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Why Should You Care about the Terrorism Risk Insurance Act Renewal?

September 20, 2013

First, some background:

Prior to the 9/11 attacks terrorism risks in the United States were largely regarded as negligible, routinely included in general policies at no real cost to the insured. However, when the bulk of the financial impact of the attacks was felt by reinsurers, many of them completely pulled out of the terrorism market, forcing primary insurers to begin excluding it from their policies. Those that continued to offer insurance for terrorist attacks did so by offering specialized policies.

Because of the unpredictable nature of terror attacks and potential for high losses these policies tended to be very limited and relatively expensive. This left many businesses unable to afford coverage leaving them responsible for the full absorption of costs incurred from such an attack.

Here’s the pinch – many commercial lenders (particularly in the real estate, construction, utilities, and transportation sectors) required terrorism insurance. With many businesses suddenly unable to afford coverage this began halting ongoing projects and preventing new ones from getting started. A 2002 survey by the Real Estate Roundtable found that nearly $10.5 billion of real estate projects had been either stalled or canceled because of a continuing scarcity of terrorism insurance.

As a result, the Terrorism Risk Insurance Act (TRIA) was enacted in November of 2002. It has since been extended, first in 2005 and again in 2007. It is now set expire December 31st 2014.

What is the purpose of TRIA and why should the government be involved?

For other types of risks, insurers rely on historical data or predictive modeling. Auto insurers can determine how likely you are to have an accident based on where you live, your age and gender, and other factors. Cat insurers know what parts of the country are likely to have losses due to hurricanes vs. hail and at what time of the year they are likely to happen.

There is no practical way to accurately determine the risk or magnitude of terrorism attacks. They can be influenced by psychological changes in individuals as well as groups, political actions of foreign and domestic governments, and they can vary wildly in scope and severity. Also, information that is known about threats is often not accessible by the general public or entities outside of the government. Therefore, insurance companies would either be unable to insure these types of risks or have to charge steep premiums to cover potential losses.

TRIA was established to stabilize the market and make terrorism insurance more accessible to those who needed it. It created a federal backstop to help mitigate the costs to insurance companies in the event of a large-scale terrorist attack. It also requires that insurance companies to offer terrorism insurance to businesses.

Why do we care about it now?

With the 2014 sunset approaching, the House Financial Services Committee held a hearing this week on the reauthorization of TRIA. In defense of reauthorization, testimony was given by Peter Beshar of Marsh & McLennan Companies, Eric Smith of Swiss Re America Holding Corporation, Janice Abraham of United Educators, and Gordon Woo of Risk Management Solutions.

During the previous reinstatements a hesitant congress waited until the last minute to issue the renewal and it appears as though this time will be no different. Arguments were made that TRIA was intended to be a temporary program and that 12 years after 9/11 insurers and reinsurers have a better understanding of terrorism risks and therefore should be capable of sustaining a stand-alone market.

Of primary concern, was the possibility of an undue burden placed on taxpayers. Committee chair Rep. Jeb Hensarling, R-Texas had this to say, “As we look at the national debt clock, which I know is inconvenient to some, it principally turns because insurance programs–be they social insurance programs such as Social Security and Medicare or others–the government has not done a particularly good job,” he went on to say, “That ladies and gentlemen, represents a man-made disaster. And it will certainly color my opinion on this matter.”

However, TRIA costs nothing to maintain and in the event of a large-scale terrorist attack, “the federal government would help insurers cover losses … and would also impose assessments on the insurance industry to recover all or a portion of the federal payments.” 1

In response to the Treasury Department’s request for comment on TRIA, Aaron Davis a managing director with Aon Risk Solutions, a risk management services and insurance brokerage company, stated that, “Should the program expire, Aon’s market intelligence suggests that more than 85 percent of insurers will no longer continue to insure terrorism risk. Ultimately, in the unfortunate event of a large-scale attack, the U.S. government would face the full burden of the associated costs of said terrorism.”

In 2005 as the expiration of TRIA approached, many insurers began including sunset provisions in their policies in case TRIA was not reinstated. It is likely that the same will happen in the coming year to prepare for its possible expiration.  Marsh & McLennan’s Peter Beshar stated that concerns about TRIAs expiration “are already affecting the primary insurance market, particularly on the workers’ compensation line of business.”

To keep up on what’s going on with the TRIA renewal and hearings follow us on Twitter @WSRBsolutions.

Article by: April LaRita Green

1. Willie, Susan. "Congressional Budget Office Cost Estimate: H.R. 2761: Terrorism Risk Insurance Program Reauthorization Act". Congressional Budget Office.
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