The Terrorism Risk Insurance Act (TRIA) is set to expire at the end of next year. It has evolved over its lifespan, yet the uncertainty of the risks TRIA addresses begs the question whether it should, as Hamlet considered, continue to protect against the slings and arrows of outrageous fortune or shuffle off its mortal coil. That question is likely to be answered differently depending on the interested party and how Congress might amend the current form of the law.
Although its sunset date is December 31, 2014, the debate over whether to extend TRIA yet again has begun. In response to the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity (Subcommittee) providing an early opportunity to submit comments, various interested parties weighed in last fall. Those early commenters included Risk and Insurance Management Society, Property Casualty Insurance Association of America, National Association of Mutual Insurance Companies, Insurance Information Institute, Independent Insurance Agents and Brokers of America, Financial Services Roundtable, Reinsurance Association of America, National Association of Realtors, the U.S. Chamber of Commerce, The Hartford Financial Services Group, Wharton School, Heritage Foundation, and the Coalition To Insure Against Terrorism.1
In February of this year, a bill was introduced in the House of Representatives that would essentially extend TRIA without amendment. That bill is not given much chance of success and news reports indicate that the 113th Congress will likely take a close look at a TRIA renewal as interested parties line up on either side of TRIA's continued existence. This could take some time to do because of the 2014 sunset date and the Subcommittee's competing priorities such as Dodd-Frank, Basel III and the Federal Housing Authority. Some believe, however, that it is important to resolve the question sooner so as to avoid chaos in the market when terrorism policy renewals come up. Once the issue is taken up fully, however, we expect that it will be considered a high-profile matter for insurers and terrorism insurance consumers.
TRIA was enacted in 2002, and was renewed in 2005 and 2007, to enable the U.S. government to provide support in the form of reinsurance to property and casualty insurers in the event that they suffered significant losses resulting from acts of terrorism. Such reinsurance significantly mitigated insurers' concerns about the lack of loss experience to inform underwriting and the very dynamic political/terrorism insurance landscape. As a result, insurers were willing to offer terrorism coverage in an uncertain market. Absent that reinsurance, the availability of terrorism coverage, which had previously often been included in commercial policies, would likely have all but dried up.
Certain restrictions were built into the reinsurance that TRIA provided:
- As enacted originally, TRIA required a USD5 million loss trigger, which was increased to USD50m and then USD100m in subsequent renewals of the law.
- There is a co-payment obligation required of an insurer above its retention that increased from 10% to 15% as part of the 2007 renewal.
- Before the U.S. government is required to indemnify any insurer, it has to have liability in excess of 20% (increased from 15% and 17.5% as part of the renewals) of its property and casualty premiums.
- The insurance industry must bear an aggregate actual loss amount or the U.S. government is permitted to recoup its excess payments. That amount leapt from an original USD15 billion to USD25bn and USD27.5bn with the renewals. Of course, TRIA allows insurers to shift their recoupment risk to holders of commercial policies that feature coverage provided under TRIA.
Other hurdles to recovery under TRIA include exclusions for nuclear, chemical and biochemical attacks. Nor are risks such as international facilities, life and health, professional liability (other than D&O), and automobiles covered. Furthermore, losses must have been caused by a terrorist act, as determined by the Secretary of Treasury.
While all should be thankful that there has been no need to call upon TRIA to date, the lack of experience dealing with potential issues should it become operational has limited the ability to predict precisely how it would work in practice. One can expect issues will surface such as whether different standards might apply due to the “patchwork quilt” of state regulation, how the Secretary of Treasury will make a determination that a terrorist act has occurred, how TRIA will affect overlapping coverage afforded under non-TRIA policies, how TRIA will interact with non-US government sponsored terrorism coverage, and how to determine the level of coverage necessary. Some may also question whether insurers are engaging in profit taking while the U.S. government bears the real risk. Furthermore, others may oppose TRIA as a matter of political philosophy on the grounds that the U.S. government should not intercede in what is viewed as a private sector responsibility.
Policyholders may have already wrestled with the uncertainty of such issues and voted with their feet – commenters have estimated that forty percent of commercial enterprises declined TRIA coverage and declinations by larger corporations were disproportionately greater. As a result, it is believed that TRIA coverage is unbalanced by adverse selection and does not generate sufficient premiums to satisfy the potential losses.
Some argue that terrorism coverage cannot exist without government support and call for a greater shift of the burden of the risk to the U.S. government. Part of the argument is that the burden will fall on the U.S. government anyway as it cannot resist a call for a declaration that a significant terrorist attack would constitute a disaster requiring federal funding. There was a great deal of consensus among the early commenters that government support was critical and that a private-public partnership was essential. Failing such support and partnership, the private sector would pull back from providing coverage out of fear that one severe event would threaten insurer solvency (the USD32.5bn loss attributed to 9/11 was second only to Katrina as a catastrophic loss). One commenter stated that the market would lose eighty percent of its terrorism coverage, which would thwart the regulatory goals of availability, affordability and capacity.
There was also support for the notion that the U.S. government cannot carry the whole burden. While it may have the financial resources, it lacks the process. The private sector is encouraged by the stabilizing participation of the U.S. government to manage the front end of the claims with its established loss evaluation process. Absent such established process for dealing with claims, the government would be forced to create a process in the critical period immediately following a terrorist event.
Some of the early commenters also claimed that the absence of access to terrorism coverage would have a negative economic impact as deals and transactions would not be consummated, jobs would lost and investments would suffer. The positive spin was that terrorism insurance is a risk mitigation tool that should be seen as a form of capital that promotes the economy at no cost to the U.S. government. While that is an argument based on the fact that TRIA has not yet been triggered, one could say TRIA has had that effect since its inception.
Notwithstanding these arguments in favor of renewal, some commenters raised concerns that terrorism insurance is still difficult to assess and that governmental involvement stymies the private sector’s initiative for finding a market solution that does not place the burden on taxpayers. A number of commenters called for ongoing efforts to improve the TRIA program so that there is greater uptake by potential policyholders in order to better spread the risk and to accumulate premium sufficient to cover any potential catastrophic event.
We believe that the TRIA renewal debate is worth tracking and those with a stake will want to participate. Those who decide they cannot do without terrorism coverage should be alert to the possibility that TRIA may not be renewed, or may be amended in a way that effectively disables their expected benefit of the law, so that they are positioned to obtain a piece of what limited coverage is available in the market. Those who can do without terrorism coverage may now want to reconsider deal terms to eliminate it as a requirement. For those deals requiring terrorism coverage beyond 2014, parties may wish to consider restructuring obligations now to avoid a default should TRIA not be renewed.