Insurance Information Institute warns of “tightening” market as Terrorism Risk Insurance Act expires this year

The Insurance Information Institute warned Tuesday that the availability and price of terrorism insurance is “tightening” in the United States due to uncertainty over the impending expiry of the Terrorism Risk Insurance Act, which was initially passed in 2002.

TRIA requires commercial insurers in the U.S. to cover losses in incidents which are “certified” by the U.S. government as terrorist acts and requires the U.S. government to pay a portion of a carrier’s insured losses that exceed the carrier’s deductible. It is scheduled to expire Dec. 31, 2014.

In a press release, New York City-based I.I.I. warned that without a renewal of the act, “terrorism risk insurance would be less available to businesses of all sizes” who are in the market for such coverage.

“The availability and pricing of terrorism insurance is currently tightening given uncertainty over reauthorization, and because of the unique nature of terrorism risk and the possibility for virtually unlimited losses, private insurance markets do not have the capacity to cover terrorism losses to the extent possible” under the Terrorism Risk Insurance Program Reauthorization Act, I.I.I. president Robert Hartwig stated in the release.

On July 17, the United States Senate voted in favour of the Terrorism Risk Insurance Program Reauthorization Act of 2014. However, a separate bill proposing to extend TRIA has yet to be passed by the House of Representatives.

In order to get passed into law, a bill approved by one house must first be sent to the other house, and then both houses need to work out any differences before the final version goes to the President.

The Senate version proposed to extend TRIA to 2021 while the House version, if passed, would extend it to 2019.

Currently, in order to trigger coverage under TRIA, a terrorist act would have to result in losses exceeding US$5 million in the U.S. and be certified as a terrorist act by the Secretary of State, the Attorney General and Secretary of the Treasury, Risk and Insurance Management Society Inc. (RIMS) noted in a 2013 paper, titled Terrorism Risk Insurance Act: The Commercial Consumer’s Perspective The attack would also have to result in aggregate losses, to the industry, of more than US$100 million. The deductible, to the private insurers, is 20% of their annual direct earned premiums from commercial P&C lines. Once that deductible is exceeded, the federal government covers 85% of the insurer’s loss above the deductible, until the total losses are US$100 billion.

The Senate version proposes to increase the insurance marketplace aggregate retention amount, by US$10 billion, to US$37.5 billion.

The House of Representatives version, tabled in June, proposes to “phase in a new program trigger” for events other than chemical, radiological, biological and nuclear attacks “from US$100 million to US$500 million by 2019,” according to a press release from Texas congressman Randy Neugebauer. That bill would also reduce the federal share of insurers’ losses from 85% to 80%.

“Prospects are increasing that the issue of TRIA’s reauthorization will not be resolved until the Lame Duck session” after the 2014 mid-term elections, I.I.I. predicted.

“Recent and explicit threats to American interests around the world from new terrorist organizations, including Islamic State (ISIS), demonstrate that the need for the program is greater than at any time in the past several years,” Hartwig stated.

I.I.I. noted that the hijacking of four civilian airplanes September 11, 2001 produced insured losses of about US$42.9 billion, in 2013 dollars.

“Losses were paid out across many different lines of insurance, including property, business interruption, aviation, workers compensation, life and liability,” I.I.I. noted.