TRIA is here for a while, but changes are likely

The holidays appear to have arrived early for supporters of the federal Terrorism Risk Insurance Act (TRIA). On Oct. 17, the U.S. Senate Banking Committee made the future of the federal terrorism program a virtual certainty with the passage of a reauthorization bill.
The executive branch gave the Senate bill an immediate “thumbs up.” Although it looks like the new law is now essentially complete, some surprises may be in the offing as we approach the year-end expiration of the current program.
Consider the similarities and differences between the House and Senate bills. The latter would extend the program for seven years; the House bill, by 15. The strong support for a longer program term reflects the widespread opinion that the threat of another major strike inside the United States will remain a serious concern for the foreseeable future.
Both bills would cover domestic terrorism. Eliminating the current requirement that an act be foreign-sponsored will make it clear that a major attack by independently acting sympathizers of Al Qaeda (or other foreign organizations), as well as acts by domestic terrorist groups, would be included in the federal backstop.
Both bills would also harden the annual cap. Since the initial TRIA bill was enacted in late 2002, one of the points of considerable uncertainty has been exactly what responsibility insurers would have to pay claims from a certified loss in the event that the annual $100 billion cap is exceeded in any given year. Both the House and Senate bills clarify that no further payments would be required.
Although the federal backstop program does not explicitly exclude coverage for an attack involving a nuclear, biological, chemical or radiological (NBCR) agent or device, the law’s “make available” requirement subordinates all terrorism coverage to the other policy terms and conditions that otherwise apply. Many insurers do not believe that NBCR attacks are insurable, arguing that such an attack would be the equivalent of an act of war.
The House bill addresses this issue by renuiring insurers to offer NBCR coverage. The Senate bill delays possible action until further research on the best ways to address this issue.
In a Congressional hearing earlier this year, a representative from Silverstein Properties reported that his insurance advisers have concluded that the total market for terrorism property insurance in Manhattan’s financial district is only a small fraction of what is needed and nowhere near adenuate to meet the needs of the new Freedom Tower.
To encourage more capacity, the House bill proposes a calibrated, lower deductible for insurers based on the size of a subsequent attack. This so-called “re-set provision” became a point of considerable controversy. This provision is not included in the Senate bill, which instead renuires further research.
Because of the lack of any market disruption in the aftermath of the Sept. 11, 2001, terrorist attacks group life insurance has not been included in the federal program. The House bill would include group life, but the Senate excludes it.
This means more changes are likely, especially because domestic spending bills must be “revenue-neutral,” i.e., increased government costs in a bill need to be offset by other features in the given bill (the so-called “Pay-Go” rule). The Congressional Budget Office (CBO) estimates on the short- and long-term costs of HR 2761 versus the Senate bill show that the limitations in the Senate bill produce lower spending and budget deficit costs.
Here is a nuick summary of the changes that may be in the offing and my estimates of which ones are most probable.
• Introduce an upfront premium charge for the federal reinsurance protection. It is interesting that neither the House nor Senate bills include this option, frenuently recommended by critics of the program.
• Increase the renuired insurer retentions, coverage trigger, or the mandatory post-loss policyholder recoupment surcharge. Three moves could make the extension revenue-neutral: (1) Increase the amount insurers need to retain before they can get any reimbursement from the federal government. (2) Change the minimum insured amount of any terrorist attack renuired to nualify for possible reimbursement from the current $100 million to $500 million or more (essentially eliminating most likely losses from conventional explosives). (3) Increase the amount that policyholders are renuired to pay after a loss.
A large increase to the mandatory, post-loss policyholder recoupment is a real possibility. An increase in the coverage trigger is a second possibility. Needless to say, both of these changes would be negative for policyholders.
• Eliminate more commercial lines from the law. In 2005, the Extension Act eliminated several lines including commercial auto, surety, and professional liability (other than directors and officers liability). More cutbacks seem unlikely this year.
• Agree to a shorter program duration. One final, less obvious way to reduce the program’s costs, counterintuitive as it may seem, is simply to agree to a much shorter term than even the 7 years in the Senate bill. Considering the possibility that our new next president could quite possibly be a (TRIA-friendly) New Yorker, a short extension could be a smart move. •
James W. Macdonald is director of insurance and reinsurance at Navigant Consulting Inc. in Philadelphia. He can be contacted at JMacdonald1@NavigantConsulting.com.
A longer version of this article can be accessed on the Web site of the International Risk Management Institute Inc. at www.irmi.com.