As Congress reconvenes, the House of Representatives is poised to debate the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIA). House Democratic leaders are signaling that the bill will be on the House floor next week. But, just as the bill seemed to be moving easily to House passage, the Congressional Budget Office (CBO) threw a monkey wrench into the proceedings.

Late last week, the CBO issued a cost estimate of the bill, putting its potential costs at over $10.4B between 2008-2017, with an additional $13.7B for the years after 2017. Even though the CBO admitted that it could only make the broadest estimates (no federal money will be spent if there is no attack triggering federal obligations) and that any federal outlays would be "largely offset" by federal revenues through the bill's recoupment provisions, the report is causing problems for the bill's sponsors and the Democratic leadership.

Chairman Barney Frank of the House Financial Services Committee has been quoted as saying that he might "fix" the problem by adding language to the bill saying that no federal funds will actually be allowed to be spent until other legislation appropriating the funds is passed after a terrorist attack, which Frank predicted would happen quickly. However, despite Frank's statement, this would be a very major change from current law, which makes federal monies available automatically, without requiring any additional federal legislative action.

This change in the bill's core structure would pose significant problems for insurers because they could be on the hook for paying terrorism claims, without any assurance that their federal "reinsurance" would actually be paid. Therefore, at the very least, the Frank language needs to be coupled with additional statutory language limiting insurer financial obligations. This additional language would say that insurers would not have any financial obligations beyond their "deductibles" and "co-pay" requirements, unless Congress appropriated the promised funds.

Another approach to solving the problem would be to simply make all of the federal financial recoupment provisions mandatory. Under current law, the recoupment provisions are surcharges placed on all covered commercial insurance policies to repay the federal government over a period of time for its outlays. Also, under the current law—and under the pending bill—some of those surcharges are mandatory, while others are at the discretion of the Secretary of the Treasury. This could be changed to make all the surcharges mandatory, unless the Congress enacted legislation after the event to limit the surcharges to a certain percentage of the outlays or to a specific dollar amount. This approach would appear to be much less dangerous than the one that Chairman Frank has been quoted as suggesting.

This drama is likely to play out within the next week in the House, as TRIA reauthorization is on a tight deadline, with the current law scheduled to expire on December 31, 2007. Introduced by Committee Chairman Barney Frank (D-MA) and Rep. Michael Capuano (D-MA) on June 16, 2007, the reauthorization bill, H.R. 2761, has undergone a few significant changes on its path from the Capital Markets Subcommittee and Financial Services Committee to the House floor.

Just before the summer recess, on August 1, 2007, the House Financial Services Committee favorably reported H.R. 2761 by a vote of 49-20, with some Republican support. During the month of August, a Manager's Amendment to be offered by Chairman Frank was negotiated and recently made available. The amendment makes a few notable changes to the bill reported by the Financial Services Committee, including:

  • Modify the NBCR certification to say that an act of NBCR terrorism can result in both conventional losses and NBCR losses;
  • Limit the certification of NBCR events to those events that have more than $5M in NBCR insured losses;
  • Establish a reset provision for NBCR deductibles. The reset brings the deductible down to 5 % of prior year insured losses if there is an NBCR event (or events in one geographical area during the year) that exceeds $1B. The NBCR deductible starts at 3.5% for the first year after enactment and then goes up by 50 basis points per year, unless the reset provision comes into play.
  • Indexing the various program dollar amounts to the Consumer Price Index for All Urban Consumers for the 12-month period preceding each program year.

The August 1 Committee hearing set the stage for a classic clash over fundamental ideological differences about the role of the federal government and private markets in meeting the unique needs of terrorism risk distribution and coverage. Beyond the conceptual debate, additional flashpoints arose between members who have experienced terrorism firsthand, or who hail from large metropolitan areas that presented likely targets, and members from small-town America. The bill is expected for debate on the House floor shortly after Labor Day. The Senate Banking Committee is unlikely to proceed ahead of House action unless the bill becomes mired in House politics and gets stalled.

H.R. 2761 proposes several important changes to both deepen and broaden the scope of TRIA, including:

  • Extending the law for 15 years;
  • Expanding coverage, with a mandatory offer, for nuclear, biological, chemical and radiological (NBCR) terrorist acts;
  • Expanding coverage to include domestic, as well as foreign, terrorism;
  • Reducing the insured losses threshold for Treasury financial participation from $100M to $50M;
  • Providing coverage for group life insurance and enacting new rules that limit the rights of life insurers to condition coverage for travel to certain foreign countries;
  • Redefining the $100B annual cap to put more federal dollars into the program by applying the cap separately to insurers and the government;
  • Providing NBCR exemptions for small insurers that meet certain criteria;
  • Establishing a reset mechanism for significant attacks; and
  • Forming a coverage buy-down fund for insurers essentially to establish pre-event reserves with Treasury for some or all of their deductibles or co-pay obligations.

During the Subcommittee on Capital Markets markup, debate centered on how long to extend TRIA, with Rep. Capuano calling for a 10-year extension. Capuano acknowledged that there was nothing magic about 10 years and characterized it as a product of compromise. Rep. Peter King (R-NY) and others from New York argued that at least a 10-year extension was necessary to assist with large-scale construction projects in major metropolitan areas and pushed for a longer extension. Subcommittee Chairman Paul Kanjorski (D-PA) expressed hope that the private market would eventually be capable of functioning without TRIA. Rep. Jeb Hensarling (R-TX) and other Republicans argued that a lengthy extension makes TRIA a de facto permanent program and contravenes the purpose of the legislation, noting that construction has continued despite the earlier two-year extensions.

Against the backdrop of the heated subcommittee debate over a shorter extension, the House Financial Services Committee markup went in the opposite direction. It abandoned the 10-year extension of TRIA, in favor of 15 years. Chairman Frank and others argued that TRIA should indeed be a permanent federal program because the risks and economic impact of terrorism are a long-term national concern. The Bush administration and other Republicans, including Ranking Member Spencer Bachus (R-AL) said that the program eventually should be phased out, and they supported a more modest extension of between two and three years. Kanjorski parted company with his fellow Democrats and did not support the 15-year extension. Rep. Richard Baker (R-LA) expressed concern that the Democrats may have won on the extension at the expense of securing passage of the bill. Given the significant difference between the two sides and the underlying philosophical differences on the role of private markets and the federal government, the extension's length will be the major focal point of future debate. 

In one of the key new features, the Act expands the scope of the program to add coverage for nuclear, biological, chemical and radiological (NBCR) terrorist acts. Under what would be essentially a "program within the program," insurers would be required to offer NBCR coverage to every customer who purchases "conventional" terrorism coverage. Initially, insurers would be allowed to price that coverage through the private market, but after a three-year brief exemption period, state prior-approval rating laws would be reimposed.

Since NBCR coverage is not generally available in the private market today, and any NBCR event is likely to have greater economic consequences than any "conventional" event with the same amount of insured losses, the bill envisions far greater federal involvement for covered NBCR losses than for non-NBCR terrorism losses. For example, the initial NBCR deductible is 3.5%, compared to the 20% deductible for conventional attacks. Similarly, the NBCR co-pays operate on a sliding scale, which decreases as the amount of losses increases, moving from an initial 15% co-pay for NBCR losses under $10B to 5% for NBCR losses above $60B.

The political reception for NBCR coverage, as with some other elements of TRIA, has been mixed. The administration maintains that there is no policyholder demand for coverage and that the failure to include NBCR coverage in most insurance policies has not harmed the economy, so the proposed mandatory offer requirement is unwise. Some in the insurance industry are concerned about setting a precedent for coverage that cannot be accurately priced. Others in the industry believe that NBCR coverage is the most important feature of the bill to provide protection for both insurers and policyholders. In any case, the Democrats appear united in their support of NBCR coverage, arguing that it is necessary to protect the real estate industry and to encourage economic development. 

Given the host of issues presented in the legislation and the looming deadline for renewal, the debate over H.R. 2761 will be one of the most important and lively of the year.