The Terrorism Risk Insurance Act (TRIA) is a federal law enacted on November 26, 2002, just after 9/11. TRIA created a federal “backstop” for insurance claims related to acts of terrorism.
In early February, President Obama unveiled his 2011 budget plan, which, among other provisions, would reduce the federal backstop for those providing terrorism risk insurance. The President’s proposal would remove coverage for domestically inspired acts of terrorism, increase private insurer deductibles and co-payments, increase the “trigger” amount of aggregate insured losses that must occur before federal compensation becomes available, and allow the program to expire at the end of 2014 as planned under current law.
We have prepared a chart, The Evolution of TRIA (click the "Download PDF" link to the left to view this chart), to quickly bring you up to date on the legislative history of TRIA.
In some ways, TRIA is the perfect government program. Why? Set out below are the reasons it is an attractive and effective use of federal funding. Also discussed are the implications of the changes to TRIA proposed in the Administration’s Budget Plan.
Finally, under the rubric of “What is good for the goose is good for the gander,” I thought it entertaining to speculate on how the TRIA model might be applied to the banking industry.
First, why does TRIA work?
TRIA costs nothing until there is horrific loss.
TRIA is a backstop and is triggered after insured losses of $100 million. It is designed to jump start the private market for terrorism insurance, and that is what it has done. Until there is an Act of Terrorism (as defined in TRIA) and until the losses mount to $100 million, no federal funding is used.
Impact of the Proposed Amendments
None. The President claims his reductions will save $249 million. Welcome to Washington Budget Land. Any such savings are realized only on paper. The budget “cost” of TRIA is based on the estimated probability of various loss scenarios over the life of the program. As mentioned above, absent a catastrophic loss, TRIA requires no federal outlays.
TRIA piggy-backs existing industry administrative framework of direct insurance policies and reinsurance.
There is no new division of Homeland Insurance Security or Bureau of Terrorism Risk Finance charged with implementing TRIA. The Secretary of the Treasury, through its Terrorism Risk Insurance Program office, has administered TRIA on a budget basis using the administrative framework of the insurance industry.
Impact of the Proposed Amendments
None. The insurance industry would continue to administer TRIA.
TRIA provides incentives and confidence which allow the existing non-government terrorism insurance market to develop.
Certainly the market for Terrorism Insurance is better and more robust today than immediately following 9/11. It is understandable that the Obama Administration is seeking expense savings, and this is one easy target. The question is at what level of reduced government support does the mechanism fail to support the private market and cause private coverage to disappear? One successful terrorist attack will no doubt engender much the same fear as followed 9/11. In early February, CIA Director Leon Panetta told Congress we could expect an Al-Qaeda attempted attack within six months.
Impact of the Proposed Amendments
Commentators have said the amendments likely will undermine the private market confidence and cause private terrorism coverage to dry up.
TRIA has a simple dollar threshold which promises fast determination of applicability.
It is quite difficult to determine quickly whether an act of terrorism is motivated by foreign or domestic ideology. We need only to think back to the recent loss of life at Fort Hood by Major Nidal Malik Hasan. Would you call this a foreign or a domestic Act of Terrorism? Was Major Hasan motivated by a foreign person or interest? It would be difficult to come to a quick resolution. It is the reliability and responsiveness of a program such as the TRIA backstop that encourages private sector participation.
Impact of the Proposed Amendments
Most believe the amended plan would undermine reliability of reimbursement and negatively impact private terrorism insurers.
TRIA establishes in advance a framework for federal government payout of a loss that the federal government would otherwise payout in a politically charged and inconsistent manner.
This is truly a no-brainer. One needs only look to Katrina or Haiti. Should there occur an Act of Terrorism that causes substantial loss, historically, the federal government and our political process have quickly responded to that loss. The rationale for “making things right” is even greater than in a natural disaster because there is an obligation for our government to protect us from such acts, motivated either domestically or by foreign operatives. Why not keep in place a well planned method of reimbursing loss, measuring reimbursement and adjusting future premiums.
Impact of the Proposed Amendments
The amendments would reduce the magnitude and usefulness of the federal backstop and would invite a political solution during a chaotic time of national loss because TRIA may have been eroded to the point of ineffectiveness.
TRIA’s application to the U.S. Banking System
Perhaps we can take a page from TRIA and apply it to banking. The suggestion of risk sharing has already been made by others, including Sheila Bair, the thoughtful Chairwoman of the Federal Deposit Insurance Corporation. We should learn from our recent past and charge a risk premium for risky business. It has been suggested that the structure of risk premiums for a bank’s risk profile would attach to its FDIC insurance, with the federal government providing a back-stop (a la TRIA) for losses in excess of FDIC insurance recoveries. Federal government payouts above the FDIC pool of funds would, over the long term, be assessed against all participants in the financial services sector. This would not substitute for many of the rule revisions contemplated by Congress to rebuild fire walls between commercial banking and investment banking, but it would be a good start.
Thomas Player is a Senior Partner in the Insurance and Reinsurance Practice. His areas of expertise include insurance and reinsurance, mergers and acquisitions, complex regulatory issues and dispute resolution. Tom received his bachelor’s degree from Furman University and his law degree from the University of Virginia.