TRIA is back.
On November 26, 2002, in the wake of the September 11th attacks, President Bush signed the Terrorism Risk Insurance Act of 2002 (TRIA), and with it, breathed life into a new player in the catastrophic event insurance market: the government.
TRIA created a terrorism risk insurance program (TRIP) of dual back-scratching: the insurer was required to make available terrorism insurance, and the federal government committed itself to taking the cataclysmic risks off the table. The law created a temporary federal program that provided for shared public and private compensation for certain insured losses resulting from a certified act of terror. The Terrorism Risk Insurance Extension Act of 2005(TRIEA) extended TRIP through December 31, 2007, and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA 2007) further extended TRIP through December 31, 2014.
TRIA and its progenies have helped to ensure the continued widespread availability and affordability of commercial property and casualty insurance for terrorism risk. Unfortunately, TRIPRA 2007 was not extended and expired on December 31, 2014.
On January 12, 2015, however, President Obama raised terrorism risk insurance from its shallow grave and signed the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA 2015), making a few key changes to TRIP and providing a new expiration date of December 31, 2020.
Although there was some concern over coverage liability during the 15-day gap between the December 31, 2014 expiration and the January 12, 2015 amendment, the alarms have quieted as the chances of now discovering an attack that qualifies as an act of terror, and meets the requisite TRIA trigger amount, are slim. Perhaps a more interesting question — given that premiums on policies issued during the gap should reflect the uninsured tail risk now covered by TRIA — is whether premiums decreased after TRIA was passed, and whether insureds are able to renegotiate their policy terms based on the new model.
So what is TRIPRA 2015, and how does it differ from TRIA, TRIEA and TRIPRA 2007?
- The first, and key, determinant under TRIPRA and its predecessors remains whether an event is certified as an act of terror. And, depending on one’s primary policy coverage, this legislation still does not require coverage for losses due to nuclear, biological, chemical or radiological attacks. This could be troubling — whereas prior terrorist attacks utilizing such methods have been rare, one would have to assume that terrorists would have no preference against such means.
- What TRIPRA 2015 does do is increase the aggregate industry loss (AIL) criterion. Prior to the 2015 extension, the AIL had to exceed $100 million to trigger federal intervention. Under TRIPRA 2015 however, the AIL trigger will phase up, in $20 million increments, from $100 million to $200 million, over a five-year period. In order to meet the trigger amount, TRIPRA 2015 does allow for aggregation of the losses from multiple events during a calendar year. That said, it remains the case that no one event with losses below $5 million will be counted in that aggregation.
- Other legislative changes include those pertaining to the federal share and the mandatory recoupment amounts. With the federal share, insurers will retain a deductible of 20% of the insured losses; under TRIPRA 2015, phased decreases, of 1% per calendar year, will result in the government reimbursement being reduced from 85% to 80% over a five-year period, of that portion that exceeds the deductible. TRIPRA 2015 increases the mandatory recoupment amount of $27.5 billion, by $2 billion each calendar year, until the mandatory recoupment amount reaches $37.5 billion, of which 140% of the federal share of losses will need to be recouped.
So what does all this mean to property owners and lenders?
Perhaps not much, at least not right now. From what we’ve been told, the market for terrorism insurance remains open and a number of players are continuing to provide coverage. The insurance criteria of most lenders have not changed and in the ordinary course, it should not be either more difficult or more onerous to acquire coverage required by both capital markets and portfolio lenders.
Is it worthwhile for owners not obliged to buy coverage by their lenders?
That could be a close call in much of the U.S., but the coverage is so broadly required by lenders that it may just be a moot point. TRIA 2015 has, and will continue, to increase the share of the risk held by the private insurance market. Are any of these changes likely to break the camel’s back so that some year in the not-so-distant future a significant amount of coverage in the market will evaporate? We don’t know, but it doesn’t seem likely. But though there has not been any real impact to premiums due to the tweaks in the reauthorization, that may change as we approach 2016 when the programmatic changes to TRIPRA are implemented.
We dodged a bullet. The coverage remains in effect and we won’t have to reprise the renewal battle, at least until 2020. In the meantime, it’s probably worth remembering that there are factors out there that could push premium prices higher.