terrorism Risk Insurance Act’s (TRIA) expiration on Dec. 31, 2005, the law’s current sunset date. The economy’s current strength reflects the ability of businesses to cover affordably catastrophic terrorism risks.

“This is in large part due to the federal backstop put in place by TRIA,” said Howard Mills, New York State’s Superintendent of Insurance. “The removal of that type of protection could return the insurance market to the uncertainty experienced in the aftermath of Sept. 11, 2001.”

Terrorist acts of chaotic frequency and unknown cost, such as the ones that occurred in London, create challenges for the property-casualty insurance industry, whose risk models are generally built on frequent and predictable losses. U.S. tax policy does not encourage insurers to set aside current funds for tomorrow’s losses, meaning sizable terrorism losses would have to be funded by increased premiums.

To protect American businesses, state insurance regulators will not allow insurers to totally exclude insurance coverage for acts of terrorism. However, limitations on terrorism coverage have been allowed to protect the solvency of insurers. In most states, insurers have contingent endorsements that would restore the coverage limitations for damages that exceed $25 million, which existed before TRIA was enacted. In such cases, certain losses exceeding this coverage limit would not be insurable.

Topics Catastrophe Natural Disasters

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