If It Ain’t Broke, Don’t Fix It?

It has been just over 18 years since the tragic events of 9/11 and the insurance industry tumult that followed.

Just over a year later, Congress enacted the Terrorism Risk Insurance Act in an effort to ensure the industry would continue to insure “acts of terrorism” going forward. The grand bargain: the industry had to “make available” terrorism cover in exchange for a government reinsurance backstop intended to replace the private market reinsurance that evaporated in the wake of 9/11.

The last program reauthorization—signed into law on Jan. 12, 2015, after the program expired on Dec. 31, 2014—expires at the end of 2020. No one wants to see a repeat of the 12 days of uncertainty and lost time and expense trying to put fingers in the dyke of the then (temporarily) expired TRIA program. But the fundamental dynamics of Congress, especially in the current political moment, argue against a speedy resolution.

That said, the House has begun its reauthorization discussions, and legislation has been introduced and was passed out of the House Financial Services Committee unanimously on Oct. 31 (a clean seven-year extension with no changes to the program other than a study of the coverage of cyber-related terrorism risks). Full House action is likely by the time you are reading this column (or by year-end at the latest, I hope). The Senate waits in the wings.

TRIA Framework

The framework created in 2002 has weathered well in a world in which there have been no triggering terrorist events in the United States since 9/11. Terrorism coverage is widely available and, according to the Department of the Treasury, which is tasked with issuing annual reports on the program, uptake rates nationwide in the lines of coverage included under TRIA are well over 70% (although there is some variance when you evaluate those uptake rates on a regional and/or industry basis).

In exchange for the “make available” obligation, the U.S. government provides a terrorism reinsurance facility for certified “acts of terrorism” subject to a series of risk sharing requirements:

• Program reinsurance is not available until industry losses exceed $200 million (but Treasury can certify an event as an “act of terrorism” if insured losses exceed $5 million).

The $200 million in minimum industry losses was not a feature of the original program but was added in the 2005 reauthorization at $50 million in 2006 and $100 million in 2007. In the 2015 reauthorization legislation, that amount was increased by $20 million per year.

• The facility is not available to an insurer for losses from certified “acts of terrorism” until that insurer first has satisfied a deductible equal to 20% of its direct written premium for the prior year for the lines of insurance covered by the program (primarily commercial P&C lines).

The deductible under the original 2002 program was 7%, but it went to 10% in the second year. The deductible increased to 15% and then to 17.5% under the first reauthorization in 2005, and it increased to 20% under the 2007 reauthorization legislation, where it has remained fixed.

• After the insurer has satisfied its deductible, it is eligible to receive co-share payments from the U.S. government of—in 2020—80% of its losses.

Insurer co-shares were 10% under the initial program, increased to 15% in the 2007 reauthorization, and increased an additional 1% per year under the 2015 reauthorization, which expires next year.

• The Department of Treasury is required to impose a post-event policyholder premium surcharge to recover any losses below an industry threshold which—in 2020—will be set at the amount equal to the sum of the potential deductibles and co-shares of all of the insurers eligible to participate in the program less the deductibles/co-shares actually incurred by those insurers for event losses. The surcharges are required to be set at 140% of the difference between those two amounts, but they shall not exceed 3% of paid premiums in any single year.

• Overall TRIA insured losses are capped at $100 billion.

The program has critics on every side. It is an industry bailout that puts the taxpayer at risk; it crowds out private reinsurance; it is too expensive for the industry; it is punitive to larger insurers that realistically will never benefit from the federal TRIA backstop absent an extraordinary event given the magnitude of their deductible obligations, which are based on overall direct written premium and not on loss exposure; it is punitive to smaller insurers because an isolated event could jeopardize the solvency of a smaller insurer if overall terrorism losses do not exceed the $200 million threshold; etc.

There are answers, of course. The program is a grand—and elegant—bargain that has maintained market stability at relatively minimal cost and that would harness the industry’s financial wherewithal and its infrastructure if we were to fall victim to a significant terrorism event (loss adjustment and relief delivery, for example). Taxpayers avoid risk because of the combination of insurer obligations (high deductibles and co-payment obligations) and post-assessment surcharges. There is some reinsurance available, but it appears to primarily reinsure the co-insurance obligations and not the insurer deductibles (which generally are double the level of a normal private market reinsurance arrangement).

We could try to fix some of the problems. But that tends to divide the industry, especially the big insurers from the small. And the biggest problem is that the program as currently structured likely is one and done: if the industry were to absorb losses to the full extent possible under the program, it is not clear that insurers could gird for any next round. But that is not addressable in the current political moment. Our best hope lies with a clean extension for as long as we can get. Luckily, the industry and policyholder communities seem aligned on this objective.

Our biggest enemy is the short legislative calendar and the press of other high-priority issues. We can, should and will agitate for early action, and our pleas are being heard at least in some quarters. You and your clients need to echo those sentiments. But you also need to be sure that you are prepared in case the calendar runs out on us once again and we find ourselves in a program gap moment. Make sure you and your clients understand the limitations on their coverage (which likely run out with the program, both if losses exceed the $100 billion threshold and if the program expires for any length of time) and that you have contingency plans in place to fill any coverage gaps if the client deems the terrorism coverage essential.

A slight twist to the old adage—advocate for the best (because hope is not a strategy) but plan for the worst. At this time, that’s all we can really do.