Risk Management

Is the Terrorism Insurance Logjam Finally Broken?

An insurance industry lobbyist blames delays in renewing a federal backstop for corporate terrorism insurance on Tea Party and libertarian legislat...
David KatzApril 11, 2014

With corporate terrorism insurance policies said to be hanging in the balance, four U.S. Senators introduced a bill yesterday to extend the Terrorism Risk Insurance Act for seven years.

English: Charles Schumer, United States Senato...

Sen. Charles Schumer

In the absence of congressional reauthorization of the seven-year federal reinsurance program before it expires at the end of 2014, insurers have been pulling back on the terrorism protection offered under workers’ compensation and property-casualty coverage, insurance industry players say.

But on Thursday, after four months of negotiating, four members of the Senate Banking Committee announced that they had “reached a crucial bipartisan agreement” on legislation to reauthorize TRIA, according to a press release issued by New York Democrat Sen. Charles Schumer. The other banking committee members introducing the bill were Republicans Dean Heller of Nevada and Mark Kirk of Illinois, and Democrat Jack Reed of Rhode Island.

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Created in 2002 in the wake of the 9/11 terrorist attacks, TRIA was reauthorized in 2005 and in 2007.  Christopher Flatt, a leader of the workers’ compensation practice at Marsh, the insurance brokerage, however, recalls congressional reauthorization going much more smoothly seven years ago. “I don’t remember the same level of scrutiny or the market disruption” that’s happening now, he said during a Marsh webcast on terrorism risk management on Wednesday.

“Some of our workers’ comp clients are being offered only short-term policies that are expiring with TRIA’s presumed expiration,” he added. Insurers are also lowering the levels of terrorism risk they’re willing to assume and asking corporate clients to pay higher premiums, according to Flatt, who said that defense contractors and hospitals are among the hardest hit, as are employers with large concentrations of risk in big cities.

Speaking during the webcast, Leigh Ann Pusey, chief executive officer of the American Insurance Association, a lobbyist for the property-casualty insurance industry, said that insurers have “limited appetite for [terrorism] risk without a federal backstop.” While the United Kingdom and other governments provide insurance directly to companies suffering terrorism-related financial losses, the United States only provides reinsurance backing to insurance carriers, which are required to offer the coverage in their standard policies.

The reason that legislators have moved so slowly on reauthorization compared with 2007 is that there’s been “tremendous turnover in Congress,” according to Pusey.  That places a burden on commercial insurance buyers and the insurance industry to educate the new members about TRIA, she said.

An equally tough challenge for TRIA advocates, though, is the political background of those new members. “Many of them come from the Tea Party, conservative, libertarian or other free-market groups that most of us, on any other day, might identify with on certain issues,” she said. “But I think they’re so spooked and have so much anxiety about government and taxpayer exposure and so much focus on constraint at the federal government level” that they can’t support the program.

“If you were sent to Washington to get rid of government programs and turn back everything to the private sector,” it’s understandable if you would oppose what seems like another big government program, Pusey added.

Terrorism Bill Could Strain Insurers

Insurance groups like the AIA and the Risk and Insurance Management Society, which represents corporate insurance buyers, were encouraged by the bipartisan nature of the legislation and the fact that the action had begun in the Senate. But the AIA has qualms that the proposal would place added strains on the industry’s capacity to underwrite risk. The legislation, for example, would phase in over five years a 5 percent hike in the share insurers must pay on covered terrorism losses, from the current 15 to 20 percent. That hike “could lead to decreased market capacity,” Pusey said in a release.

The Senate bill would also boost the likelihood that insurers would be required to collect surcharges from their corporate clients if a terror attack occurs. Those charges represent a recoupment by the federal government of its terrorism reinsurance payments to the insurance industry.

Under the current version of TRIA, when the industry’s aggregated insured losses are less than $27.5 billion, insurers must collect mandatory policy surcharges from their clients and pay them to the federal government.

But the proposed Senate bill would raise the mandatory recoupment threshold to $37.5 billion, so that when the insurance industry’s aggregate uncompensated losses fall below that dollar amount, the government will recoup TRIA reinsurance payments it’s made to insurers.

Another insurance industry qualm: With less than eight months left before TRIA’s expiration, will Congress get the job done? Although the introduction of the bill in the Senate “is a positive step forward,” said Wendy A. Peters, a senior vice president in the terrorism practice group of Willis North America, in a release issued by the insurance brokerage firm, “it does not preclude the possibility of further delays by the House of Representatives, [which has] been more vocal in [its] opposition” to reauthorization.

Photo credit: Wikipedia

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