Will midterms impact terrorism insurance?

The Terrorism Risk and Insurance Act (TRIA) was signed into law approximately one year after the 9/11 attacks. The program was necessary because insurers began to exclude coverage for terrorism and those that continued to offer did so using very high rates. Terrorism is inherently difficult to model given the uncertain frequency and severity. Given the limited capacity and considerable uncertainty, most insurers chose to exclude. This led to significant disruptions in real estate development because lenders require the property they finance to be insured. It also created problems for employers in major cities since they are required to provide Workers Compensation coverage for their employees, and insurers were reluctant to insure locations with a high concentration of risk. 

TRIA created a federal reinsurance program that allowed insurers to offer coverage for claims arising from terrorism and therefore stabilized the market. The President and Congress understood that a viable insurance market is critical to economic development and the ability of a society to recover after a catastrophe. TRIA had a sunset provision and has been renewed two times in an amended form. The updated version of the program reduced coverage by increasing insurer deductibles, raising program triggers, and reducing the share of losses that the government would pay. The updated versions did expand coverage in one aspect when it clarified that qualifying domestic attacks are covered instead of the previous focus on only foreign. 

{mosads}The current version was reauthorized in 2007 and is now called the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA). This program expires on December 31.

It should have been renewed in some form earlier this year to avoid problems for insurers and policyholders. Insurers are now issuing policies that provide coverage in 2015 and are assuming that Congress finally reaches an agreement. Though most agree that some sort of agreement will take place, it is by no means a guarantee. 

The delay is surprising because it is widely supported by insurers, brokers, banks, construction companies and realtors. It is also surprising because TRIA (and now TRIPRA) has been an undeniable success. Not a single claim has qualified for coverage and it continues to stabilize the market by keeping coverage available and affordable.  

In addition, it is important to note that the track record of insuring catastrophic risk in the United States is not very good. We have a disjointed, piecemeal approach of insuring against hurricanes, earthquakes and flood. States have created a number of confusing plans that insure against wind and earthquakes and require a separate policy. TRIA and TRIPRA have much lower administrative expense than the other federal disaster approach, such as the National Flood Insurance Program

The current debate appears to focus on the more “status quo” renewal already passed the Senate and the “scaled back” version is stalled in the House. The differences actually are not that great and our leaders should be able to find a compromise. Now that the Republicans control the Senate and have a wider margin in the House, it seems likely that would increase the odds we will see a “scaled back” version. This would lead to a higher trigger, a larger portion of losses paid by insurers, and a larger overall insurance industry retention. Even with the increased insurance company contribution, the vast majority of the losses would still be paid by the federal government. 

The House version separates “acts of terrorism” into two categories (NBCR and non-NBCR). Nuclear, Biological, Chemical and Radiological (NBCR) attacks would have a lower program trigger and a higher percentage of federal compensation than non-NBCR. Having the government bear a larger share makes sense because these losses have higher severity and there is less private reinsurance capacity for NBCR type losses. It also makes sense to gradually shift a larger share of the non-NBCR to insurers and reinsurers. 

One area that is not being adequately addressed by either version is cyberterrorism.  Under the current terms of TRIPRA, cyberterrorism is not specifically excluded and therefore it could be covered. It is unclear though and subject to coverage interpretation. Given the potential to be as severe as an NBCR attack, it is logical to explicitly include in the next version and insure in a similar manner. It is better to address now than wait until after an event and try to determine in the midst of chaos. 

The insurance industry is very well capitalized and the reinsurance market has seen a substantial increase in capital as well from Insurance Linked Security products. Risk models have improved and there is a better understanding of the exposure. The time is right to continue to transition a greater portion of non-NBCR exposure to the private sector. Hopefully now that the elections have passed, this will reduce the gridlock that has stalled the reauthorization over the last year.   

TRIA and TRIPRA have led to greater economic development and a more resilient society with minimal financial support from the federal government. The downside of continuing to delay far outweighs the proven benefits of continuing the program. 

Marlett, professor in the Department of Finance, Banking and Insurance at Appalachian State University, and a senior fellow at the American Consumer Institute.

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