Uncertainty Ahead over Terrorism Risk Insurance Act

As the ball drops on New Year’s Eve, uncertainty will surely rise over the impending expiration of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA). Under the program, the federal government caps losses faced by insurers in the event of a major terrorism event. Although sunset for the law would not occur until December 31, 2014, policyholders may soon see rising costs and conditional terrorism exclusions for renewals. Because commercial real estate loans usually require terrorism coverage, potential coverage gaps could force many loans into technical default. What is ahead in the coming months for TRIPRA?

The act originated as a temporary response to the September 11, 2001 attacks. Before those catastrophic events, business insurers often included terrorism coverage in general policies. But after $30–40 billion in 9/11 losses, private coverage became too expensive or unavailable until Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002. That legislation created the Terrorism Risk Insurance Program (TRIP), which requires business insurers to offer terrorism coverage and provides a federal reinsurance backstop to private insurance losses in case of a large-scale terrorist attack. The program would only be triggered by an event certified by the Secretary of Treasury as an act of terrorism, with losses of $5 million in 2002. TRIA was amended and extended in 2005, with the trigger re-set to $50 million in aggregate insured losses. The 2007 extension, known as TRIPRA, further raised the trigger to $100 million before the federal government would share losses. Insurers also must cover a 20% deductible before the government covers 85% of losses up to $100 billion. To protect taxpayers, the act also assures recovery of federal losses through an added a surcharge to future insurance premiums if TRIP is unlocked.

TRIP has never been triggered, yet the act is credited with stabilizing the economy and supporting development, especially in the central business districts of cities considered high-risk terrorism targets. Bipartisan bills have been introduced to extend the program, and three hearings on the matter were held last fall by the House Financial Services Committee and its subcommittee on housing and insurance. At the November 13 hearing, a witness from Lloyds of London testified in favor of reauthorization, noting the difficulties of modeling risk of terrorism because the events are rare and difficult to predict, and the information needed for risk assessment is often classified. According to Sean McGovern of Lloyd’s, “Without TRIA, the aggregation of risk will quickly lead the industry to exclude coverage or withdraw capacity from key economic centers in the U.S.” A witness from the Insurance Information Institute also cautioned against raising the trigger above $100 million because smaller insurers would likely be deterred from offering terrorism insurance. Supporters at each hearing have urged timely renewal for varying terms; some pressed for making the program permanent. In a press release announcing his sponsorship of a reauthorization bill (H.R. 508), Representative Michael Grimm (R-NY) said, “It would be irresponsible to allow TRIA to lapse, which is why I introduced the TRIA Reauthorization Act to extend this vital program for another five years.”

Yet calls for reform or expiration have also been voiced at the hearings and elsewhere. Representative Jeb Hensarling (R-TX) opposed reauthorization in 2007 and spoke against it at a September 19 House hearing before the full committee. Hensarling and others contend that the bill was designed as a short-term measure and may have inhibited innovations to cope with terrorism risks in the private insurance market. A wide-ranging panel discussion in November, hosted by the National Journal, explored many concerns, such as escalating costs if the program were expanded to cover cyber-terrorism or attacks by weapons of mass destruction. Representative Randy Neugebauer (R-TX) emphasized that the federal track record for insurance is less than stellar. “When the government is involved in it, it’s priced politically,” said Neugebauer. He and other critics want more market-based pricing, plus less taxpayer risk through a significantly higher trigger. By reforming the legislation to reduce government involvement, Neugebauer believes, TRIP could be phased out within 5 years.

But even most critics recognize the current need to continue TRIP in some form. Further, it seems that few favor a protracted period of uncertainty over the legislation, recognizing that the possibility of gaps in coverage could have stifling effects on credit and development. According to a presidential working group studying TRIP-related issues, the policyholders at greatest risk of finding coverage too expensive or unavailable are owners of high-value properties in high-risk geographic locations. To avoid a potential crisis next December, the House will need to mark up the proposed reauthorization legislation early in 2014. No one wants to be worrying this time next year about the fate of TRIP when the ball drops for 2015.