Nothing focuses the mind like a deadline. So with the clock ticking down to a Dec. 31 expiration of the federal Terrorism Risk Insurance Act, it was not surprising that the House and Senate last month finally agreed on an extension that the White House could live with. The new legislation, the Terrorism Risk Insurance Program Reauthorization Act, was signed into law the day after Christmas.
TRIPRA's fundamental parameters match those of the expiring legislation. Participating insurers are required to give commercial-lines policyholders the option to buy terrorism insurance. In the event of an act of terrorism causing $100 million or more in losses, individual insurers are required to absorb a deductible equal to 20% of their previous calendar year's direct written premium, and the industry as a whole must meet a $27.5 billion deductible. After the deductibles are satisfied, the federal government reinsures 85% of carriers' additional losses up to $100 billion.
The enactment of TRIPRA ended months of wrangling between the House, which wanted to significantly expand TRIA, and the Senate and the Bush administration, which mainly wanted to preserve the status quo. The tussle also pitted the largest commercial-lines insurers against small and midsize carriers in what was essentially a fight over workers compensation insurance. More on that later.
In the end, the House did all the compromising. While coverage for acts of domestic terrorism was added to the existing coverage for those that originate abroad, the program otherwise was not significantly broadened. Dropped from the final legislation were numerous enhancements sought by the House, including:
--A provision that would require insurers to make available insurance for nuclear, chemical, biological and radiological acts of terrorism, which the program would then reinsure.
--The removal of the program's exclusion for group life insurance losses.
--A reduction in the program's trigger to $50 million in losses from $100 million.
--A "reset" provision that, following a terrorist attack causing at least $1 billion in damages, would lower the deductible of affected insurance companies in the event of a subsequent attack, as well as lower the program's trigger.
The House also wanted to renew the terrorism insurance program for 15 years but in the end settled for the Senate's seven-year extension, which could well be TRIPRA's most significant feature. TRIA was originally enacted as a three-year program in 2002 and then extended for two additional years in 2005. Now, the insurance industry and its commercial-lines policyholders can at least count on continued terrorism coverage through 2014.
One of the more interesting aspects of the debate over renewing TRIA was the attempt to make the act more useful to workers compensation insurers. By law, they are required to cover injuries to employees while they are at work-no matter how those injuries occur or whether TRIA is applicable to them.
The losses to property from a terrorist attack can be dramatic. Indeed, the image of the collapse of the World Trade Center on Sept. 11, 2001, is indelibly etched into the national consciousness. But the consequences of an act of terrorism for workers compensation insurance are potentially even more significant than they are for property insurance--especially if the act is nuclear, chemical, biological or radiological (NCBR) in nature. An Insurance Information Institute report on the 9/11 attack, written a few years ago, estimated total losses at $32.4 billion, including $1.8 billion from workers compensation. But the III added that had the attack taken the form of a large release of anthrax in downtown Manhattan, fatalities could have reached 173,000, and workers compensation losses could have totaled $91 billion. More recently, a study by the American Academy of Actuaries estimated that a large NCBR attack in New York could cause $158.3 billion in commercial property insurance losses and more than triple that amount--$483.7 billion--in workers compensation claims.
With major workers comp insurers already on the hook for NCBR losses, it was understandable that they would try to transfer as much of that risk as possible to the federal terrorism insurance program. Hence the 350-member American Insurance Association, along with a group of large businesses, lobbied hard to make the program applicable to NCBR losses by requiring participating insurers to cover the associated perils.
That move, however, was opposed by the Property Casualty Insurance Association of America, which says its 1,000 members cover 32% of the workers comp market, and the National Association of Mutual Insurance Companies, whose 1,400 mostly small carriers probably write even less. Both PCI and NAMIC said they were dead set against requiring insurers to offer NCBR coverage to participate in the reauthorized federal terrorism insurance program, maintaining that such a requirement would prompt many small and midsize carriers to leave the program instead.
Given the Bush administration's strong opposition to expanding TRIA, only by showing a united front could insurers have had any hope of adding NCBR coverage to the terrorism insurance program. Lacking consensus among its constituents, Congress did what it usually does in such cases: delay action by commissioning a study. A provision of TRIPRA requires the U.S. comptroller general to look into the problem of how best to deal with the NCBR exposure and report back within a year. For now, most agents and brokers, as well as their clients, are probably just relieved to see the terrorism insurance program renewed more or less as is.
TRIPRA's fundamental parameters match those of the expiring legislation. Participating insurers are required to give commercial-lines policyholders the option to buy terrorism insurance. In the event of an act of terrorism causing $100 million or more in losses, individual insurers are required to absorb a deductible equal to 20% of their previous calendar year's direct written premium, and the industry as a whole must meet a $27.5 billion deductible. After the deductibles are satisfied, the federal government reinsures 85% of carriers' additional losses up to $100 billion.
The enactment of TRIPRA ended months of wrangling between the House, which wanted to significantly expand TRIA, and the Senate and the Bush administration, which mainly wanted to preserve the status quo. The tussle also pitted the largest commercial-lines insurers against small and midsize carriers in what was essentially a fight over workers compensation insurance. More on that later.
In the end, the House did all the compromising. While coverage for acts of domestic terrorism was added to the existing coverage for those that originate abroad, the program otherwise was not significantly broadened. Dropped from the final legislation were numerous enhancements sought by the House, including:
--A provision that would require insurers to make available insurance for nuclear, chemical, biological and radiological acts of terrorism, which the program would then reinsure.
--The removal of the program's exclusion for group life insurance losses.
--A reduction in the program's trigger to $50 million in losses from $100 million.
--A "reset" provision that, following a terrorist attack causing at least $1 billion in damages, would lower the deductible of affected insurance companies in the event of a subsequent attack, as well as lower the program's trigger.
The House also wanted to renew the terrorism insurance program for 15 years but in the end settled for the Senate's seven-year extension, which could well be TRIPRA's most significant feature. TRIA was originally enacted as a three-year program in 2002 and then extended for two additional years in 2005. Now, the insurance industry and its commercial-lines policyholders can at least count on continued terrorism coverage through 2014.
One of the more interesting aspects of the debate over renewing TRIA was the attempt to make the act more useful to workers compensation insurers. By law, they are required to cover injuries to employees while they are at work-no matter how those injuries occur or whether TRIA is applicable to them.
The losses to property from a terrorist attack can be dramatic. Indeed, the image of the collapse of the World Trade Center on Sept. 11, 2001, is indelibly etched into the national consciousness. But the consequences of an act of terrorism for workers compensation insurance are potentially even more significant than they are for property insurance--especially if the act is nuclear, chemical, biological or radiological (NCBR) in nature. An Insurance Information Institute report on the 9/11 attack, written a few years ago, estimated total losses at $32.4 billion, including $1.8 billion from workers compensation. But the III added that had the attack taken the form of a large release of anthrax in downtown Manhattan, fatalities could have reached 173,000, and workers compensation losses could have totaled $91 billion. More recently, a study by the American Academy of Actuaries estimated that a large NCBR attack in New York could cause $158.3 billion in commercial property insurance losses and more than triple that amount--$483.7 billion--in workers compensation claims.
With major workers comp insurers already on the hook for NCBR losses, it was understandable that they would try to transfer as much of that risk as possible to the federal terrorism insurance program. Hence the 350-member American Insurance Association, along with a group of large businesses, lobbied hard to make the program applicable to NCBR losses by requiring participating insurers to cover the associated perils.
That move, however, was opposed by the Property Casualty Insurance Association of America, which says its 1,000 members cover 32% of the workers comp market, and the National Association of Mutual Insurance Companies, whose 1,400 mostly small carriers probably write even less. Both PCI and NAMIC said they were dead set against requiring insurers to offer NCBR coverage to participate in the reauthorized federal terrorism insurance program, maintaining that such a requirement would prompt many small and midsize carriers to leave the program instead.
Given the Bush administration's strong opposition to expanding TRIA, only by showing a united front could insurers have had any hope of adding NCBR coverage to the terrorism insurance program. Lacking consensus among its constituents, Congress did what it usually does in such cases: delay action by commissioning a study. A provision of TRIPRA requires the U.S. comptroller general to look into the problem of how best to deal with the NCBR exposure and report back within a year. For now, most agents and brokers, as well as their clients, are probably just relieved to see the terrorism insurance program renewed more or less as is.
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