TRIA Expiration Looms Large For Insurers

By Caroline McDonald

NU Online News Service, Aug. 21, 4:24 p.m. EDT, Orlando,Fla.? Insurers facing multiple challenges from the federalterrorism act have risen to the occasion--developing pricing, andon short notice, informing customers of coverage options, industryexperts said.

Their comments came during a panel discussion at the 58th AnnualWorkers' Compensation Educational Conference held here thisweek.

But, speakers noted that insurers are they're hurting fromunreplenished losses incurred on Sept. 11, 2001. Panelists alsoworried about what would occur when the Terrorism Risk andInsurance Act expiration date arrives Dec. 31, 2005.

"Terrorism is a long-term risk. The current TRIA is short-term,"said Robert G. Purdy, an executive vice president with AmericanInternational Group's American Home Assurance Company inPhiladelphia, Pa.

TRIA's "objectives have not been accomplished or realized," hesaid, stressing the need for the government backstop of TRIA to beextended.

He said there has been some discussion about an industry poolingarrangement when TRIA expires. However, he concluded, "There is notnearly enough private capital available in the insurance industry"to replace the $100 billion federal backstop.

Noting that the threat of attack is part of life today, heexplained that any insured with losses due to terrorism would bepaid from insurers' capital and not from loss reserves.

"Nobody has a potential terrorism catastrophe reserve set up tofund" losses, he said. "Nor can they set one up under existingaccounting and tax rules. So the potential loss from an attack hasnot been pre-funded."

Indeed, he added, "The loss from 9-11 [2001] has not even beenrecouped yet and may never be."

TRIA, he noted, has contributed no capital to the insuranceindustry and will only respond to future losses.

Mr. Purdy said that without a master backup plan from a sourcebeyond the insurance industry, "terrorism risks arising frompotential use of nuclear weapons or other weapons of massdestruction are not insurable."

"In a most direct, literal sense, the industry will not be ableto pay."

Yet, he continued, injury by terrorist attack, including nuclearattack and war, is not excluded from any workers' compensationpolicy.

He also said that while TRIA succeeds in backing solvency of theinsurance industry, it does not guarantee the solvency of anyparticular carrier.

The conference, which centered mainly on topics related toworkers' comp, is a partnership between The Florida Workers'Compensation Institute Inc. and The National UnderwriterCompany.

Leading off the discussion on terror risks, Robert Hartwig,senior vice president and chief economist with the InsuranceInformation Institute in New York, noted that only a year ago itwas believed that the Terrorism Risk and Insurance Act "would nevercome to pass."

The bill, signed last Nov. 26 by President George W. Bush, isnot, he said, the "simple pooling arrangement" that had originallybeen proposed, which exists in other countries such as the UnitedKingdom. In contrast, TRIA increases industry deductibles over aperiod of time, he said. Also, reinsurance is required and TRIAcaps the federal government's liability, he said.

Other limitations associated with TRIA include the fact thatpersonal lines insurers, reinsurers and life insurers are noteligible under the program, he noted.

But the biggest limit of all, he said, is the fact that the billexpires on Dec. 31, 2005. "Any policy written on 1-1-2005 or laterwill expire in 2006," he said, suggesting that 2004 is "the year inwhich you want to handle issues associated with renewal."

While terrorism coverage is mandatory for workers' compensation,"in the property area, the take-up rate for terrorism is only about20 percent." He noted that insurers are still struggling toquantify terrorism.

Insurers' first challenge with TRIA was implementation andcompliance, "an enormous job," he said. "There are 6 millionbusinesses in the United States, each one of those having multiplepolicies subject to TRIA."

In order to comply with TRIA, insurers had 90 days to send "tensof millions" of notices to policyholders asking for acceptance orrejection of certain terms of coverage after the initial 90-dayperiod, he noted.

Immediately after the 90-day period, he said, the first renewalseason for terrorism began. This was "an enormous IT challenge forinsurers, and an enormous personnel management issue," he said.

The common misconception about
TRIA, he emphasized, was that it got insurers off the hook.

The term "bailout" was "inappropriately used by some critics ofthe industry," he said. Mr. Hartwig added that insurers kept"enormous retentions, which increase each year."