President Bush Approves

President George W. Bush signed without comment or fanfare a two-year extension of the Terrorism Risk Insurance Act on Dec. 22, just over a week before the controversial federal reinsurance program was due to expire. The extension scales back the program's scope and raises the industry's exposure.

The bill signed by the President virtually tracked a scaled-down version of TRIA extension passed by the Senate the week before Thanksgiving, backed by the White House. The House of Representatives passed a much more ambitious approach that would have expanded TRIA's coverage and established different "silos" of insurer retentions depending on the line of business, but that bill was virtually dismissed out of hand in limited negotiations between House and Senate leaders.

The legislation will extend TRIA until Dec. 31, 2007, while cutting the scope of its coverage.

Commercial auto, burglary/theft, surety, professional liability and farmowners multiple-peril will no longer be covered under the program. The negotiators did agree to include general liability, which was left out of the original Senate bill, but group life–a big addition in the original House version==was not included in the final product.

Insurers will also have to shoulder a bigger portion of the losses from any future terrorism event, as the industry's retention level will rise from the current 15 percent to 17.5 percent next year, and 20 percent in 2007.

In addition, the law raises the program's trigger from an event of $5 million in insured losses, to one of $50 million effective April 2006, and $100 million in 2007.

In addition, a "President's Working Group" will be appointed to review how the program works and make recommendations for a longer-term solution.

The American Insurance Association said earlier in the week that one of the top issues on the industry's agenda next year would be to get involved with the working group.

Dennis Kelly, director of federal media relations at the AIA, said the purpose of the group is to do an analysis of market conditions for terrorism insurance. They will do this analysis in consultation with the National Association of Insurance Commissioners, representatives of the insurance and securities industries, and policyholder representatives, he noted.

The AIA, Mr. Kelly added, "will continue our focus and attention on analyzing potential long-term solutions. We're looking forward to engaging the President's Working Group as soon as possible. The problem has not been solved for the long term. As far as we are concerned, there should be a continuing federal role in dealing with catastrophic terrorism, especially when it comes to NCBR==nuclear, chemical, biological and radiation==events. Catastrophic terrorism remains uninsurable by the private market."

However, the Council of Insurance Agents and Brokers, in a bulletin to its members, cited its "fear that this forum may simply restate the disappointing June report of the Treasury Department, which argued that TRIA has been 'crowding out' marketplace innovation."

"This bill won't make terrorism risk disappear or make it any easier to insure without the participation of the federal government," according to Joseph Annotti, vice president of public affairs at the Property Casualty Insurers Association of America. "This extension gives us some breathing room that allows us to keep making this coverage available while we continue to work on a long-term, market-driven solution."

He also predicted that even though Congress just enacted a two-year extension, the issue will be back on the congressional agenda in the second half of 2006.

A disappointed House of Representatives reluctantly approved the compromise legislation on Dec. 17 on a voice vote without opposition. The Senate had eagerly passed the bill–which closely followed its own limited proposal–the night before.

"There is a time to fold your cards, and the time is now," said Rep. Mike Oxley, R-Ohio, chair of the House Financial Services Committee, who was the champion of the House's more ambitious TRIA extension measure. He called the final bill "short-sighted," adding that "when members, inevitably, are asked again to renew this 'temporary' program, they will correctly conclude that in 2005 the can was simply kicked down the road without any real reform."

Rep. Barney Frank, D-Mass., ranking minority member of the House Financial Services Committee, voiced frustration on Saturday about how lack of time as well as opposition from conservative Senators and the White House had forced the House to accept the Senate's version to get something on the books before TRIA expired on Dec. 31.

"There is more democracy in Iraq the last few days, under American leadership," Rep. Frank observed, "than there is in the U.S. Congress under a government where the Republicans control the House, the Senate and the executive branch."

But in the Senate, there was relief when the bill was passed by unanimous consent. "At long last builders and insurers of major projects in large cities, particularly New York, can breathe a sigh of relief," said Sen. Charles Schumer, D-N.Y. "Terrorism insurance will be renewed."

Senate staffers==working at the request of the White House, Sen. Richard Shelby, R-Ala., chair of the Senate Banking Committee, and Senate Majority Leader William Frist, R-Tenn.==deliberately delayed talks as long as possible to force House negotiators to accept the more modest Senate bill==which maintains the current TRIA structure, cuts down on the lines covered by the federal reinsurance backstop, raises the industry's retention and limits extension to two years.

The Senate leadership and Sen. Shelby also declined to appoint conferees to reconcile the two bills, knowing full well that Congressional rules would have given Rep. Oxley the gavel as chair of the conference committee, putting pressure on the Senate to accept provisions from the House bill.

Another change will be a provision increasing the payback insurers must make for any federal aid provided due to a terrorism attack. Under the final version of the bill the industry in 2006 will have to repay $25 billion, compared to $17.5 billion in the original Senate legislation. That number rises to $27.5 billion in 2007.

In addition, coverage for nuclear, chemical, biological and radiation attacks in property and liability policies–included in the House bill and opposed by the insurance industry–did not make it to the final version passed by Congress.

The final bill was a victory for Sen. Shelby and the White House, because it gave them the finality for the program they cherished. The CIAB memo said that Sen. Shelby "forged the basic agreement weeks ago with TRIA supporters Sens. Chris Dodd, D-Conn., and Robert Bennett, R-Utah. Sen. Shelby had opposed the passage of TRIA in 2002, and clearly wanted to scale back the scope of the program with an ultimate goal of finality in the federal component of the backstop."

The Treasury Department, speaking on behalf of the Bush Administration, was clearly pleased by the virtual adoption of the bare bones Senate approach.

"Congress has agreed on legislative language that meets the critical goals set out by Secretary [John] Snow when he delivered the Treasury's TRIA report in June," said Treasury Undersecretary Randal Quarles, in a statement, citing "a significantly reduced TRIA program, more room for private-sector innovation, greater protections for the taxpayer, and recognition of the temporary nature of the program. Many thought these goals were not achievable when this debate began, but the House and Senate worked constructively to achieve this outcome, and we think the American taxpayer can be satisfied with the result."

The American Insurance Association issued a statement after the House vote, saying the new extension bill "will keep a workable federal terrorism insurance mechanism in place for 2006 and 2007."

"This timely, decisive action taken by Congress should bring comfort to businesses all over the country that rely on insurance to protect them from the potential financial devastation that could result if they become victims of a terrorist attack," said AIA President Marc Racicot==the former governor of Montana, chairman of the Republican National Committee and head of the Bush-Cheney reelection campaign.