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 Marc McTeague, president of Best Hoovler McTeague Insurance Services, a member of 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 McTeague 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.
Marc McTeague is the president of Best Hoovler McTeague Insurance Services, a member of SeibertKeck. Reach him at (614) 246-RISK or email@example.com.
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As your business needs and values change, your insurance policies need to be updated to ensure your company is properly covered.
A comprehensive risk assessment should be conducted at least every other year. This need often comes up when you’ve been with a broker for a long time, or if you switch brokers based on pricing and not added value, and the new broker copies incorrect information, says Eric Kerensky, sales executive at Momentous Insurance Brokerage.
“When I make an assessment appointment, I gather their current policies and review them line by line to make sure the values are up to date, such as personal property, building values, locations, fleet list, driver’s list and any operation changes that may have occurred,” Kerensky says.
Smart Business spoke with Kerensky about what’s included in a comprehensive risk assessment and how it helps your insurance bottom line.
What are the major advantages of an insurance assessment?
It gives you peace of mind that your broker is doing his or her job, properly covering all the risks in your particular field. It’s the worst feeling in the world when you pay for insurance and find out later a claim is not going to be covered. These assessments help safeguard you against that. You may want to have a specifically designed insurance plan, not just the standard issue insurance policy for the overall type of industry.
The assessment could also lower your insurance costs, especially if you might unknowingly have double coverage. You could even get a different line of coverage that covers something for which you currently pay extra. For example, each time a distribution company ships, it buys insurance through its common carrier, as opposed to buying a cargo policy. The cargo policy could be cheaper, depending upon how much is annually shipped, or broader, providing cover on the job location — eliminating the need to put it on the property policy — and for earthquakes.
What are some broker services that the assessment checks?
When conducting the comprehensive insurance review, you can discover if your broker is providing services like helping put a disaster plan in place. As another example, it may be worthwhile to have your broker and carrier do a site risk appraisal to lower re-occurrence of property claims or slip-and-falls.
Additionally, does your broker conduct a semi-annual client review? You don’t want a broker who just comes out at the end of the year to pick up the check. He or she should review your sales activity, which affects your general liability premium. If sales have increased, you don’t want to be faced with a large, year-end audit, or if your company is not hitting anticipated sales, you have the ability to adjust the policy and increase your operating cash flow.
How does the assessment audit the business operations?
The review will look at all business operations. If you’ve added or discontinued a service or business activity but haven’t communicated that to the insurance carrier, a claim could be denied.
It’s very important that your insurance carrier knows every time your company is named as an additional insured by another entity, usually in the form of a certificate of insurance they provide to you. This reassures underwriters and could lead to lower rates on your policy. For example, as the distributor, named as an additional insured on the manufacturer’s policy, your company isn’t liable for product malfunctions or recalls. Copies of all additional insureds on record should be passed along to your broker.
How does an assessment of claims impact the cost of risk?
The assessment should examine your claims activity. One important example is with workers’ compensation. Because rates are projected to increase, you want to ensure claims are getting closed promptly so they don’t get stuck in your reserves. Since many insurance carriers reserve more than what will likely be paid out, this inflates your claims amount and increases your overall workers’ compensation premium costs.
Eric Kerensky is a sales executive with Momentous Insurance Brokerage. Reach him at (818) 933-2711 or firstname.lastname@example.org.
Blog: For more information, take a look at our blog at www.momentousins.com/blog.