The December 31, 2014, expiration date of the federal Terrorism Risk Insurance Program is still more than a year away, but as renewals affected by reauthorization draw closer, attention has begun to focus on whether Congress will reauthorize the program and, if so, when and on what terms.
The Terrorism Risk Insurance Program is often referred to as TRIA, after the law that originally authorized the program following the September 11, 2001, terrorist attacks. TRIA provides a federal “backstop”—essentially reinsurance—that allows U.S. insurers to limit their exposure to terrorism losses. In return for this benefit, TRIA requires U.S. insurers to offer terrorism coverage with commercial property and casualty insurance, although certain lines, such as commercial auto, are excluded from the law. TRIA also requires insurers to recoup, through assessments on insureds, a portion of federal outlays following a covered terrorism loss.
TRIA was conceived as a temporary measure designed to give insurance markets time to stabilize following 9/11. Yet the program has been extended by Congress twice at the urging of insurers and the business community at large when it appeared the expertise and capacity to underwrite catastrophic terrorism risks simply did not exist. At each extension, the amount of federal coverage under TRIA has been reduced.
In its current form, TRIA provides federal reinsurance for losses arising from acts of terrorism certified by the Secretary of the Treasury. Acts committed by both foreign and domestic terrorists are covered, but a terrorist act generally must cause damage in the U.S. or to a U.S. aircraft or vessel to be certified. In addition, to qualify for certification, a terrorist act must cause aggregate insured losses of at least $5 million and must not be committed in the course of a war declared by Congress. This last condition does not apply to workers’ compensation.
Federal payments to insurers are available under TRIA only if aggregate insured losses resulting from a certified act of terrorism exceed $100 million. Once this threshold is met, all insured losses are compensable, including those below the $100 million threshold, subject to a deductible and coinsurance. The deductible for each insurer is equal to 20% of direct earned premiums for the previous year for lines of coverage subject to TRIA. The government covers 85% of insured losses above the deductible.
TRIA establishes a cap on the annual liability of the federal government and insurers. Under TRIA, neither the federal government nor private insurers that have paid losses at least up to their insurer deductible will be liable for any amount exceeding an annual cap of $100 billion in aggregate insured losses.
TRIA has provisions for mandatory and discretionary recoupment of amounts paid by the federal government under the program. The mandatory recoupment is designed to ensure that the marketplace retains at least $27.5 billion in insured losses during a program year.1 The Secretary of the Treasury has discretion to recoup additional amounts through a premium surcharge on insureds, which insurers are required to collect and remit to the government.
In May, Fitch Ratings released a memo warning of reduced availability of terrorism insurance coverage in large urban areas and higher premiums if TRIA is not reauthorized. Fitch notes the effect of not reauthorizing TRIA would be felt particularly in the banking, commercial real estate and construction industries and cites a study by the Real Estate Roundtable showing that over $15 billion in real estate-related transactions were either stalled or canceled because of lack of terrorism insurance in the 14 months following the 9/11 attacks before TRIA was enacted.
Two bills have been introduced in Congress this year to extend TRIA. In February, Rep. Michael Grimm (R-NY) and others introduced H.R. 508, which would extend TRIA through December 31, 2019. In May, Rep. Bennie Thompson (D-MS) and others introduced H.R. 1945, which would extend TRIA for 10 years, designate the Department of Homeland Security as the lead agency for certifying acts of terrorism and instruct the Department of Homeland Security to share information with insureds about terrorist threats and best practices to foster resilience to terrorism.
The New York City Council recently held a hearing to examine the need for an extension. As of this writing, a resolution urging Congress to enact a long-term extension of TRIA is pending before the Council.
It is too early to predict with any certainty whether TRIA will be reauthorized, but there are good reasons why it should be. The program essentially has no cost to the government unless there is a certified act of terrorism with aggregate insured losses in excess of $100 million. Even then, all or a portion of federal outlays would be recovered through premium surcharges.
In addition, the insurance industry repeatedly has warned that it has no way to underwrite terrorism risks, which are unpredictable in the extreme. Without TRIA, the industry will be forced to reduce or eliminate coverage, especially in urban areas where there is a concentration of risk. This is precisely what happened following 9/11.
Moreover, as a practical matter, the federal government, and therefore the nation as a whole, is on the risk, so to speak, for very large terrorism losses. There is no question that uninsured losses and the systemic effects of a large attack would be addressed by federal action. By promoting greater coverage for terrorism risk with a mechanism to recoup federal outlays, TRIA establishes an orderly system to mitigate the effects of a large attack and helps avoid the dampening effect on economic activity that will occur if adequate coverage is not available. In fact, given the slow pace of the recovery from the Great Recession, the economic impact of not reauthorizing TRIA could become one of the most powerful arguments for extending it.
1 In addition, the mandatory recoupment amount is increased by a 33% surcharge.
Joseph T. Holahan is Of Counsel in the firm's Insurance Practice and a member of the firm's Privacy Practice. Mr. Holahan advises insurers and reinsurers on a variety of legal matters, including all aspects of regulatory compliance. Mr. Holahan received his undergraduate degree from the University of Virginia and his law degree from the Catholic University of America.