One of the proposed budget savings recently proposed by President Obama is a reduction in the federal government’s role in the terrorism insurance market via a reduction in funding of Terrorism Risk Insurance Act (TRIA).

As we have discussed in our prior blog posts, TRIA was extended through 2014 when President Bush signed the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) in December 2007. TRIPRA extended the scope of the Terrorism Risk Insurance Program (TRIP) to include coverage for domestic terror attacks, which had not previously been covered under TRIA.

The proposed budget provides the following details of how TRIA would be changed:

Beginning in 2011, when the economy is expected to have stabilized, and then again in 2013, the proposal would increase the insurer deductible and co-payment, and the event trigger amount for Federal payments. The proposal would also remove coverage for domestic terrorism. . . . The proposal would sunset TRIP in 2014 consistent with current law. . . . The Budget projects savings from this proposal of $263 million over the 2010-2014 period and $644 million over the 2010-2019 period.

The proposal would also amend TRIP so that insurers would have additional time to remit policyholder surcharges to the Department of Treasury and would require commercial property and casualty policyholders to collectively pay back 100 percent rather than 133 percent of any federal payments made under TRIP; the Treasury would also assess a surcharge (recouping federal payments) after the economy begins to recover following a terrorist attack.

The Administration states that the property and casualty market has an improved ability to absorb losses from a terror attack, citing an increase in policyholder surplus from $287.5 billion at the end of 2002 to $456 billion (citing the Insurance Information Institute’s 2008 Year-End Report), while the total insured losses from September 11 were $31.6 billion (citing the Insurance Information Institute’s Facts and Statistics on Terrorism). According to media reports, the industry is analyzing the proposed changes to TRIA.

The budget proposal does not discuss the process whereby TRIA would be modified. It would likely require amendment of the previously-enacted TRIA/TRIPRA statute.

Click here to read proposed Terminations, Reductions, and Savings (the TRIA-related discussion begins on page 90) and click here to read the accompanying Analytical Perspectives (the TRIA-related discussion begins on page 58).

We will continue to monitor developments related to TRIA.