What Happens After TRIA?

 January 13, 2015

 NOTICE: As of January 12, President Obama signed the TRIA Reauthorization Act of 2015 into law. Both the house and the senate had passed the TRIA renewal legislation. The extension includes the following:

·Reauthorization of the program for six years

·Provision to amend Dodd-Frank to exempt energy and agricultural companies from posting collateral for swaps traded directly with banks

·Passes NARAB II to streamline insurance producer licensing

·Extends TRIA for six years

·Raises trigger amount of losses from $100 million to $200 million

·Mandatory recoupment raises from $27.5 billion to $37.5 billion over five years

 The Terrorism Risk Insurance Act (TRIA) is a federal law that was approved on November 26, 2002. The act created a federal backstop for insurance claims related to acts of terrorism. It was intended as a temporary measure to allow time for the insurance industry to develop its own solutions and products to insure against acts of terrorism.

 One of the purposes of TRIA was to establish requirements for insurers to follow to obtain payment of the federal share of insured losses from a terrorist event. But not just any terrorist event—the event must be certified by the Secretary of Treasury, in concurrence with the Secretary of State and the Attorney General, to be an act that is dangerous to human life, property, or infrastructure and to have resulted in damage within the U.S. (or outside the U.S. in the case of a U.S-flagged vessel, or on the premises of a U.S. mission).

 The threat of terrorism still exists, which in part drives the market insecurity. Terrorism is difficult if not impossible to predict and rate for, so policies without the backstop are apt to increase in price.

 TRIA was always envisioned as a short-term patch and has gone through some changes. Conditional forms were established in 2004 for possible termination of TRIA in 2005; it was reauthorized, so those forms did not take effect. The creation of the forms recognized the possible expiration of TRIA and set up an environment for still utilizing terrorism exclusions once TRIA went away. With that extension a few lines of business were removed from TRIA applicability and there was some modification of copay and deductibles.

 The reauthorization lasted until 2007; this reauthorization retained the $5 million trigger, a few lines of business were removed from TRIA applicability, new notice requirements and deductible and copay changes were made, and the conditional forms were still available.

 Another reauthorization took effect in 2008 that eliminated the distinction between foreign and domestic terrorism, removed additional lines of business, made additional copay changes, and changed notice requirements. It stabilized the marketplace by providing adequate capacity at reasonable rates. This reauthorization lasted until December 31, 2014.

 December 31 has come and gone, and TRIA has not been extended or reauthorized. The industry is in an uproar, claiming that the lack of TRIA hurts the economy and the construction, real estate, and energy industries, as well as others. TRIA provided stability to the insurance market; without that backstop, predictions of canceled coverage and market chaos are rampant, as well as fears for severe economic uncertainty in event of a significant act of terrorism. Insurers are not required to renew any existing terrorism policies, potentially leaving insureds uncovered for a significant event. When TRIA expired, carriers were no longer required to offer terrorism coverage. Workers compensation coverage is a large concern because in most states these policies do not exclude terrorism; without TRIA, there is no reinsurance to cover large losses.

 What does expiration mean? With TRIA terminated, the Secretary of Treasury no longer has the authority to declare an act of terrorism a certified act, the definition of "certified act" goes away, the backstop terminates, the $100 billion cap expires, and annual policies continue without a backstop. Assuming TRIA does eventually return, will it be a new law with changes or a retroactive reauthorization?

 Insurance Services Office (ISO) has already issued sample advisory notices to policyholders for carriers to use advising policyholders that TRIA has terminated and that the insured's policy excludes coverage for certain losses resulting from terrorist acts. Two endorsements are added: one titled Conditional Exclusion of Terrorism (Relating to Disposition of Federal Terrorism Risk Insurance Act), IL 09 95, and another titled Cap On Losses From Certified Acts Of Terrorism, IL 09 52. The endorsements recognize the termination of TRIA and address the federal program. There is a post-TRIA Exclusion of Terrorism endorsement, IL 00 30.

 The Conditional Exclusion Of Terrorism Form, IL 09 95, becomes applicable when TRIA has terminated or when a renewal, extension, or replacement of the program has become effective without the requirement to make terrorism coverage available with certain revisions. The revisions are that the statutory percentage deductible for terrorism has increased, the federal government's statutory percentage share in potential loss above deductibles has decreased, "terrorism" has been redefined, or insurance coverage is subject to provisions or requirements that differ from those that apply to other events in the policy.

 The form adds an exclusion for terrorism, including action in hindering or defending against actual or expected terrorist acts. The exclusion applies only under certain conditions: biological, radioactive, chemical, or nuclear attacks or releases of such materials. Also, the terrorist act must cause damage in excess of $25,000,000 to all types of property in the United States, its territories, possessions, Puerto Rico, and Canada. Damage is any damage covered by insurance plus damage that would be covered but for a terrorism exclusion.

 There is an exception for fire losses caused by terrorism; the loss must be direct loss or damage by fire to covered property. Coverage does not apply under business income, extra expense, or legal liability or leasehold interest. This exception applies in certain states.

 The Cap On Losses From Certified Acts Of Terrorism endorsement, IL 09 52, applies a cap of $100 billion on losses once the insurer deductible has been met under TRIA. Coverage up to $100 billion is pro rata based on procedures established by the Secretary of Treasury. This endorsement does not have any effect on the policy's response to acts of terrorism in absence of the federal program.

 The Exclusion Of Terrorism endorsement, IL 00 30, may be used for new policies issued in 2015. It includes a schedule for the exception for certain fire losses; property listed in the schedule is covered by the exception. The form adds the definition of "terrorism" used in TRIA and excludes terrorism under the same conditions as listed in the Conditional Exclusion form: biological, radioactive, chemical, or nuclear attacks or releases of such materials. Also, the terrorist act must cause damage in excess of $25,000,000 to all types of property in the United States, its territories, possessions, Puerto Rico, and Canada. Damage is any damage covered by insurance plus damage that would be covered but for a terrorism exclusion.

 The state of New York is asking 500 insurers what they intend to do—do they plan to nonrenew existing policies, do they plan to limit the sale of new policies, or do they plan to raise prices? The industry is watching closely to see what happens and what effect the lack of TRIA going into the new year will have on the industry and the economy as a whole. While it is expected that the issue will be addressed quickly, until it is addressed, the issue is a concern.