Brokers Urge Renewal of ‘Essential’ Federal Terrorism Insurance

September 19, 2013

The federal Terrorism Risk Insurance Act (TRIA) is a “model” for public-private cooperation and should be renewed, insurance broker Marsh told lawmakers on Capitol Hill.

Peter J. Beshar, executive vice president and general counsel of Marsh & McLennan Companies, testified before the House Committee on Financial Services on the future of the federal terrorism backstop, TRIA. Congress is weighing whether to reauthorize TRIA, which is set to expire on Dec. 31, 2014.

Beshar said his firm strongly supports reauthorization and modernization of the law.

“We consider TRIA to be a model public-private partnership. TRIA restored insurance capacity at a critical time after 9-11 and continues to be the backbone of a healthy terrorism insurance market,” said Beshar.

He said that an April report by Marsh — 2013 Terrorism Risk Insurance Report — that surveyed more than 2,500 Marsh clients — showed that demand for terrorism risk insurance remains strong and that the TRIA program plays a major part in the availability and affordability of coverage.

According to the report, 62 percent of Marsh’s clients purchased property terrorism coverage backed by TRIA in 2012.

“Our clients across the United States — including real estate developers, media companies, health care organizations and educational institutions — need and want terrorism coverage and would be less likely to get it without TRIA,” he said.

“In our judgment, the existence of a private terrorism insurance market, backstopped by TRIA, actually serves to protect the government and taxpayers from absorbing virtually all of the financial loss in the event of a terrorist attack.”

One of Marsh’s competitors, Aon, said that its research shows that more than 85 percent of insurers will no longer insure terror risk if the federal backstop goes away. In a written comment to the U.S. Treasury Department, Aon advised that renewal of TRIA will ensure the continuation of a functional market for commercial property/ casualty terrorism coverage and that the program’s imminent expiration at the end of 2014 “has already generated dislocation” in the commercial property/casualty insurance and reinsurance marketplace.

“If the mandatory offer of coverage disappears with TRIPRA 2007 expiring without replacement, then the market will contract. This is not supposition–it has been backed up by carrier behavior with prior TRIA expirations—with nearly 85 percent of property insurance carriers looking to exclude terrorism in the absence of TRIA,” Aon said in its letter.

Insurance carriers submitted similar testimony in support of TRIA.

“For over a decade, the risk-sharing mechanism created by TRIA has ensured our national and economic security at virtually no cost to the taxpayers,” said Jimi Grande, senior vice president of federal and political affairs for National Association of Mutual Insurance Companies (NAMIC). “The program has created space for a robust private market for terrorism insurance to form where it might not have otherwise. Allowing this program to expire or materially altering the trigger or deductibles would lead to higher costs for the insured and less coverage in the market, which increases the ultimate burden on taxpayers”

Grande said that failing to reauthorize the program would have “far-reaching effects, including making the American economy more vulnerable to terrorists” and “significant consequences across the economy.”

“We saw after 9/11 what kind of damage to the economy is possible,” Grande said. “Many lenders require terrorism coverage, and without TRIA that financing would dry up, causing development projects to grind to a halt and costing thousands of jobs. This happened in the immediate aftermath of 9/11 and was one of the main reasons TRIA was created in the first place.”

Marsh’s Beshar offered three recommendations for refinement of the program including:

• Specific clarification that coverage is provided by TRIA for all forms of terrorism — including nuclear, biological, chemical and radiological events — if coverage is afforded on the primary policy.

• Modernization of TRIA to reflect new terrorist threats that have emerged — in particular, the risk of cyber terrorism.

• Establishment of a 90-day time period for determining whether or not an act of terrorism is covered by TRIA.

Marsh representatives also shared their views on TRIA with Michael McRaith, director of the Federal Insurance Office (FIO) at yesterday’s meeting of the Federal Advisory Committee on Insurance (FACI).

Christopher Flatt, leader of Marsh’s Workers’ Compensation Center of Excellence, and Aaron D. Bueler, managing director and leader of Guy Carpenter’s workers compensation practice and terrorism task force, told the federal regulators that continuation of TRIA is “essential.”

“Non-renewal or a major change in the program will negatively affect the affordability and availability of commercial lines insurance vital to the economy,” Bueler said. “Since TRIA’s enactment in 2002, the terrorism reinsurance market has become a critical component of risk management strategy for many insurers. A dramatic change in the federal backstop could lead to a contraction in both the insurance and reinsurance marketplace.”

Flatt said TRIA affects the state-regulated workers’ compensation market, especially in the areas of pricing and capacity. “The uncertainty in the market is causing some carriers to reduce their available capacity and aggregate exposures in large cities, and workers’ compensation prices on these risks are certainly going up,” he told members of FACI.

TRIA has been extended twice since originally enacted in November 2002 as a response to the attacks of September 11, 2001.

The Senate Banking Committee plans to hold a hearing on TRIA on Sept. 25.

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