Summary of six-year reauthorization of the terrorism insurance program

After failing to pass a TRIA reauthorization during the lame duck session last Congress, on January 8, 2015, the House passed H.R. 26, the Terrorism Risk Insurance Program Reauthorization Act of 2015, by a vote of 416-5. Shortly after on January 9, 2015, the Senate passed H.R. 26 by a 93-4 vote. Upon the President’s signature, TRIA will be reauthorized until December 31, 2020. Following the passage of S. 2244 in the Senate and the passage of H.R. 4871 by the House Financial Services Committee, discussed below, Chairman Jeb Hensarling (R-TX) and Senator Chuck Schumer (D-NY) spent the lame duck session negotiating this final agreement on a six-year reauthorization, which did not pass the Senate during the lame duck session due to an objection by then-Senator Tom Coburn. The compromise makes the following changes to the current TRIA program:

  1. Insured Loss Shared Compensation – The federal share will decrease from 85% to 80%. Beginning on January 1, 2016, the percentage decreases from 85% by one percentage point per year.
  2. Program Trigger – The program trigger will increase from US$100 million to US$200 million. Beginning on January 1, 2016, the trigger increases by US$20 million per year.
  3. Mandatory Recoupment of Federal Share – Increase the insurance marketplace aggregate retention amount from the current amount set at US$27.5 billion by US$2 billion a year until it reaches US$37.5 billion. Beginning on January 1, 2016, this amount increases by US$2 billion per year.
  4. Mandatory Recoupment of Federal Share – Increases recoupment from 133% to 140%.
  5. Certification of Terrorism – Requires the Secretary of Treasury to conduct a study with respect to the certification process of an act of terrorism. A rulemaking is to follow the study.
  6. Government Accountability Office (GAO) Study – Requires the Comptroller General of the United States to conduct a study on the viability of requiring insurers to pay upfront premiums and creating a capital reserve fund.
  7. Reestablishment of the National Association of Registered Agents and Brokers – Includes the National Association of Registered Agents and Brokers Reform. This provision would establish the National Association of Registered Agents and Brokers and provides a one-stop licensing compliance mechanism for insurance agents and brokers operating outside of their home states.
  8. Business Risk Mitigation and Price Stabilization Act of 2014 – Includes the Business Risk Mitigation and Price Stabilization Act of 2014 (H.R. 634). This amends the Dodd-Frank Act to clarify that margin requirements do not apply to end users of derivatives.

Terrorism Risk Insurance Act

Enacted after 9/11

After the September 11, 2001 terrorist attacks, private insurers suffered steep losses, which caused some insurers to stop offering terrorism risk insurance on commercial buildings all together. As a result, insurance coverage for losses relating to terrorism acts became very expensive or largely unavailable, creating a severe market shortage for terrorism insurance. Due to the lack of public data about the probability and severity of terrorist acts, terrorism risk is viewed to be fundamentally different from other risks and essentially uninsurable by the private insurance market. After the September 11 attacks, acquisitions, dispositions, and financing for commercial real estate development projects were at risk as lenders continued to require terrorism insurance and borrowers were unable to secure sufficient coverage.

Concerned about the impact of the limited availability of terrorism risk coverage on the economy, Congress passed the Terrorism Risk Insurance Act of 2002, a temporary three-year program in which the federal government would share insured losses with private insurers in the event of a major terrorist attack. TRIA requires private insurers to offer terrorism coverage on the same terms and conditions offered in other types of coverage, in return for the federal backstop. The federal government does not charge a premium for this coverage.

Goals and key elements of TRIA program

TRIA aims to stabilize the private insurance market in the wake of the September 11, 2001 terrorist attacks by ensuring the availability and affordability of insurance for terrorism risks. The program only covers commercial property and casualty insurance. The initial thresholds and criteria under the current TRIA program are as follows:

  1. Certification of Terrorism – An individual act of terrorism must be jointly certified by the Secretary of State, Attorney General, and Secretary of Treasury. Losses from an individual act must exceed US$5 million to be certified for TRIA coverage. 
  2. Program Trigger – The aggregate industry insured losses resulting from an act of terrorism must exceed US$100 million before federal government coverage on losses commences. 
  3. Deductible – Before receiving federal coverage, each individual insurer is responsible for paying out a deductible equal to 20% of its annual direct earned premiums during the immediately preceding calendar year.
  4. Insured Loss Shared Compensation – Once the US$100 million aggregate loss threshold and 20% deductible have been surpassed, the federal government will cover 85% of each insurer’s losses above its deductible until the total amount of losses is US$100 billion. Private insurers retain 15% of their losses. 
  5. Cap on Annual Liability – There is no federal government coverage on losses that exceed US$100 billion and insurers are not liable for any portion of losses that exceed US$100 billion.
  6. Mandatory Recoupment of Federal Share – The insurance marketplace aggregate retention amount is the amount the private insurers must pay through deductibles and co-payments. If insurer’s losses are under the aggregate retention amount, currently US$27.5 billion, the Secretary of Treasury is required to recoup 133% of the federal share of the losses through a surcharge on commercial property/casualty insurance policies. If insurer’s losses are over US$27.5 billion, but uncompensated insurer losses do not exceed US$27.5 billion, the Secretary of Treasury is required to recoup a reduced amount of the government outlays. If uncompensated insurer losses are above US$27.5 billion, the Secretary of Treasury is no longer required to recoup government outlays but retains the discretionary authority to do so. Under the current TRIA program, all mandatory recoupments must be collected by September 30, 2017.

Reauthorized in 2005 and 2007

TRIA was signed into law on November 26, 2002 and was renewed for two years in December 2005 and extended for another seven years in December 2007. With each extension, the prospective government share of losses in the event of a terrorist attack has been gradually reduced while the private insurer portion of losses has been greatly increased. The current TRIA program is set to expire at the end of 2014.

In 2005, the extension legislation focused primarily on reducing the government’s upfront financial exposure under the act by increasing the program trigger, increasing the insurer deductible, reducing the government’s share of losses, and increasing the post-event mandatory recoupment of federal share. The 2005 reauthorization was brought to the Senate floor and passed by unanimous consent. The legislation was amended and passed in the House by a vote of 371-49 and signed by the president on December 22, 2005. The 2005 extension legislation closely follows the bill initially passed by the Senate.

The 2007 extension legislation essentially maintained the prior TRIA program but made several significant changes. The 2007 legislation accelerated the post-event mandatory recoupment of federal share and expanded the program to cover losses from domestic acts of terrorism in addition to foreign acts of terrorism. The 2007 extension legislation was introduced in the House, amended, and passed by a vote of 312-110. The legislation was further amended and passed in the Senate by unanimous consent. The legislation as amended by the Senate was passed in the House by a vote of 360-53 and was signed by the president on December 26, 2007.

TRIA renewal

With TRIA scheduled to expire at the end of 2014, Congress commenced legislative activity to propose legislation that has determined the federal government’s continued involvement in providing compensation for potential losses arising out of terrorist attacks. Legislation on the reauthorization of TRIA passed by the Senate and a related bill that passed the House Financial Services Committee are summarized below.

Terrorism Risk Insurance Program Reauthorization Act of 2014 (S. 2244)

On July 17, 2014, the Senate voted overwhelmingly in favor of the Terrorism Risk Insurance Program Reauthorization Act of 2014 (S. 2244) to reauthorize and extend the current TRIA program for seven years, until December 31, 2021. The legislation retains most of the provisions of the current law with a few key changes: it decreases the federal loss-sharing amount and increases the mandatory amount to be retained by the industry and recouped by the federal government.

As passed, S. 2244 would gradually decrease the federal government share of insured losses from 85% to 80%. The insurer deductible would not change, but the individual insurer copayment would increase from 15% to 20%; thus private insurers would pay a greater proportion of each loss. The bill would also increase the insurance marketplace aggregate retention amount from the current amount set at US$27.5 billion by US$2 billion a year until it reaches US$37.5 billion. In addition, S. 2244 would extend the various dates for mandatory recoupment provisions by seven years and increase the percentage of recoupment to require that 135.5% of federal payments are recouped compared with the current 133%. The bill would require the Secretary of Treasury to issue final rules governing the certification process along with a study on how to improve the process. The bill would also require GAO to issue a study on the viability of requiring private insurers to pay premiums to the government for the coverage provided under TRIA. S. 2244 would also create an advisory committee on risk-sharing mechanisms.

Senator Charles Schumer introduced S. 2244 on April 10, 2014, along with eight cosponsors. The Senate Committee on Banking, Housing, and Urban Affairs marked up S. 2244 on June 3, 2014 and ordered the bill favorably reported on a vote of 22-0. The bill was amended and passed by a vote of 93-4 by the full Senate on July 17, 2014. Senators Tom Coburn (R-OK), Pat Roberts (R-KS), Marco Rubio (R-FL), and Jeff Sessions (R-AL) voted against S. 2244.

TRIA Reform Act of 2014 (H.R. 4871)

The TRIA Reform Act of 2014 (H.R. 4871) was introduced in the House on June 17, 2014. The bill was amended and reported by the House Financial Services Committee on July 16, 2014. The bill would reauthorize and extend the TRIA program for five years but with much greater private insurance industry liability. Under H.R. 4871, no changes would be made to the current program in 2014; however, H.R. 4871 would gradually reduce the federal government’s exposure to future potential TRIA losses and increase the mandatory recoupment of federal share provisions. The various changes to the TRIA program called for by H.R. 4871 include:

  1. Certification of Terrorism – A new requirement that an act is certified as an act of terrorism within 90 days of attack. The bill also calls for the removal of the US$5 million minimum certification amount.
  2. Program Trigger – A gradual increase in the program trigger from the current US$100 million to US$500 million by 2019. In addition, the bill prohibits the Secretary of Treasury from considering any act resulting in less than US$50 million in insured losses in determining aggregate losses.
  3. Insured Loss Shared Compensation – A gradual reduction of the federal government’s share of payments of insured losses from 85% to 80% by 2019 for conventional terrorist attacks.
  4. Bifurcated Program – The bill calls for the separate treatment of nuclear, chemical, biological, and radiological terrorist attacks and extends a lower program trigger (US$100 million) and higher federal government loss share (85%) to such attacks.
  5. Mandatory Recoupment of Federal Share – Increase of the percentage of mandatory recoupment from the current 133% to 150% of federal payments and an increase in the maximum amount of mandatory recoupment to the sum of all insurer deductibles under the program.

In addition to the revised provisions above, H.R. 4871 also allows small insurers to opt out of the current TRIA requirement to make terrorism insurance available to policyholders if it would cause an undue financial hardship. Similar to the Senate bill, the House bill would also require the Secretary of Treasury to collect additional data and provide an annual report on the terrorism insurance market, as well as require GAO to issue a study on the effects of instituting insurer premiums for TRIA coverage. H.R. 4871 would also require a capital reserve fund to cover these and other studies on budgeting, costs of federal insurance programs, and small insurer market competitiveness.

H.R. 4871 was introduced by Representative Randy Neugebauer on June 17, 2014. The bill was marked up by the House Committee on Financial Services on June 19, 2014 and ordered favorably reported on June 20, 2014 by a vote of 32-27.

Conclusion

TRIA and its extensions authorized the creation of a federal reinsurance plan that is triggered once insured losses relating to terrorist attacks exceed a predetermined amount. The TRIA legislation has been widely credited for restoring stability to the commercial real estate lending market and, in turn, to the economy as a whole following the September 11 terrorist attacks. The sharing of losses between the private insurance industry and the federal government effectively limits private insurers’ losses, which has allowed the commercial insurance market to continue to function in light of the continued threat of terrorism today.