President Obama is expected to quickly sign legislation reauthorizing the Terrorism Risk Insurance Act (TRIA). The bill, which moved through Congress the first week in January, is substantively the same as compromise legislation that passed the House in December and died when the Senate adjourned before Christmas. In addition to extending TRIA for six years, the legislation creates the National Association of Registered Agents and Brokers (NARAB), which establishes a national entity for licensing insurance producers to conduct business across jurisdictions.
The Terrorism Risk Insurance Act (TRIA) was enacted in 2002 in response to the terrorist attacks on September 11, 2001. TRIA created a temporary three-year federal reinsurance program or backstop in which the government would share some of the losses with private insurers should a foreign terrorist attack occur. The TRIA program was extended in 2005 and again in 2007. The 2007 reauthorization ended December 31, 2014. Congress’s failure to reauthorize TRIA last year caused the program to expire on that date. This is the first major legislation passed by the new 114thCongress, which was sworn in last Tuesday.
With a few important exceptions, the legislation leaves the TRIA program largely unchanged. The major changes under the six-year extension in the bill are:
- The program trigger, which is currently $100 million in annual aggregate insured losses, will be increased in phases to $200 million. The trigger will increase $20 million per year every year for five years starting in 2016.
- The insurer co-share will increase from 15 percent to 20 percent. Starting on January 1, 2016, the co-share will increase 1 percent a year for five years.
- The amount that the federal government will recoup will increase from the current $27.5 billion to $37.5 billion. The recoupment amount increases $2 billion per year for five years starting in 2015. After that, recoupment will be the lesser of $37.5 billion or the annual average of the sum of insurer deductibles for all insurers participating in the Program for the prior three calendar years. Determination of such sum will be made pursuant to regulations to be issued by the Treasury Department. Finally, the rate of recoupment will increase from 133 percent to 140 percent.
Under the reauthorized program:
- A terrorist act must cause at least $5 million in insured losses to be certified for TRIA coverage;
- The aggregate insured losses from a certified act of terrorism triggering government coverage to begin will increase by $20 million each year from $100 million in 2015 to $200 million in 2020;
- An individual insurer must meet a deductible of 20 percent of its annual premiums for the government coverage to begin;
- Assuming above thresholds are passed, the government covers 85 percent of losses (decreasing to 80 percent by 2020) due to terrorism, up to a cap of $100 billion;
If insured losses are under $27.5 billion (increasing to $37.5 billion by 2020), the government is required to recoup 140 percent of government outlays. As insured losses rise above the monetary thresholds, the government is required to recoup a progressively reduced amount of the outlays. At a certain high insured loss level, which will depend on the exact distribution of the losses (i.e., if overall losses exceed the industry retention level), the government would no longer be required to recoup outlays, but would retain the discretionary authority to do so.
The timing of the reauthorization – after the official expiration of the program on December 31, 2014 – raises the question as to the impact of the gap in timing on existing policies that contained so-called “springing exclusions,” which automatically excluded terrorism risks from coverage as of the expiration of the program. The bill does not specifically address this issue, but Rep. Randy Neugebauer, the most recent chairman of the Insurance Subcommittee of the House Financial Services Committee, made clear in a statement during the House debate on the bill that it is the intent of Congress that there be no coverage gap. If a policy has a springing exclusion that the insurer forebore on, then the insurer is not required to go back through the make available process for the coverage to remain eligible for the TRIA backstop. We anticipate that the Federal Insurance Office (FIO) will issue guidance, or regulations, in the near term to confirm this understanding, as well as to clarify that policyholders that declined TRIA coverage for policies starting January 1, 2015, are not entitled to receive another offer of such coverage post-enactment.
In addition to reauthorizing TRIA, the just-passed legislation creates a national agent and broker licensing mechanism, NARAB, after years of effort by regulators and industry stakeholders alike. Once operational, NARAB will be a self-regulatory national licensing authority – a national licensing clearinghouse – providing insurance agents and brokers with a mechanism for obtaining non-resident state licenses in a single step under a single set of requirements.
NARAB membership will be optional and insurance producers – agents, brokers, and agencies – who opt to become members of NARAB would have to obtain resident licenses from their home states before applying for NARAB membership. Once licensed in their home states, producers operating in multiple jurisdictions could apply for NARAB membership and one-stop nonresident licensing.
To qualify for membership, a producer would be required to comply with NARAB’s membership criteria, as established by the NARAB Board. The criteria, which would include standards for personal qualifications, education, training and experience, must meet or exceed the highest professional requirements that currently exist in the States. As a practical matter, therefore, to be eligible for NARAB membership a producer would effectively satisfy the substantive licensing requirements currently required by every State. Non-resident states would be prohibited from imposing any requirement upon a member of NARAB that is different from the criteria imposed by NARAB.
NARAB applicants would be required to undergo a national criminal background check if their resident State does not require one, and would have to pay State producer licensing fees, as well as assessments to cover NARAB’s administrative expenses. NARAB membership would be renewed annually, and NARAB would have the authority to bring disciplinary actions to deny, suspend, revoke or decline renewal of membership.
Finally, NARAB would not replace or displace state insurance regulation. Indeed, the bill very clearly retains state regulatory authority over insurance producers. Although NARAB would have an important role in the licensing of non-resident insurance producers, the bill clarifies the state regulators’ continuing role in the licensure process through the notice period and regulator participation on the NARAB Board and in standard setting. Moreover, state regulators would continue to supervise and discipline producers, and would continue to enforce state consumer protection laws.
Going forward, the NARAB Board, the majority of which must be state insurance regulators, will be appointed by the president and must be in place within 90 days of the law’s enactment. Therefore, it is likely the Board will be in place by early April. Once formed, the Board will have a great deal of work to do raising initial capital to get the organization up and running, hiring staff, and establishing standards and procedures for admission (licensing) of members / producers, among other things. In addition, we anticipate that the NAIC and NIPR will be intimately involved in the implementation and on-going operation of NARAB and its licensing processes. Given all the players and all the operational and policy issues that have to be addressed, it is likely that NARAB will not be fully operational for a significant period of time.