It is often overlooked that the insurance industry paid out between $25 and $40 billion in losses following the attacks of 9-11 according to estimates.  In the aftermath of these attacks the unpredictability of terrorism resulted in reinsurers excluding coverage for acts of terrorism. The consequences threatened to potentially impact the economy by restricting both development and new construction projects.

The Terrorism Risk Insurance Act (TRIA), passed in 2002 and reauthorized most recently in 2015, averted the coverage crisis, and today has some impact on almost every commercially insured account.

Below is an overview of the program and where it stands today.

TRIA provides for a temporary funding mechanism to provide insurers with financial support for commercial insurance losses following a terrorist event.  The program aims to achieve its goals by nullifying and prohibiting the exclusion of certified acts of terrorism and by requiring the mandatory participation of all commercial insurers in the US.  The public-private funding mechanism is established by limiting the insured losses that are covered and by establishing program triggers, deductibles and co-payments resulting in private insurers bearing a significant portion of insured losses under the program.

Here are some features of interest…

• The act applies only to commercial insurance and limits the commercial lines that it applies to. Personal lines, health insurance and life insurance are not covered by the act.  Only approximately 50% of all premiums would actually be eligible for coverage under the program.  The act provides funding for insured property, business interruption, workers compensation and many liability losses following a terrorist event.  Claims for nuclear, biological, chemical or radiological losses would not be covered if they are excluded on the insurer policy.  These exclusions would not apply to worker’s compensation as most states do not allow any exclusions for worker’s compensation.

• Coverage has to be provided by the insured’s policy.  If an insured has not purchased business income on their policy, the program would not extend business income coverage to the insured as an example.

• The act requires all entities providing commercial property and casualty insurance in the US to offer terrorism coverage to all qualified policyholders and to disclose the cost of that coverage. The act, however, does not require policyholders to purchase coverage.

• Only “insured losses” from “certified acts of terrorism” are eligible for funding under the program.  An event must be certified by the Secretary of the Treasury as an act of terrorism.  There are several eligibility requirements for certification, the most notable requirement being a minimum $5 million in “insured losses.”  Once an act is certified, federal funding under the program would not begin until a current threshold of $120 million in insured losses is reached.  Losses under that threshold would be completely borne by insurers. This trigger will grow by $20 million per year until reaching $200 million in 2020.

• Most are surprised to learn that the Boston Marathon bombings in 2013 did not qualify as an act of terrorism under TRIA since the insured losses fell short of the $5 million threshold.

• Once an act is certified and the insured loss funding trigger is met (currently $120 million) individual insurers pay 100% of insured losses equal to 20% of their direct written premium as a deductible before qualifying for federal funding under the program.  “Insured losses” above this deductible are shared with the insurer paying 16% of the loss and the federal government paying 84% for any insured losses in 2016.   The insurer percentage, referred to as a copayment, increases annually by 1% until reaching 20% copayment in 2020 when the current act expires.

• The program is capped at $100 billion in insured losses.  Neither the federal government nor insurers are responsible for loss payments above the $100 billion cap.   If claims for insured losses exceed this amount the federal funding would be pro-rated to insurers by the Secretary of the Treasury.  The triggers and caps are annual and certified events will diminish the available funding for future insured losses in a given year.

If you are thinking that there may be some potential gaps for insureds, you have been following along. There are a number of potential scenarios in which insureds, who pay for terrorism coverage under the program, may end up without payment for losses.  While some scenarios would admittedly be very extreme, others are more probable and one has actually taken place.

1. A event of less than $5 million in insured losses, as with the Boston Marathon bombing, will not qualify for certification under the program.  Carriers could apply their exclusions for terrorism in this case leaving insureds without coverage.
2. Although unlikely, an individual carrier disproportionately impacted by an event falling under the funding trigger could become insolvent.
3. Once the $100 billion cap is reached neither carriers nor the federal government would be required to make additional payments.
4. In most cases nuclear, biological, chemical or radiological losses will not be funded by the program.
5. The program’s caps and triggers apply to annual insured losses.  In a multi-event year, losses could go unfunded if the cap is exhausted.

In summary:

• Only commercial lines are covered by the program.
• Nuclear, biological, chemical or radiological losses would not be covered for most insureds under the program with the exception of workers compensation claims.
• All property and casualty insurers are required to offer terrorism coverage under the act,  but insureds are not required to purchase it.
• Events must be certified as acts of terrorism under the program.
• The current trigger for funding under the program is $120 million in insured losses.
• The program has a $100 billion cap.
• There are scenarios in which “insured losses” could go unpaid.

Unquestionably the best source of information was the CBO’s “Federal Reinsurance for Terrorism Risk in 2015 and Beyond” .   Two of the authors, David Torregrosa and Perry Beider, and to their colleague Stephen Rabent, were very helpful in the preparation of this overview.

For additional information on TRIA there are a number of sources that can be found online.   The acts themselves are relatively short in terms of legislation, links below. Read the original 2002 version first, if inclined.  The 2015 reauthorization makes edits to the original for deductibles and triggers in addition to some administrative changes.

• 2002 Original TRIA Act (Including the 2005 and 2007 Reauthorization Changes)
• 2015 Reauthorization

 

Today’s Guest Blog was contributed by: James F. O’Neill, CPCU