Alternative TRIA Approach Pitched

Republican staffers on the House Financial Services Committee are drafting legislation that would take an entirely new approach to extending the Terrorism Risk Insurance Act, creating a "silo" system that would base a federal backstop on the insurability of the risk. The new concept is totally different than extension guidelines suggested by the Bush administration and draft legislation prepared by the committee some months ago.

For example, under the plan being developed, losses from terrorist attacks through nuclear, chemical, biological and radiation devices would be mostly covered by the government because it is an uninsurable risk. Other coverages, such as workers' compensation, would get some level of federal reinsurance, while some lines might receive no government coverage.

However, timing remains an issue. Lobbyists for most property-casualty trade associations and companies were briefed on the new approach by committee staffers early last week and were told that action on a TRIA extension is unlikely in the House before the week of Nov. 14. TRIA is due to expire on Dec. 31.

At a flood insurance hearing in the Senate Banking Committee last week, it was made clear by Republican senators that action on an extension is a priority in that body, but timing and substance was not discussed.

Dennis Kelly, a staff official at the American Insurance Association, confirmed that Republican staffers on the committee are considering this new alternative. "The silo approach is one of the ideas we have been discussing with the Hill," he said. "It is one idea for making the program better. What is vitally important is that Congress enacts legislation that is workable for policyholders and insurers before the current program expires."

Mr. Kelly said the silo approach "is appealing because it is a way to have the retention levels better reflect the risk."

While Republicans drafted–but did not introduce–legislation that would raise the potential cost of a terrorist attack to insurers exponentially, Democrats are supporting legislation that calls only for a simple two-year extension of the current legislation.

A lobbyist for one insurer involved in the discussions, who asked that his name not be used, called the silo approach "an interesting idea," but wondered: "Do they really have the time to negotiate something that complex this late in the year?"

This lobbyist said the silo proposal would "require the full-time attention of members of Congress"–something not available this late in the year because "there are a lot of competing issues on the table."

At the same time, the lobbyist said, "it might be the long-term answer for TRIA."

However, this lobbyist is now optimistic TRIA will be renewed in some form. "It is a political imperative that the Republicans show they can get something done," the lobbyist said. "And since renewal of TRIA has bipartisan support, it is an easy way for the Republicans to show they can govern."

The new plan is designed to respond to intense criticism of earlier TRIA extension drafts from both large and small carriers. The new approach would alleviate concerns of smaller insurers by incorporating so-called "catastrophic coverage" principles resurrected some weeks ago by Allstate. That concept calls for a layered approach to dealing with catastrophic losses, with:

o The initial layer paid for by the private market through creation of a pool populated with tax-advantaged contributions.

o A second layer paid for by state catastrophe funds through a 90 percent state/10 percent private contribution.

o A third layer paid 90 percent by the federal government and the remainder by contributions from the private sector and state catastrophe funds.

That Congress considers extension of TRIA in some form a priority was confirmed at last week's flood hearing before the Senate Banking Committee. Sen. Robert Bennett, R-Utah, said at the hearing that he was "pleased" that Majority Leader William Frist, R-Tenn., had placed extension of TRIA "on his list of items that need to be addressed before we adjourn."

Sen. Bennett's comments were made at the hearing on flood issues as part of his effort to determine when the Senate would act on the issue. Sen. Bennett and Sen. Chris Dodd, D-Conn., have introduced legislation that would extend the current program for two years while Congress debates at its leisure a more permanent solution to cover terrorism risks. His bill would also extend coverage to group life insurance.

In response to Sen. Bennett's inquiry, the committee chairman, Sen. Richard Shelby, R-Ala., said "we're coming along" on the issue, but could offer no specific timetable as to when TRIA would be taken up. "We're going to address that," he said.

Sen. Elizabeth Dole, R-N.C., noting the "importance" of TRIA, also voiced support at the flood hearing for action this year on the issue.

Infographic, with silo or Capitol Hill art:

Flag: The Skinny

Head: How Would 'Silos' Work?

Republican staffers at the House Financial Services Committee are drafting a bill that would establish tiers of federal responsibility for terrorism claims. Under the plan:

o The federal backstop for damages from a nuclear, biological, chemical or radiological attack would be the greatest because the risk is uninsurable.

o Other business lines–such as workers' compensation, liability and property insurance (including business interruption)–would get less federal support.

o The lowest level of federal reinsurance would apparently be for commercial auto because the Bush administration doesn't think any backstop for that is necessary.

o Whether personal lines would be covered (against White House wishes) remains to be decided.

o Small insurers would get added help through federal support for pooling–a system by which insurers would get tax benefits for contributing into a central fund.

o As the loss grew, state catastrophe funds and the federal government would contribute a greater share of the cost.