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5 key questions about terrorism insurance (TRIA)

Credit, Political Risk and Terrorism|Property
Geopolitical Risk

By Wendy Peters | September 2, 2019

This installment from our TRIA 2020 Legislative Update series, covers fundamental differences between TRIA and traditional coverage as well as questions we get from clients.

The Terrorism Risk Insurance Act (TRIA) was passed by the US Congress in 2002 in the aftermath of the terrorist attacks of September 11. Providing a federal backstop, the law enables insurers to write coverage for risks that could otherwise render them insolvent in the event of a large-scale terrorist attack. Since its passage, the law has been reauthorized three times, reducing the U.S. government’s share of the burden with each extension.

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About our TRIA 2020: Legislative Update series

As the Terrorism Risk Insurance Act (TRIA) comes up for renewal on December 31, 2020, we will continue to take a holistic view on the status of terrorism risk coverage and its evolution over the years. We focus on major themes and talking points during the TRIA renewal considerations.

With TRIA scheduled to expire again next year, several questions once again are top of mind:

  1. How different is TRIA from traditional (re)insurance?

    The TRIA program does not require participants to pay premiums. Instead, it uses a post-event recoupment mechanism. It is hence generally referred to as a federal backstop. This structure allows it to be less capital intensive and makes “pricing” more accurate than a reinsurance approach. However, it requires insurers to maintain significant amounts of exposure through insurer deductibles and copayments, creating a market demand for the development of terrorism reinsurance in the private market.

    The term “backstop” is used to describe this program because the federal government facilitates and backs it up, though much of the upfront risk is borne by the insurance industry. The post-event recoupment provides a reimbursement of losses, but unlike reinsurers the federal government does not bear the risk. The TRIA program does not try to predict the risks and potential costs (premiums) in advance. Rather the intent is to pool the risk and then distribute the costs of a loss after the terrorism incident.

  2. How does it really benefit the insurer?

    TRIA requires that commercial property and casualty insurers offer terrorism coverage in the policies they are selling. For a terrorism loss to be covered by the program, it needs to be certified as an act of terrorism by the U.S. government and losses from the event must exceed $5 million. An insurer’s recovery under the program is based on a number of factors including its individual deductible, the program trigger, the federal share of compensation of an insurer’s losses and the program cap.

    Before any federal payments are made, the program trigger must be met. The trigger is the minimum amount of aggregate insured losses resulting from a certified act of terrorism taking place in a particular calendar year.The loss trigger was $120 million in 2016 and has increased by $20 million every year until it reaches $200 million in 2020. The insurer’s losses must also exceed its own deductible, which is 20% of its annual direct earned premiums from the previous year.

    Interestingly, the program has an annual cap of $100 billion (more than twice the losses from the September 11 attacks). However, if total insured losses exceed $100 billion in a calendar year, the program will not make additional payments and insurers that have met their deductible are relieved of any liability that exceeds the cap.

  3. How has TRIA evolved since its passage?

    Due to quick action by the U.S. Congress in the aftermath of September 11 terrorist attacks, the private insurance market was able to stabilize and build capacity to offer terrorism insurance that is largely affordable to U.S. policyholders. However, due to the unpredictable nature of a terrorist attack and the limited frequency of events, the private insurance market still relies upon government involvement in the event of a significant terrorism event.

    During the last 18 years, Congress has passed three extensions to the TRIA program – in 2005, 2007 and belatedly in 2015. The 2005 extension primarily focused on reducing the government’s upfront financial exposure under the act, whereas the 2007 extension left most of the upfront aspect of the TRIA program unchanged but accelerated the post-event recoupment provisions. The 2007 legislation also included the only expansion of the TRIA program since initial enactment. It extended the program to cover any acts of terrorism, as opposed to only foreign acts of terrorism.

    In 2015, Congress once again extended the program until the end of 2020, while reducing the government’s share of potential loss. Specifically, the extension:

    1. Gradually increased the program trigger from $100 million to $200 million
    2. Reduced the government share of the losses from 85% to 80%
    3. Increased the insurer aggregate retention amount from $27.5 billion to $37.5 billion while indexing it to the sum of insurer deductibles in years thereafter
  4. How does TRIA stack up against terror programs in other countries?

    Beyond the United States, many other countries have significant government programs for terrorism insurance. Many came into existence as a “wake-up” following the September 11 attacks. Pool Re in the United Kingdom was set-up in response to I.R.A. bombings in London, while Israel launched The Victims of Hostile Actions (Pensions) Law and The Property Tax and Compensation Fund Law in 1961 and Spain launched Consorcio de Compensación de Seguros (CCS) even further back in 1954.

    The unwillingness of private insurers, even in a large pool, to take on terrorism risk at catastrophic levels means that although terms and conditions vary considerably between the country programs for terrorism insurance, unlike TRIA, many operate as reinsurance with some form of government involvement as a guarantor of the fund. The Australian Reinsurance Pool Corporation (ARPC), for example, was established under the Terrorism Insurance Act 2003 with a number of funding layers including a co-reinsurance layer as well as a government guarantee.

  5. So, if it’s a win-win for everyone involved, what causes the TRIA debate during each renewal?

    Critics of the program have continued to argue that by extending TRIA the government is prolonging the burden on taxpayers to benefit large organizations. They contend that with a much-stabilized insurance market since the September 11 attacks, there is no apparent need to continue providing a federal backstop to sustain low-cost terrorism cover.

    The debates have centered around the fact that in the current scenario with 18 years of TRIA backup, the private market for terrorism insurance has developed enough appetite to sustain itself. With increased demand and research, models for terrorism risk can be further developed to facilitate underwriting terrorism risk.

    While such factual arguments are true, the unpredictable nature of terrorism risk makes it impossible to price at a level that will promote widespread purchasing of terrorism insurance. The obvious benefit of TRIA continues to be for the black swan events due to their unpredictability. Like during September 11 attacks, the scope of the risk turned out to be much greater than had previously been expected, and reinsurers withdrew from the market. The primary insurers, in turn, sought state regulators to exclude terrorism from coverage.

    However, it is with the federal backstop intervention that the current prices have dropped to a level that most insureds are willing to pay. Currently, the take-up rate for terrorism insurance has relatively stabilized at about 60%. We will discuss this further in future editions of this series.

    Looking back, the federal backstop has provided a risk pooling mechanism to address the catastrophic risks associated with just some terrorist activities, but it has left insurers with enough “skin in the game” to create an incentive for a private market to stabilize, reprice and build capacity. Although the U.S. has not been subject to any large-scale terrorist events as complex as those of September 11, terrorism risk is still highly unpredictable and potentially catastrophic.

    Insurers have become more willing to put up some of their capital to cover terrorism risk and the current stable market is expected to fall back to severe constrictions if this backstop were withdrawn. Hence the need to sustain TRIA is imperative for the terrorism coverage market even beyond 2020.

    Looking ahead

    As TRIA’s expiration approaches next year, renewal cannot be taken as a given. Despite historically bipartisan support for the law, potential for renewed debate could be high — especially in a highly divided and fractious US political environment and as a presidential election looms.

    Previously in this series: Terrorism insurance: Time to revisit the ghosts of 2015

Author

Wendy Peters
Global Head of Terrorism within Financial Solutions

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