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What Does an Expiration of TRIA Mean?

Disruption in the terrorism marketplace is expected and insurers are bracing themselves as a result of the failure of Congress to renew the Terrorism Risk Insurance Act...
December 22, 2014

Disruption in the terrorism marketplace is expected and insurers are bracing themselves as a result of the failure of Congress to renew the Terrorism Risk Insurance Act (TRIA).

The U.S. Senate adjourned without reauthorizing TRIA. This leaves the fate of the program in serious jeopardy as TRIA is set to expire on Dec. 31, 2014, and the Senate is not scheduled to return until after the holidays. This makes at least a short expiration of TRIA likely.

In the days since what the entire industry is describing as a debacle, carriers, agents and insurance industry analysts have been offering comments and predictions about the impact of what is hoped will be a short lapse in the nation’s terrorism insurance program.

There is broad agreement that significant market disruption is in the offing. This report offers a sampling of what interested parties are saying, along with PIA’s observations on impending effects.

Broad Impact

In the event of a major terrorist attack on the United States after December 31, 2014, impacted businesses may be left without insurance coverage for the damage caused to property and employees, according to the Insurance Information Institute (I.I.I.).

“A major terrorist attack occurring without a federal Terrorism Risk Insurance Act law on the books will be far more disruptive to the U.S. economy than one where TRIA is in place,” said Dr. Robert Hartwig, president of the I.I.I. and an economist.

“Terrorism insurance policies are going to lapse in 2015, and insurers will be under no obligation to renew them, adversely impacting the construction, energy and real estate industries, among others,” Hartwig said.

TRIA Addresses the Insurance Supply Problem

Currently, the federal government provides a financial backup for insurers by covering a portion of insured losses above $27.5 billion, up to $100 billion; giving the insurance industry some certainty as to its maximum exposure. In return, insurers are required to offer terrorism coverage to all business clients, which can decide to purchase coverage or not. About 60 percent of large businesses carry terrorism insurance, indicating strong demand for it.

Now that TRIA has not been reauthorized, insurers will have the right to cancel terrorism insurance policies after Jan. 1, 2015. By law, only insurance companies offering workers’ compensation insurance must include the terrorism peril in their policies, whether or not TRIA is renewed. The effect on the workers’ compensation market is expected to be particularly acute.

Many property/casualty policies issued in 2014 were endorsed with sunset clauses that canceled terrorism insurance coverage effective Dec. 21, 2014, in the event of the expiration of TRIA. A recent study conducted by Marsh found that almost half of the property insurers surveyed indicated they will not offer stand-alone terrorism coverage if TRIA expires.

The majority of commercial insurance in the U.S. renews 12/1/14 through 1/31/15 for liability & property. For existing property policies that include TRIA and continue in force beyond 12/31/14, the private market is on the hook from 1/1/15 forward.

An open question at this point is whether insurers will change coverage mid-term, or choose to terminate policies.

For property owners where their lenders or any third-party contractual liability obligation demand TRIA – in construction projects, Guaranteed Investment Contracts (GICs), stable value investment contract (WRAPs), subcontractors and surety coverages – may be affected.

Stakeholder Reactions

In the days since the TRIA renewal failed to occur, additional assessments have been published by industry players.

Lloyds of London: “…we expect that discussions to revive TRIA will begin again in earnest as soon as Congress reconvenes in the New Year, however, it is unclear on what basis those discussions would take place as the failure to avoid expiry may prompt renewed efforts to renegotiate the terms of the deal.

“Underwriters must therefore ensure that the wordings of all policies offering terrorism cover in the US from or beyond 1 January 2015 take into account the absence of TRIA for an indefinite period. Please note that the TRIA requirement to ‘make available’ terrorism cover on US property and casualty policies, and the penalties for failing to do so, will remain in force until midnight 31 December 2014.”

Business Insurance: “With insurers no longer be obligated to offer terrorism as part of property cover, this will lead to reduced availability and potentially lower terrorism insurance penetration.”

Deloitte Services L.L.P.: “It’s going to reduce capacity and availability and certainly will drive up costs,” said Howard Mills, chief adviser at the insurance industry group at Deloitte Services L.L.P. and former superintendent of the New York State Insurance Department. “I think you’re going to see some severe market disruptions, which could have a major effect on the industry and the economy as a whole.”

A PIA Member: “We have already had London pull our outstanding quotes this morning (12/19).”

Risk Placement Services, Inc. (RPS) sent an alert to agents: “We … are in the process of analyzing your specific placements to identify any situations where the “sunsetting” of the terrorism legislation on 1/1/15 may have an impact. We will be contacting you individually should we find that any of your policies are in fact impacted.

RPS adds: “We have been advised by industry representatives that when Congress reconvenes on January 6, the extension of TRIA-TRIPRA will be at the top of the list, and the fact that Senator Coburn of Oklahoma will not be returning bodes well for the legislation.”

National Council on Compensation Insurance (NCCI) has an FAQ posted that was done earlier in 2014; however, it addresses several “what if” scenarios involving expiration: https://www.ncci.com/nccimain/industryinformation/terrorismwc/pages/tria-faq.aspx

National Association of Mutual Insurance Companies (NAMIC) President & CEO Chuck Chamness: “People have been asking what will happen now that TRIA is set to expire, and we have to tell them it's not clear. And that's exactly the point,” Chamness said in a statement. “The whole purpose of TRIA was to provide stability and certainty to the market, and Congress has now done the opposite. The industry will have to spend the holiday season scrambling to get notices out to policyholders, re-evaluating its risk, and seeking other remedies.”

American Insurance Association (AIA) President & CEO Leigh Ann Pusey: “Without TRIA in place on January 1, insurers will be forced to assess their exposures. The program’s lapse will significantly jeopardize the terrorism insurance marketplace that currently protects our nation’s economy against major acts of terrorism. We strongly urge the new Congress to take up the House-Senate negotiated TRIA reauthorization provisions as its first item of business when it returns in January, in order to minimize marketplace disruptions.

“A failure to quickly reauthorize TRIA would be a failure to protect our economy from terrorism.”

Stress Tests

A.M. Best Senior Financial Analyst Michael Russo said the rating agency has been reviewing companies' preparations for a possible loss of federal terrorism coverage for more than a year:

“A.M. Best has been stress testing our companies for the absence of TRIA for several years now. We got out last year and really requested action plans and mitigation strategies for companies that we deemed over-reliant on TRIPRA. So we've been following them the past year and what we need to do now is ensure that these action plans and these exposure management initiatives have been followed through. If an exposure was supposed to be renewed or additional reinsurance obtained, we have to be diligent to ensure these companies did obtain these mitigation strategies.”

Too Big for the Private Sector

The impact of a lapse of TRIA, of whatever length, will be significant – even for the world’s “insurer of last resort.” Sean McGovern, chief risk officer and general counsel of Lloyd’s of London, the world’s largest insurance market, put it in perspective. He said that even for an insurance giant that prides itself on insuring things no others will, global terrorism is too big a threat for the private sector to handle on its own.

McGovern noted that virtually every developed economy has a government backstop to help insurers cover terrorism.

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