On September 18, 2013, the Federal Advisory Committee on Insurance (FACI), an advisory body to the Federal Insurance Office (FIO), met in Washington, DC.

The majority of the FACI meeting involved discussions concerning perspectives on the Terrorism Risk Insurance Program (Program), which was established by the Terrorism Risk Insurance Act of 2002 (TRIA). The Program was initially authorized for three years and was reauthorized in 2005 and 2007. It is scheduled to expire on December 31, 2014. Under the Dodd-Frank Act, the Director of the FIO is tasked with assisting the Treasury Secretary in administering the Program.FIO Focus, Issue No. 6 contains a description of TRIA. The FIO is also taking a lead role in drafting the President’s Working Group on Financial Markets (PWGFM) 2013 report on the long-term availability and affordability of terrorism risk insurance. FIO Focus, Issue No. 36 provides information on the composition of the PWGFM and topics identified in the FIO’s request for comments relating to its report on insurance for terrorism risk.

After FIO Director Michael McRaith provided an overview of the Program, representatives from Marsh & McLennan Companies, Inc., a former senior vice president and chief insurance risk officer at a major insurance firm and a representative from Lloyd’s gave presentations to the FACI. There were a number of common themes throughout the presentations:

  • The Program is a balanced public and private partnership that has worked and should continue as terrorism remains a significant threat;
  • Losses caused by terrorism are challenging to insure because the risk is not measurable, there is limited precedent and data relating to the likelihood of terrorist acts is largely confidential;
  • The industry has made great strides in improving management of conventional terrorism loss, largely managing the risks within the Program’s existing retentions. However, no private insurance mechanism alone is sufficient for pooling large-scale, terrorism-related losses;
  • Terrorism coverage is available in the private market because of TRIA;
  • The likelihood of reduced capacity in the workers’ compensation market if TRIA is not extended;
  • If TRIA is not reauthorized, rebuilding efforts in the aftermath of future terrorism will be hindered;
  • Discussions about the reauthorization of TRIA, including whether cyber-terrorism should be included in the definition of “act of terrorism,” improving the process for certifying an event and whether there should be changes to the insurer deductible, the aggregate threshold and the insurer copay in the event of coverage under the Program;
  • If TRIA is not reauthorized, insurers will not offer terrorism coverage and they will exclude acts of terrorism from policies;
  • Credit agencies are considering insurers’ plans to manage terrorism risk; and
  • The timing of Congressional action is important for certainty in the market as the TRIA expiration date approaches

McRaith asked the FACI to consider what data points could be used to best demonstrate the impact of the Program on the insurance market or, in the alternative, the impact of not reauthorizing TRIA.

The United States House of Representatives Committee on Financial Services (committee) had a full committee hearing regarding TRIA on September 19, 2013. Issues addressed at the hearing were largely similar to those discussed at the FACI meeting. The first panel at the hearing was composed of:

  • The Honorable Michael G. Grimm;
  • The Honorable Michael E. Capuano;
  • The Honorable Peter T. King; and
  • The Honorable Carolyn B. Maloney

The second panel consisted of:

  • Mr. Peter Beshar, Executive Vice President and General Counsel, March & McLennan Companies;
  • Mr. Eric Smith, Chief Executive Officer, Swiss Re America Holding Corporation;
  • Ms. Janice Abraham, President and Chief Executive Officer, United Educators;
  • Dr. Gordon Woo, Catastrophist, Risk Management Solutions; and
  • Mr. Steve Ellis, Vice President, Taxpayers for Common Sense

The Chairman of the Committee, Representative Jeb Hensarling, noted that many current members were not in place when TRIA was previously authorized. While the extension of TRIA generally has bipartisan support, the witnesses’ testimony varied on whether and how to modernize the Program.

Other Business at the FACI Meeting

Under its new charter, the FACI will increase from 15 to 21 members. McRaith stated that a request for membership applications will be posted in the Federal Register by the end of the year.

With respect to an update on reinsurance captives, FACI member William White, District of Columbia’s Commissioner of Securities, Insurance and Banking, provided a brief update noting that the NAIC received a report from a consultant on principle-based reserving, which will likely bring about additional discussion on the topic. He cautioned that it is important to understand what drives reinsurance captive transactions. Reinsurance captives will be on the agenda for the next FACI meeting.

McRaith gave an update on the FIO’s international activities. He mentioned that the Financial Stability Board gave the International Association of Insurance Supervisors clear direction to meet certain standards, including the development of straightforward capital backstop requirements, quantitative capital standard for internationally active insurance groups and resolution/recovery plans for global systemically important insurers. An update on international developments will also be on the agenda for the next FACI meeting, scheduled for December 11, 2013.