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Turbulence with TRIA Re-Authorization

The United States Senate has ended their most recent session without extending the Terrorism Risk Insurance Act (TRIA) past December 31, 2014.  This has created turmoil for insurers and the policyholders they cover.  This apolitical piece is intended to address, at a high level, why TRIA was instituted, the structure of the program and possible implications of a non-extension of the Act. 

The Terrorism Risk Insurance Act (TRIA) was created in 2002 to reinvigorate a dried up terrorism insurance market. Insurance companies (and their supporting reinsurers) had largely withdrawn from covering terrorism due to the substantial losses incurred September 11th, 2001 and their inability to model such events. Policy exclusions and limitations made it nearly impossible for many policyholders - especially those in metropolitan areas - to secure the insurance required in their loan or debt covenants.  This created financing challenges and posed a sizeable risk to the greater US economy.  In response, the Federal Government instituted TRIA as a financial backstop.

TRIA operates like a reinsurer, participating on large “certified” terrorism losses.  For a terrorist attack to be “certified”, and thereby TRIA eligible, the event must cause over $5 million in damage and be qualified by the Secretary of the Treasury and other federal officials as satisfying the Acts criteria.  Over the years TRIA has undergone a few iterations, generally increasing the insurance industry’s participation.  Most recently the Act has been limited to $100 billion in losses.  TRIA funding is triggered by events generating over $100 million in total insured losses (from all affected insurers).  Commercial insurers are subject to a deductible of 20% of their TRIA eligible premiums and a 15% participation above that for their share in the loss.  Commercial insurers are also subject to a $27.5 billion “industry aggregate” retention spread amongst one another.  See image on the right for an example of an insurer that writes $5 billion in TRIA eligible annual premium and suffers $30 billion in TRIA eligible losses.

While the full effects of a TRIA non-renewal are unknown, many commercial insurance observers have been quick to speculate on the implications.  As it stands, several commercial policyholders have “sunset clauses” in their insurance policies making terrorism coverage contingent on the Act’s legislative approval, which affect the coverage immediately on January 1, 2015.  On the other hand, some carriers have underwritten TRIA-like extensions in the event TRIA does not pass.  It is important for insureds to recognize these provisions in their policies.

The consequence to the overall insurance market from a TRIA non-extension is less clear.  Insurance companies may seek to carve out coverage for terrorism and/or look for additional premium to fill the TRIA void on property and liability policies.  While carriers may exclude terrorism coverage in these policies, statutory Worker’s Compensation does not allow for such a limitation.  Insurers, already wary of concentration concerns, may seek to reduce their metropolitan Worker’s Compensation portfolio without proper reinsurance (reinsurers may be equally wary). Cancellations and unexpected premium increases could follow a non-extension of the Act.

The insurance industry finds itself in one of its most highly capitalized positions relative to historic norms.  In a sense, this makes a possible non-extension of TRIA well-timed if carriers are willing to put that capacity towards developing more robust terrorism insurance products.  Nonetheless, how carriers choose to use their capital is certainly not predicated solely on policyholder demand. 

The consensus is comprehensive private market terrorism products (if possible) would take time to develop and certainly would not be available immediately.  Additionally, many believe insurers (and reinsurers) will not likely be willing to put up an appreciable amount of capital for nuclear, biological, chemical or radioactive risks.  Whether or not the private market is able to be on-par with a TRIA backed industry is up for debate.  Challenges with catastrophe modeling capabilities largely underlie insurer hesitancy in underwriting coverage.

Insureds should be prepared for some volatility in their property casualty insurance program through 2015 in the event of a TRIA non-extension.  Hopefully the Act’s direction will become clearer in early January when Congress reconvenes so that policyholder and insurer uncertainty can be eased.  Possible coverage options for the interim could be derived from standalone terrorism programs, and/or relying on “fire following” state laws in which fire loss following a terrorist event cannot be excluded on property policies. Regardless of the outcome, it is important for policyholders to understand their insurance program and how it is influenced by the TRIA turbulence.