On Tuesday, September 11, the eleventh anniversary of the 9/11 terrorist attacks, the House Financial Services Committee's Subcommittee on Insurance, Housing and Community Opportunity held a public hearing on the Terrorism Risk Insurance Act (TRIA) and its future. TRIA, which is a federal reinsurance program designed to provide a backstop for losses to property/casualty insurers following an act of terrorism, was enacted one year after the 9/11 attacks and was subsequently extended in 2005 (through the Terrorism Risk Insurance Extension Act (TRIEA)) and 2007 (through the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA)). The program is currently scheduled to expire on December 31, 2014.
Following 9/11, insurers and reinsurers struggled with how to properly price terrorism risks, and, as a result, terrorism risks became widely excluded from property/casualty policies. TRIA was enacted as a temporary program to fill this gap in the market. The TRIA program is triggered by the occurrence of an “act of terrorism” (as determined by the U.S. Secretary of the Treasury) that results in industry-wide insured losses in excess of $100 million. In such a scenario, the federal government would pay 85% of insured losses, subject to a deductible for each insurer of 20% of its direct earned premium from property/casualty insurance, up to $100 billion a year. TRIA also provides a mechanism for the federal government to recoup from the marketplace any payments it makes on covered losses. During Tuesday’s hearing, Committee members and industry representatives discussed whether the TRIA program is still needed, and, if so, whether any changes should be made to the program.
A recurring theme during Tuesday’s hearing was one that has been at the forefront of the current political landscape: what role should government play in the marketplace? Industry representatives who spoke during the hearing (including representatives from the Insurance Information Institute, the National Association of Mutual Insurance Companies, the American Insurance Association and the Reinsurance Association of America) were almost unanimously in favor of extending TRIA in some form. In contrast, David John, a senior research fellow at the Heritage Foundation (a conservative think tank), proposed that the TRIA program gradually be phased out by the end of 2016 to make way for a self-sufficient market response to the problem of terrorism coverage. Notably, Mr. John did not advocate for the immediate repeal of TRIA and acknowledged the vital role that the TRIA program played in stabilizing the insurance market after 9/11. Dr. Erwann Michel-Kerjan, the Managing Director of the Risk Management and Decision Processes Center at the Wharton School of Business, suggested that we should look to similar government-funded terrorism insurance programs (such as the programs in the U.K. and Germany) for ideas on how to improve TRIA.
Representatives in favor of extending TRIA emphasized that the war on terror is ongoing, and noted the inherent difficulty in modeling and pricing terrorism risks, given the limited amount of information available on terrorist activity (and the national security considerations related to that information). They also noted that, given the current state of the global economy, now is not the appropriate time to create market uncertainty on this issue (particularly in light of standard provisions in financing and lease agreements that require insureds to maintain terrorism coverage). In addition, some panelists noted the difficulty of securing coverage for nuclear, chemical, biological and radiological (NCBR) hazards, and expressed the view that coverage would be completely unavailable absent TRIA. All 2014 expiration is a positive, noting that commercial insurers began issuing policy exclusions for terrorism as the prior expiration dates for the program approached. A complete list of industry representatives who appeared at the hearing and their written testimony is available.
During Tuesday’s hearing, industry representatives did not address some of the more prickly issues surrounding TRIA, including participation of captive insurers in the TRIA program and whether the 20% deductible or 15% coinsurance participation by insurers should be changed. Nor were actual take-up rates discussed, although in his written statement, Dr. Michel-Kerjan does discuss the uncertainty surrounding TRIA’s impact on the market, citing market data from Aon and Marsh indicating that commercial take-up rates for terrorism insurance have more than doubled since TRIA’s inception and median premium rates for terrorism insurance are down, but noting that roughly four out of 10 large U.S. corporations do not currently carry terrorism coverage. These issues are likely to be front and center as Congress continues to discuss TRIA’s future.