The rubber will hit the road for the insurance industry onreauthorization of the Terrorism Risk InsuranceAct Tuesday when the Senate takes up legislationthat would reauthorize the program for seven years.

The bill is S. 2244, the Terrorism Risk Insurance ProgramReauthorization Act of 2014. The program will sunset Dec.31 unless it is reauthorized.

A strong possibility for inclusion is separate legislation, S.S. 2270, "the Insurance Capital Standards Clarification Act of2014," which would "revise" Sec. 171 of the Dodd-Frank financialservices reform law. That section "requires" the Federal Reserve toapply bank capital rules to insurance companies it supervises. S.2270 and its companion House bill, H.R. 4510, "clarifies" that theFed can apply insurance-based capital standards to the insuranceportion of the business, while still keeping banking capitalstandards for the banking portion of the business.

It also prevents the Fed from requiring mutual insurancecompanies such as State Farm from preparing financial statements inaccordance with generally accepted accounting principles, when theyare already preparing financial statements in accordance withstate-based statutory accounting principles.

Other provisions seeking to reaffirm state oversight ofinsurance could also be proposed, although industry lobbyists saythe battle over that issue is more likely to come up when the Houseacts on TRIA. 

For example, 49 House members sent a letter to the HouseAppropriations Committee May 29 asking that 48 other membersrequesting legislative and report language in the Treasury andFederal Reserve Board appropriation bills designed to ensure thatU.S. federal officials halt negotiating European-centric, bank-likecapital standards for internationally active U.S. insurers.

Reauthorization of TRIA is the top federal legislative priorityfor the insurance industry, and reporting out of the Senate bill,which is expected to be routine, is seen as just the start of atense legislative process.

The industry has concerns about the bill because it wouldincrease the losses insurers must cover by $10 billion to $37.5billion and would also increase the percentage insurers would haveto pay for certain losses to 20% (from 15%), according to JohnDearie, an insurance attorney at Edwards Wildman in New York.

Jimi Grande, senior vice president of federal and politicalaffairs for the National Association of Mutual Insurance Companies,agreed.

He said NAMIC "still has some concern with increasing theco-payment provision by 33%. The co-payment is the only aspect ofthe program without a specific dollar threshold or limit, and it'salso the most difficult for companies to gauge in terms of theirpotential risk. 

Grande argues, "The entire goal of the TRIA program is to reducethe uncertainty surrounding terrorism risk, and we hope that thiscan be addressed when the bill moves to the Senate floor for finalpassage."

Grande says he has met with members of the Senate Banking Panelon this issue, and "based on what we heard during the TRIA hearingin February, I think the vote will show that members ofthe committee recognize the importance of keeping the TRIA program,both for its role in fostering growth as well as a part of ournational economic defense."

He adds it is "most important is keeping the process movingforward – every day that goes by without reauthorization of theprogram increases the uncertainty in the marketplace."

More important to the industry than the additional "skin in thegame" proposed in the Senate bill is the looming battle regardingreauthorization in the House Financial Services Committee. TheHouse FSC plans to take up legislation later this month that wouldeffectively end the program as it currently exists after threeyears.

The House bill, tentatively called the TRIM Act, or TerrorismRisk Insurance Modernization Act, as recently leaked by someRepublican members of the committee, would bar any federal coveragefor any event other than that caused by a nuclear, biological,chemical radiation (NBCR) event for any event of less than $500million after the initial, three-year phase-in period.

It would also require insurers to deposit 50% of terrorism riskinsurance premiums in a special fund that would be administered bythe Treasury Department.

Rep. Randy Neugebauer, R-Texas, chairman of the FinancialServices Panel's Housing and Insurance Subcommittee, andRep. Jeb Hensarling, R-Texas, chairman of the FSC, say that whilethey would likely compromise to extend the program for up to fiveyears, over the long term they desire that the industry assume allresponsibility for terrorism events except for NCBR. Their argumentis that the program was created in 2002 only as a temporarymeasure, and that their actions are consistent with thatintent.

Dearie says while the Senate bill is welcomed by most insurergroups, it will not prevent the potential disruption in the marketor the ongoing uncertainty of reauthorization.

Dearie says until legislation is final, property and casualtycarriers "would be well advised" to include conditional language intheir policies in case TRIA does not get extendedpost Dec. 31, or is not reauthorized under its currentterms.

"As terrorism insurance backed by TRIA under the proposed[Senate] legislation does not include coverage for certain risks,such as nuclear, biological, chemical or radiological attacks, somebusiness owners may wish to supplement their terrorism coverage byusing their captive insurers to take on these additional risks,"Dearie says he is advising clients.