R Street urges Congress to explore alternatives to TRIA
Passed in 2002, the Terrorism Risk Insurance Act was designed as a temporary response to the contraction in coverage for terrorism risks following the Sept. 11 attacks. The law both created the federal terrorism reinsurance backstop and also required insurers to offer terrorism coverage to their commercial property/casualty clients — including excess, workers’ compensation and surety – on terms equivalent to coverage for other perils.
The program has been renewed twice, in 2005 and 2007, each time with Congress making changes to its structure. Rep. Michael Grimm, R-N.Y., is introducing legislation that would extend the program for five years under its existing structure.
However, following a decade of TRIA, R Street Senior Fellow R.J. Lehmann said it is worth examining the degree to which the program remains necessary, as well as whether reforms might be possible to move more risk into the private market and better protect taxpayers. Lehmann notes that, over the past ten years, pricing for terrorism insurance has fallen significantly; take-up of coverage, which grew rapidly in the early years of TRIA, has remained flat since 2005, at about 60 percent; and private reinsurance capacity has grown from non-existent in late 2001 to at least $6 to $8 billion today.
“The market for terrorism insurance today is very different than it was a decade ago. Modeling firms now offer a suite of products to aid insurers in pricing and underwriting a variety of terrorism risks. The catastrophe bond and collateralized reinsurance markets also have exploded, offering whole new means to transfer risk,” Lehmann said. “There’s no question TRIA served to stabilize the market and ensure the availability of terrorism coverage. But if there are opportunities to reduce the government’s role and find more private solutions, Congress should explore every avenue.”
Under the program’s current terms, terrorist acts that cause at least $5 million in damage, with an aggregate loss to the industry of at least $100 million, are eligible to be certified by the U.S. Treasury Department as covered by TRIA. Individual companies retain a deductible of 20 percent of their premiums before government coverage attaches.
Beyond those thresholds, the federal government pays 85 percent of insured losses from terrorism up to a maximum of $100 billion. If aggregate losses are less than $27.5 billion, Treasury must recoup TRIA outlays through post-event surcharges on property/casualty policies. If losses exceed $27.5 billion, it’s left to the Treasury secretary’s discretion as to whether to assess surcharges.
Among the alternative structures R Street encourages Congress to explore are:
- Establishing a mutual reinsurance pool for terrorism risk, similar to those in Germany and the United Kingdom, that would see declining government support as the pool builds reserves.
- Permitting insurers and reinsurers to accumulate contingent catastrophe reserves dedicated to terrorism risks on a tax-free basis. Rep. Eleanor Holmes-Norton, D-D.C., has proposed legislation that would establish the District of Columbia as a unique tax-free domicile for catastrophe reserves.
- Charging insurers upfront premiums for TRIA reinsurance coverage, which would rise over time as more private reinsurance capacity comes into the market. This was the approach taken by the former federal Riot Reinsurance Program, created in 1968 and ultimately sunset in 1985.
- Transitioning TRIA to a voluntary reinsurance program that would be limited to covering the truly large nuclear, chemical, biological and radiological risks the private market has had difficulty insuring.
- Increasing insurers’ deductibles and copayments , as well as the trigger for federal assistance, as was done in the 2005 TRIA renewal legislation.
