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Terrorism insurance: Time to revisit the ghosts of 2015

Allmänt ansvar & produktansvarUbezpieczenia odpowiedzialności cywilnej|Ubezpieczenie kredytów, ryzyka politycznego i ryzyka terroryzmem|Mienie|Workers Compensation
Geopolitical Risk

By Wendy Peters | July 17, 2019

The U.S. federal backstop for terrorism insurance is scheduled to expire at the end of next year. Will Congress extend the law once again?

As we head toward December 31, 2020, when the current iteration of the U.S. federal backstop for terrorism insurance may expire, it’s worth remembering the failure of Congress to authorize the extension of the Terrorism Risk Insurance Act (TRIA) at the end of 2014. While the expiration in 2014 turned into more of a lapse, the impact and repercussions of the 12-day period of expiration in 2015 created an environment of uncertainty and upheaval for those impacted.

History of TRIA and TRIPRA

The Terrorism Risk Insurance Act (TRIA) was originally enacted in 2002 in response to the inability of insurance markets to predict, price and offer terrorism risk coverage to commercial policyholders. The program was envisioned as a temporary federal program to provide public and private compensation for certain insured losses resulting from a certified act of terrorism. It required the private insurance industry to shoulder a significant portion of losses from acts of terrorism, with a federal backstop kicking in only at catastrophic levels.

TRIA was extended in 2005, 2007 and again in 2015, when it was reauthorized as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA). Changes made over the years increased the private sector’s share of terrorism losses while decreasing taxpayer exposure. However, this hasn’t been smooth sailing or as linearly logical as it could have been, illustrated most dramatically by the 2014 lapse.

TRIA was extended in 2005, 2007 and again in 2015, when it was reauthorized as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA). Changes made over the years increased the private sector’s share of terrorism losses while decreasing taxpayer exposure."

Without a reauthorization of TRIA, insurers were in a state of uncertainty about the right to cancel terrorism policies after January 1, 2015. They were likely to do so for fear of insolvency should a massive terrorist attack take place without government backup.

The Property Casualty Insurers Association of America (PCIAA) criticized Congress’ failure to reauthorize TRIA, as the threat of a terrorist attack against the United States had been at its highest level in a decade, when TRIA expired. There was widespread anticipation that should a massive attack occur before TRIA was reauthorized, there could be no terrorism insurance coverage or taxpayer protection.

There was a barrage of questions that resulted from the uncertainty. There were questions about whether insurance companies would be able to offer terrorism risk coverage for commercial property and casualty policies, and doubts about the extent, availability and affordability of terrorism risk insurance without TRIA.

Equally, there was speculation as to what type of industries and locations were in greatest need of terrorism risk insurance and how they would be impacted if TRIA was not reauthorized. Some insurance ratings agencies speculated that ratings downgrades of insurers would have to take place in order to reflect the increased risk.

TRIA and catastrophic risk

As TRIA comes up for reauthorization over the next 18 months, the larger themes driving the discussions will be trending to address the catastrophic potential of cyber network breaches to paralyze industries and infrastructure. While in 2017, the U.S. Department of Treasury took steps to provide clarity as to the intended coverage scope of TRIA to respond to some of the consequences a network breach, many questions still remain as to potential limitations of the program to respond to the significant potential of an event.

As TRIA comes up for reauthorization over the next 18 months, the larger themes driving the discussions will be trending to address the catastrophic potential of cyber network breaches to paralyze industries and infrastructure."

Additionally, there is little indication of insurer interest to expand coverage scope of most policies to include events of biological, chemical, radiological or nuclear terrorism in the absence of the TRIA backstop. Coverage may no longer be accessible to most insureds, despite a recent proliferation globally in these types of attacks.

The year ahead

We expect to delve deeper into these emerging issues, as well as some more fundamental ones, in subsequent blogs, which explore the issues at play in the run-up to TRIA 2020 reauthorization:

  1. What impact will the growing uncertainty have in the months ahead for program renewals which extend past 2020?
  2. What are the factors that drive the reauthorization debate (yet again)?
  3. What alternative mechanisms could change the distribution of the financial risks of a terrorist attack?
  4. Will an election year and the absence of major events in the US diminish impact Congressional focus on the legislation’s extension?

History has a strange way of repeating itself, despite alarms raised and lessons learned. Businesses, risk intermediaries and insurers woke up to a harsh reality and unpleasant New Year the morning of January 1, 2015. That it was eventually rescued and reauthorized 12 days later is a different story.

Author

Wendy Peters
Global Head of Terrorism within Financial Solutions

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