Terrorism Risk Insurance: TRIA Is in the House!

June 30, 2014

The future of the Terrorism Risk Insurance Act (TRIA), slated to expire on December 31, 2014 in the absence of Congressional action,has been consistently trending as one of the top headlines in insurance industry news. Most recently, the House Financial Services Committee introduced legislation to extend the TRIA program for an additional five years. Earlier in June, the Senate Banking, Housing, and Urban Affairs Committee voted unanimously to move forward with their own bill to reauthorize the program for seven years.

So just why is the potential expiration or reauthorization of TRIA so newsworthy?

Soon after 9/11, terrorism risk insurance became either unavailable or unaffordable as many insurance providers excluded terrorism risks from standard commercial insurance policies. A threat to the broader economy loomed as a result as many projects were abruptly put on hold, particularly within the construction and real estate sectors-putting at risk the jobs of hundreds of thousands of U.S. workers.

President George W. Bush signed TRIA into law in 2002 to create a federal reinsurance backstop that would allow for public and private sharing of insured losses resulting from future terrorist attacks. Intended to be only a temporary measure-providing time for the private market to stabilize and to ensure protection for consumers and the broader economy-it has been amended and extended twice to prevent it from expiring.

While the insurance industry has become increasingly willing to cover terrorism risks over the years, the federal backstop remains a critical component to the stability of the private insurance market and to the broader economy.

There is still a long way to go before any bill to extend TRIA yet again could be enacted into law-leaving plenty of time for both the House and Senate to make revisions to their proposed legislation. But one thing seems clear: while there are significant differences between the House and Senate bills, both include a reduced federal role in the program.

Select legislative aspects from the House and Senate bills that significantly differ from the current TRIA program

  S.2244 - The Terrorism Risk Insurance Program Reauthorization Act of 2014 (Senate) H.R. 4871 - TRIA Reform Act of 2014(House)
Expiration of Program December 31, 2021 December 31, 2019
Federal Share of Insured Losses (Co-Pay) Phased reduction of government's share of co-pay from 85% to 80% Phased reduction of government's share of co-pay from 85% to 75%
Program Trigger No change Phased increase from $100 mil to $500 mil in insured loss for conventional terrorist attacks; trigger remains at $100 mil insured loss for Nuclear, Biological, Chemical and Radiological attacks
Availability of Coverage No change Small insurers can voluntarily opt-out of TRIA's mandatory availability requirement

One of the major legislative differences between the bills is related to the Houses' separation of coverage for conventional terrorism attacks (i.e., bomb blast and air crash events) and Nuclear, Biological, Chemical and Radiological (NBCR) attacks. For conventional terrorist attacks, the reform would gradually raise the program trigger to cover only events resulting in more than $500 million in insured losses. The program trigger would remain at the $100 million threshold for all NBCR type attacks.

Supporters of the House bill argue that the increase in the event trigger reduces the insurance industry's reliance on taxpayers and the federal loss sharing program. Those that are in opposition of the House bill say that the measure would have the opposite effect, as smaller insurers may not have the capital needed to bear more of the risk if the federal program is significantly scaled back. This could result in concentrations of risk if the smaller insurers are forced out of the terrorism insurance market.

While advances in enterprise risk management and terrorism modeling capabilities continue to improve, the need for a federal reinsurance backstop program still exists. The absence of federal loss sharing under TRIA would cause further disruption to the terrorism insurance market by limiting capacity and leading to an increase in pricing-leaving consumers and U.S. businesses at risk from future terrorist attacks. While the current legislation proposals between the House and the Senate may have stark differences at the moment, both bills are a positive sign that we are moving towards a bipartisan agreement for reauthorizing TRIA. I remain optimistic that even within a divided Congress, the life of TRIA will be extended once more.

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