Following 9/11, Congress recognized the unique challenges of insuring commercial real estate for terrorist attacks and passed the Terrorism Risk Insurance Act (TRIA) in November 2002. TRIA established a risk-sharing mechanism for commercial lines that allows the federal government and the insurance industry to share losses in the event of a major terrorist attack. The program is designed to ensure that adequate resources are available for businesses to recover and rebuild if they become the victims of a terrorist attack.
The basic provisions of the TRIA program are as follows:
Make available requirement: Only commercial insurers and causes of loss specified in the underlying policies are covered under the program and required to make coverage available. Residual market insurers such as workers’ compensation pools, captive insurers and risk retention groups are also covered. Personal lines insurers and reinsurers are not covered; neither are group life insurance losses.
Definition of a certified act of terrorism: The 2007 extension expanded the definition of a certified act of terrorism to eliminate any distinction between domestic or foreign acts of terrorism. The original act covered only acts of foreign terrorism on U.S. soil.
Individual insurer deductibles: The amount of terrorism losses that an individual insurer must pay before federal assistance becomes available. The level rose to 20 percent of an insurer’s direct earned premiums for commercial property/casualty insurance in 2007 where it currently remains (up from 17.5 percent in 2006 and 15 percent in 2005).
Co-payments: The share of losses that insurers pay above their individual retentions is rising to 20% percent by 2020, up from 10 percent in 2006.
Industry retention level: The industry as a whole must cover a certain proportion of the losses through deductibles and copayments before federal assistance kicks in. This amount will rise to $37.5 billion in 2020 and thereafter be based on the sum of individual company retentions, up from $15 billion in 2005. If the insured loss is less than the $37.5 billion threshold, the federal government can recoup the difference between the actual amount it paid and the required retention. This comes via a surcharge on commercial insurance policyholders not to exceed 3 percent of premium for insurance coverages that fall under the program. If the insured loss exceeds this threshold, federal expenditures may be recouped for amounts in excess of the threshold at the discretion of the Secretary of the Treasury.
Triggering event: The threshold for the program to go into effect rose from $5 million under the original act to $50 million after March 2006. In 2007, the triggering event threshold rose to $100 million and is no moving to $200 million. Federal funds will be paid out only in the event of a terrorist act(s) that produces total losses above this threshold.
Program cap: The program is capped at $100 billion per year for insured losses (federal and insurer combined). A provision in the law requires the U.S. Department of the Treasury to establish a process for the allocation of pro-rata payments in the event that terrorism-related insured losses exceed the federal government’s annual $100 billion cap. The law states that no insurer may be required to make any payment for insured losses in excess of its deductible and its share of insured losses.
Since its initial enactment in 2002 the terrorism risk insurance program has been revised and extended three times now. The most recent extension – occurring in January of 2015 – lasts until December 31, 2020. Additionally, the portion of the loss insurers would pay in the event of a terrorist attack has increased significantly over the years.
NAMIC supports the current TRIA program and believes that a public-private partnership is needed in order to protect the U.S. economy from a devastating terrorist attack. NAMIC opposes changes to the program which would make it more difficult for insurers of all sizes to participate in the program and the terrorism insurance market.