5 Crucial TRIA Questions and Experts' Responses

It is worth noting that as some legislators express concerns about the program's cost to taxpayers, Rep. Peter King, R-N.Y., pointed out recently at Advisen's Property Insights Conference in New York that the program, over its 12-year existence, "hasn't cost one penny."

However, based on Neugebauer's comments to PC360, legislators' concerns appear to be not the amount of money paid out, but the amount of risk assumed by taxpayers should a payout become necessary. And our reader's concern centers around where money paid for terrorism coverage comes from and where it goes. 

On the following pages, see our reader's TRIA questions, the experts' responses and some general information about the program.

TRIA Basics

For starters, the Coalition to Insure Against Terrorism (CIAT), which is made up of business-insurance policyholders, offers on its website information about the current version of the program and roles that insurers, policyholders and government play:

Insurer Responsibility: If a terrorist attack occurs resulting in at least $100 million in aggregate losses, the insurer will pay claims up to 20% of the insurer's direct earned premium (of prior year) and 15% of claims above its deductible. As much as $35.5 billion in insured losses may be retained by insurers even before any federal co-pay support.

Policyholders: Commercial policyholders pay the premium for terrorism coverage and retain any individual policy deductibles as applicable. Policyholders bear aggregate losses exceeding $100 billion with no liability for insurers or the federal government.

Federal Role: The federal government will only provide assistance if the act of terrorism results in at least $100 million in aggregate insured losses. Federal assistance is provided only if an insurer has paid out losses exceeding the deductible and will cover only 85% over the deductible. There is a 15% co-share of losses exceeding insurer deductibles.

Taxpayer Protection: For terrorist events that result in aggregate losses up to $27.5 billion, any federal assistance through TRIA must be recouped over time through a surcharge on all commercial policies in covered lines. 

A Reader Asks…

With the basics out of the way, we turn to our reader's questions about the program and the experts' answers. 

Q: Who currently earns revenue from TRIA? Including:

• Insurance Broker Commissions.
• Investment Broker Commissions.
• Insurance Carriers.
• Lobbyists.
• Politicians.
• Anyone else.

Hartwig: Terrorism coverage is no different than any other line of insurance. Insurers earn the premiums written on terrorism coverage throughout the term in which the policy is in force. Agents and brokers earn a commission on the sale of all types of insurance, including coverage that coverers terrorism risk. States assess a premium tax on all premiums written by P&C insurance companies in their state. Of course, in the event that a certified terrorist attack occurs, insurers will pay all sums due under the impacted policies. 

Again, this is how all insurance works. If no event happens, insurers earn a profit. The same situation would apply, for example, on a homeowners or auto policy. If an event occurs the insurer will likely lose money on the impacted policies.

Q: Who primarily manages the TRIA Funds and what have they done with the money? Also, how much do they earn for their services? 

Hartwig: Premiums generated through the sale of terrorism coverage are earned by insurers. Insurers typically manage their own funds (some also contract with outside investment-management firms) and make their investments in accordance with all applicable state laws.

This question and those that follow seem to suggest that the reader believes there is a "TRIA Fund" account held by insurers. There is no accumulated pool of TRIA funds/premiums. Once premiums are earned over the course of a year, they (like all premiums and all lines) become just one component of an insurer's income stream used to pay operating expenses, taxes, etc. Again, if no loss occurs, then a profit is earned. 

Mills: All TRIA is, really, is a backstop. It's simply a statement that if there is an event that is of such magnitude; that exceeds the ability of insurance companies to pay, that the federal government will then jump in. and that gives the insurance industry the confidence to go ahead and write coverage for events they cannot predict, model or price like NBCR (nuclear, biological, chemical and radiological) events.

The other thing I'd add—it's almost a formality because if there ever is a terrorist attack of such sufficient size and scale in the U.S. that we're talking these types of numbers, everyone knows the federal government will get involved anyway. They will be rebuilding cities; they'll do what they need to do to rebuild. So all TRIA does is it enables the private sector, in the form of the insurance industry, to write coverage that's terribly needed, because no ones' going to be able to undertake construction activity, etc., without having terrorism coverage in today's world.

Q: What else can TRIA Funds be used for? Is there a tag bill that lets the funds be used for say "fighting potential terrorist threats in a foreign country?" 

Hartwig: Premium dollars collected from terrorism coverages would be used in the event an attack occurs. Dollars insurers earn are not used for "fighting potential terrorist threats in a foreign country." 

Q: Is there a real accounting or balance sheet for the funds that have been collected since the inception of TRIA? If so, is there a posting so Americans can really see it?  

Mills: There is no TRIA fund that companies or taxpayers are paying into. There is no big TRIA office; no high administrative overhead. Taxpayers aren't paying a lot. This is run out of treasury, and there's really no big staff required or anything of that nature. 

I would submit to those who are skeptical about TRIA and have this idea that it costs a lot of money – it's actually one of the most effective programs in the history of the federal government. It doesn't cost anything, unless there's an event, in which case the federal government would be spending massive sums of money anyway. It's actually enabling the private sector to underwrite more of the risk, and it is, in fact, not costing the taxpayers money – it's protecting them from expenses.

Hartwig: Again, insurers earn premium from terrorism coverage over the course of the policy's term. Once fully earned, those funds are owned by the insurer. Marsh provides an estimate of the price of terrorism coverage in its annual terrorism risk survey report. 

Q: Show a scenario where the "average" business owner with 30 employees, who is paying into TRIA, would actually benefit from a TRIA Loss. 

Hartwig: Let's suppose the business owner pays $1,000 for terrorism coverage. Six months into the policy a terrorist with a truck bomb detonates a device that causes a fire, collapse and total loss of the insured's premises (which was insured for $500,000), killing five employees and severely injuring 10 others. In this instance the insurer would pay the $500,000 (less deductible) for the structure plus ensuing business interruption loss. 

The insured's workers comp insurer would be responsible for the death benefits paid to the families of the workers killed as well all costs associated with treatment for injuries and lost wages from those who are injured. Claims under other types of policies are also possible.

Mills: They're not paying into TRIA; they're buying an insurance policy that covers terrorist activity. And that's their benefit right there. It's like having a life insurance policy. If you buy a life insurance pol and you live to 100 and never cash in, you don't sit there on your 100^th birthday and think, "What a loser I am, I lost all this money." You should be happy. You had the peace of mind, you had the protection; you had the safety net there your whole life for your family in the event something bad happened.

The same is true with TRIA—you need to buy insurance coverage if you want to build a new building or have a business. You have to have it. Insurers want it. Banks would require it to build a business, and let's hope you never have to make a claim.

Remaining Concern

While not one of the questions asked by our reader, he did express concern that the program essentially benefits a few at the expense of the many. During his presentation at Advisen's Property Insights Conference, Rep. King indicated some House Republicans have slightly similar thoughts, although they frame it as a "giveaway and handout to New York."

Mills addressed this issue, stating, "I remember testifying to Congress about this back in 2005. Nothing is further from the truth. I view TRIA as part of our national defense. Everyone knows the U.S. is a target for terrorists.

"And first of all, any American is an Amercican, so whether they attack New York City or Idaho, they're attacking all of us; they're attacking America. Obviously there are some sites; some cities—New York, Boston, Los Angeles, Chicago—that are more tempting; probably New York and Washington are at the top because of their financial and governmental significance. But one of the things about terrorism that makes it impossible to model and price is that it's very unpredictable.

"New York has become a very hard target. The defenses in New York are very, very good. So I would submit to those who say TRIA is somehow a bailout for New York and the rest of the country shouldn't really have to pay—one of the most devastating things a terrorist could do would be to attack a mall, or school or sports arena in the middle of America that is not in a major city, because that would set off a panic everywhere. TRIA is needed in every corner of this country. We are targets and we don't know where they might strike next."