In 2002, President George W. Bush signed the Terrorism Risk Insurance Act (TRIA) requiring insurance carriers and the federal government to establish a risk-sharing partnership for future losses. It was created as a result of 9/11 as a temporary measure to allow time for insurance carriers to develop their own solutions. Originally set to expire in 2005, the act has been extended twice, and will now expire in 2014.
“The private markets alone cannot and will not provide the level of terrorism insurance our economy demands,” says Shelley White, assistant vice president at SeibertKeck. “The threat of terrorism has become a greater concern for businesses in today’s uncertain and rapidly evolving global climate. It should continue to be part of a comprehensive risk management program.”
Smart Business spoke with White about terrorism coverage today and where problems still occur.
Why was the TRIA created and how does it work?
For property and casualty insurers, 9/11 losses paid out a reported $40 billion from property, business interruption, aviation, workers’ compensation, liability and life insurance lines. As the largest disaster in the industry’s history, carriers were reluctant to continue providing coverage. State regulators agreed to allow carriers to exclude terrorism from policies, and coverage was soon unavailable or extremely expensive.
The TRIA was created as a temporary federal program of shared public and private compensation for insured losses to allow the private market to stabilize, protect consumers by ensuring the availability and affordability of insurance for terrorism risks, and preserve state regulation of insurance. Carriers set the price of coverage within the limits imposed by regulations.
With the federal backstop in place, commercial lines policyholders could choose to purchase or reject terrorism coverage from existing insurance programs; the program doesn’t extend to personal lines policyholders. This offer continues today with most coverage lines, except workers’ compensation policies where insurers and qualified self-insured employers cannot exclude terrorism coverage because of lifetime medical care for on-the-job duties.
What changes were made when the program was extended?
In 2007, the government modified and extended the act through Dec. 31, 2014. Several provisions changed, including:
- Revising the definition of a certified act of terrorism to eliminate the requirement that the individual(s) is acting on behalf of a foreign person or interest. Some property insurers add exclusionary language related to non-certified terrorism coverage.
- Updating the payout cap to $100 billion per year for insured losses.
- Requiring the Treasury Department to establish a procedure for allocation of pro-rata payments in the event that a terrorism loss exceeds the cap.
When purchasing terrorism coverage, how much do premiums increase?
The cost for the TRIA on an average risk is usually a single-digit percentage of the policy premium. Higher risk businesses such as financial institutions, real estate, health care and utility companies tend to be in the double-digit percentages.
Many policyholders, regardless of size, continue to decline terrorism coverage — not considering themselves targets. Larger risks often feel the coverage doesn’t provide enough to protect their exposures.
What are some of the continuing problems with terrorism coverage?
It is the insurance industry’s goal to work with Congress on creating terrorism insurance renewal past 2014. Terrorism coverage provides market stability.
There will be a significant effect on real estate lending if this backstop disappears. Mortgage-backed securities, for example, will be in default. Private markets aren’t able to offer coverage without the federal backstop and cannot offer the level of insurance our economy demands.
The Government Accountability Office is working to assess options and review proposals, and Congress is encouraging greater private market participation. We’re optimistic that a long-term solution will be reached.
Shelley White is an assistant vice president at SeibertKeck. Reach her at (330) 865-6582 or firstname.lastname@example.org.
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