TRIA Renewal Remains Uncertain

Efforts to extend the federal terrorism insurance backstop, set to expire at the end of the year, face significant hurdles despite widespread belief among carriers that such a program is necessary to prevent massive market dislocation.

A recent report by the Congressional Budget Office maintained that an extension of the Terrorism Risk Insurance Act would shift the enormous cost of another terrorist attack from private insurers to taxpayers. In addition, many see TRIA as a government bailout, further damaging chances for renewal.

But insurers say that without the government backstop, passed in wake of the Sept. 11, 2001 terrorist attacks, they will cut back the amount of coverage offered–or refuse to write policies altogether. They contend that if there is another attack, the federal government will be on the hook to pay claims; observers say that the government can either extend TRIA or pay after a terrorist strike.

“TRIA is standby capital,” says Joel Freedman, director of government affairs for the Hartford Financial Services Group. “And it’s a lot cheaper to have standby capital because it increases the chances that private insurers will come into the market.”
Congress enacted TRIA in 2002 to entice carriers to provide terrorism insurance to buildings and businesses that were desperate for it after the World Trade Center attack the previous year. TRIA guarantees that in the case of a terrorist attack causing more than $5 million in damages, the government will cover 90 percent of terrorism-related losses after insurers pay a deductible equal to a percentage of their net premiums from the previous year. Insurers pick up the other 10 percent of claims.

Total losses for the industry are capped at $15 billion, while government losses end at $100 billion.

TRIA was not retroactive. Insurers largely covered the $32 billion in claims that resulted from Sept. 11. Before then, the idea of a massive terrorist event on American soil was so inconceivable that insurers covered terrorism as an incidental to a larger policy, charging little or nothing for it.

To date, TRIA has cost the American public little because there has been no terrorist event to force its use. An insurance industry study conducted by R. Glenn Hubbard, the former chairman of the Council of Economic Advisers, found that TRIA ran up $4 million in administrative expenses in 2003.

Some conservatives in Congress believe that a federal presence in the insurance market chases private capital away. But Freedman and others say that the opposite is true. “TRIA gives people a sense of comfort,” said Andrew J. Barile, an insurance industry consultant. “The industry wants TRIA because they need a backup.”

As part of the legislation, Congress ordered the Treasury Department to study TRIA’s effectiveness and issue its findings by June 30 of this year. Once that report becomes public, the insurance industry–and its allies in real estate, tourism, hospitality, and major-league sports–will push for hearings and a bill to extend TRIA two years.

“We don’t really know if TRIA is going to be renewed,” said Lisa Stimson, a senior manager in KPMG’s audit and risk advisory service. “The U.S. Treasury Department is neutral on TRIA renewal at this point.”

If TRIA is extended, the insurance industry hopes to create a permanent private-public partnership to handle terrorism insurance. A plan like the kind put together by insurers and the state of Florida to handle hurricane claims could serve as a model.

However, if TRIA can’t get a place on the Congressional dance card this year or is rejected outright, then insurers have a backup plan. They have already gotten most states to agree to exclude terrorism from policies in place if TRIA doesn’t go past Dec. 31.

“If the TRIA backstops go away, the insurers will go to the states and submit new policy forms that would exclude terrorism from the list of protections,” says Steve Dreyer, regional practice leader for North American insurance ratings at Standard & Poor’s. “They have already greased the skids for that to happen.”

If a terrorist event were to occur after the end of this year and TRIA was no longer operational, then “businesses and property owners will take it on the chin,” Dreyer adds.

But some states with large populations, including New York, Florida, and Georgia, have not gone along with the exclusions. And in many states, mandated workers’ compensation coverage and “fire following” clauses (which cover fire damages following a terrorist attack) make these exclusions somewhat irrelevant. However, only TRIA keeps insurers from deciding to pull back from writing coverage at all, which happened following Sept. 11.

“If TRIA isn’t renewed,” said Julie Rochman, senior vice president of public affairs for the American Insurance Association, “insurers will become defensive underwriters. Companies will be forced to make very difficult decisions about whether to write or not write policies.”

This presents the government with an uncomfortable scenario: possibly refusing to cover damages in the event of a major terrorist attack.

“Under TRIA,” says Dreyer, “the federal government is openly on the hook. Without TRIA, the government is on the hook implicitly. The question is: Will the government continue its commitment to protect against terrorism risk in advance or will it let TRIA expire and just handle it when it happens?”
Also, TRIA will keep private insurers from leaving the terrorism insurance market completely. As Robert Hartwig, chief economist of the Insurance Information Institute, points out: “No insurer can afford to bet the corporate farm on terrorism risk.”

However, even with TRIA’s extension, there is no guarantee that insurers will offer terrorism coverage at an affordable rate. It is also unclear whether commercial customers will buy enough coverage to supply full property replacement value.

Terrorism is “a class of exposure that is difficult to price,” Barile said. And now that insurers know an attack can actually occur, they offer coverage at an incredible cost. “Terrorism coverage is so expensive, people don’t buy it,” he added. He suggests businesses form their own captives to insure against terrorism, that way they can retain the profits if an event does not occur.

“What TRIA does is allow carriers to satisfy the requirement that they are offering the coverage,” Barile said. “But nobody buys it or buys enough of it because it’s so expensive. And TRIA does nothing about that.”

Article reprinted with permission from KPMG’s Insurance Insider. Copyright 2005 KPMG LLP, the U.S. member firm of KPMG International,
a Swiss cooperative. All rights reserved.

Topics Catastrophe Carriers Market