The President’s Working Group (PWG) on Financial Markets released its report, "The Long-Term Availability and Affordability of Insurance for Terrorism Risk" (Report), on April 17, 2014. The Report was required under the Terrorism Risk Insurance Act of 2002, as amended (TRIA). TRIA also established the Terrorism Risk Insurance Program (TRIP), which has been reauthorized twice and is currently scheduled to expire December 31, 2014. Under the Dodd-Frank Act, the Director of the Federal Insurance Office is tasked with assisting the Treasury Secretary in administering the TRIP. FIO Focus Issue 6 provides an overview of the TRIP.
The Report draws upon the comments received in response to a notice and request for comment issued by the U.S. Department of the Treasury. Many of the comments addressed whether, and to what extent, uncertainty concerning TRIA’s scheduled expiration affects the affordability and availability of insurance for terrorism risk. In preparing the Report, the PWG engaged various stakeholders, including insurers, reinsurers, state regulators, consumer advocates, policyholders, trade associations and the National Association of Insurance Commissioners.
The PWG’s findings as stated in the Report include:
- Insurance for terrorism risk is currently available and affordable. The availability and affordability of such insurance has not changed appreciably since 2010.
- Prices for terrorism risk insurance vary depending on certain factors such as the location of the risk exposure and the policyholder’s industry.
- There has been a decline in prices for terrorism risk insurance since TRIA was enacted.
- Take-up rates have improved since TRIA was enacted and are roughly stable at 60%. The take-up rate during the first full year TRIA was in effect was 27%.
- Information provided to the PWG suggests that the market for terrorism risk insurance is tightening in light of uncertainty as to whether TRIA will be renewed.
- The private market does not have the capacity to provide reinsurance for terrorism risk to the extent it is provided by TRIA.
- Terrorism risk insurance would likely be more costly, limited in scope and less available in the absence of TRIA.
Earlier this month, Senator Charles Schumer (D-NY) announced that he has bipartisan agreement for legislation to reauthorize TRIA. Under his proposal, the TRIP would be extended for an additional seven years and the federal government’s potential liability would be reduced. Specifically, the deductible for insurers would increase from 15% to 20% of direct earned premiums. The increase would be 1% per year over five years. Under the current program, losses beyond the deductible would be covered by the federal government up to 85% of $100 billion of losses. Under the proposed legislation, that percentage would be reduced to 80% over a five-year period. The new threshold for mandatory recoupment of government payments would be aggregate uncompensated losses (deductibles and copays) of less than $37.5 billion. The current threshold is $27.5 billion and the increase would be phased in over five years.
FIO Focus Issue 34addresses TRIA renewal legislation previously introduced in the U.S. House of Representatives.