United States: Future of TRIA Not Much Clearer Despite Renewed Debate

Since the enactment, and extension¹, of the Terrorism Risk Insurance Act of 2002 (TRIA), there has been wide debate regarding the government’s involvement in terrorism insurance. Set to expire on December 31, 2007, TRIA is one of many storms forecasted to hit Capitol Hill, particularly in light of the recent wave of political changes. Although it is too soon to predict TRIA’s fate, it currently appears unlikely that the government will remove itself completely from the terrorism risk insurance market.

The insurance marketplace was severely disrupted following the September 11, 2001 terrorist attacks. The threat of terrorism produced uncertainty as insurance underwriters and reinsurers limited or eliminated many forms of coverage for injuries and damage arising from terrorist attacks. This impacted a wide range of businesses that were not able to obtain adequate coverage for terrorism exposures arising from their commercial activities. In response, the federal government enacted TRIA, which was intended to stabilize the market and facilitate the development of a stand-alone private market for terrorism insurance and reinsurance.

Initially, TRIA required insurers to offer terrorism coverage to their commercial policyholders and established a governmental reinsurance backstop for 90 percent of losses, to a cap of $100 billion, on events that caused total damage exceeding certain insurer deductibles that were based upon the insurer's prior-year commercial property and casualty direct earned premium. In the wake of TRIA’s December 2005 expiration, industry members and associations lobbied for an extension by arguing that the private insurance market could not effectively operate without some form of public backstop against catastrophic terrorism losses.

Although the government agreed that a backstop was still necessary, it emphasized, among other things, that TRIA was a temporary program and that it should expire in a relatively short time. After a contentious debate, in December 2005 Congress extended the original program for an additional two years and, among other things, increased both the industry retention and the size of the event required to trigger the public backstop. Additionally, Congress called for the formation of a working group to perform an analysis regarding the longterm availability and affordability of insurance for terrorism risk, including coverage for group life and coverage for chemical, nuclear, biological, and radiological (CNBR) events.

As TRIA is set to expire in approximately one year, the newly shaped Congress is faced with largely the same issues Congress and the industry confronted in December 2005, namely: (1) the extent to which the industry has the capacity to operate without a public backstop; and (2) the appropriate role for the government in providing a backstop for insurance losses in the face of terrorist attacks.

In a recent report issued by the President’s Working Group on Financial Markets (PWG), the PWG noted a number of positive developments in the terrorism risk insurance market since September 2001 (i.e., the PWG indicated that it believed that the availability and affordability of terrorism risk insurance has improved). Notwithstanding these apparent developments, the PWG report provides that various factors make "any evaluation of the potential degree of long-term development of the terrorism risk insurance market somewhat difficult." In addition, "in contrast to the overall market for terrorism risk insurance, there has been little development in the terrorism risk insurance market for CNBR risks." Despite its detailed analysis of the terrorism risk insurance market, the PWG report fails to provide any precise conclusions regarding the future of TRIA or the government’s role in the terrorism risk insurance market.

Many industry insiders continue to assert that the private insurance market cannot effectively operate without some form of public backstop against catastrophic terrorism losses. For example, the availability of terrorism insurance and reinsurance remains limited and the premiums are relatively high.

On the other hand, some industry observers are calling for an end to TRIA altogether. A recent editorial in The Wall Street Journal echoed this position and argued that, because the insurance market has allegedly recovered from the effects of 9/11, TRIA "creates a moral hazard by shifting costs to taxpayers and reducing incentives for mitigating risks."²

At the end of the day, as shown by the lack of government guidance and the various opinions regarding TRIA, the question of the appropriate role of the government in terrorism insurance has been renewed and is still far from being resolved.

At this point, the only certainty of TRIA is that the debate over its continuation will only intensify over the near term. As the expiration of the 2005 Extension Act draws near, both supporters and critics are sure to become more vocal in defense of their positions. While influential Democrats coming into the new Congress have already indicated TRIA will be a top priority, it would be somewhat surprising if any resolution on the future of TRIA is reached until well into next year.

Because TRIA was designed as a temporary government program to stabilize the insurance market and facilitate the development of a stand-alone private market for terrorism insurance and reinsurance, it is possible that the future terrorism risk insurance market will not have any government backstop. However, because there is no guarantee that the insurance market could absorb all of the losses associated with a future catastrophic terrorist attack, it is somewhat questionable whether Congress will completely remove the government from its current role as backstop reinsurer. Therefore, the next year is sure to be an interesting one as the insurance market closes in on another extension (or non-renewal) of TRIA.

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