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last updated on Feb. 15, 2007

TERRORISM RISK INSURANCE

THE ISSUE IS...Due to the tragic events of Sept. 11 - and the ongoing threat of terrorist attacks, Congress recognized the need to establish a mechanism to assure the financial capacity to pay claims resulting from terrorism.

IT'S IMPORTANT BECAUSE...The Sept. 11 attacks were of a nature and scope unlike any other catastrophe in U.S. history, leaving deep concerns about the insurance industry's ability to provide terrorism coverage. Congress acted to address this situation with the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA).

TRIA created a mechanism under which the federal government would provide a federal reinsurance backstop to commercial insurers in the event of another terrorist attack. TRIA was scheduled to sunset on Dec. 31, 2005.

TRIA was intended to allow the markets three years to develop adequate terrorism insurance products. However, almost four years after the attacks, predicting how, when, and where future terrorist attacks against the United States will be launched remains speculative. Acceptance or rejection of TRIA coverage appears to be based on the insureds' perception of their terrorism risk. However, another attack in the United States could change perceptions of risk leading to a shortage of coverage based on today's usage.

On Dec. 16, 2005, just days before recessing for the year, Congress passed the Terrorism Risk Insurance Extension Act (TRIEA). The legislation extended TRIA for two years and scaled back the scope of coverage, for instance by no longer mandating coverage for farm owners multi-peril insurance. Commercial auto, burglary/theft, surety, and professional liability are no longer covered under TRIA. The bill also did not include coverage for non-conventional attacks, such as nuclear, biological, chemical, or radiological (NBCR). The bill increased the industry's deductible from 17.5 percent in 2006 to 20 percent in 2007. The event trigger was also raised to $100 million for 2007.

NAMIC is currently working with the P/C industry and will continue to work with lawmakers to create a permanent public/private partnership on terrorism coverage when the TRIA extension expires Dec. 31, 2007. Also, NAMIC is working to ensure that a permanent event trigger should be set at a level that will continue to encourage participation by small- and medium-sized insurers. Too high a trigger would drive them from the market because reinsurance costs would be too high, making primary coverage unaffordable. After all, small- and medium-sized insurance carriers form the backbone of the industry and support niches of terrorism coverage larger carriers have historically avoided.

NAMIC POSITION...NAMIC commends Congress for passing a short-term extension of TRIA in 2005. NAMIC continues to work with Congress and the administration to establish a long-term limited public/private partnership that will ensure continued availability and affordability for terrorism coverage.

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