FIO Focus, Issue No. 56

by Nelson Brown & Co.

Devoted to exploring the progress of the modernization of the insurance industry, FIO Focus provides information and insights about the organizations and issues that are driving change and influencing the future of the industry.

TRIA Renewal Legislation Considered by the House Financial Services Committee

On June 19, 2014, the Financial Services Committee (FSC) of the U.S. House of Representatives held a markup of H.R. 4871, "TRIA Reform Act of 2014." It has been reported that Rep. Randy Neugebauer (R-TX) will seek to have the Terrorism Risk Insurance Act (TRIA) renewal legislation "through Congress before it leaves for its August recess, or in September at the latest."

FSC action follows the approval of S. 2244 by the Senate Committee on Banking, Housing and Urban Affairs on June 3, 2014. S. 2244 awaits consideration by the full Senate. FIO Focus Issue 50 provides information on the Senate’s TRIA renewal bill.

H.R. 4871 will extend TRIA for five years. It also:

  • Establishes a timeframe for determining a “certified act of terrorism;”
  • Provides a process allowing small insurers to seek an exemption from providing terrorism coverage on grounds of financial hardship or financial infeasibility;
  • Increases trigger and mandatory recoupment amounts;
  • Changes the aggregate retention amount;
  • Decreases the federal share of insured losses annually over a five-year period; and
  • Requires additional data collection and reports.

Under the bill, the Treasury Secretary would be required to issue a preliminary certification as to whether an event is expected to be a “certified act of terrorism” within 15 days of a:

  • Potential act of terrorism; or
  • Receipt of a petition by an insurer writing terrorism insurance covered by TRIA.

A final determination of a “certified act of terrorism” would have to be issued within 90 days of an event or receipt of an insurer’s petition. However, if the Treasury Secretary fails to act within the 90-day period, the event will be treated as having been determined, by the Secretary, not to be an act of terrorism.

Under the current law, the Treasury Secretary would certify an act of terrorism “in concurrence with the Secretary of State and the Attorney General of the United States.” With the bill, the decision would be made in “consultation with the Secretary of Homeland Security and the Attorney General.”

The TRIA Reform Act specifically addresses acts of terrorism involving nuclear, biological, chemical or radiological (NBCR) weapons.

  • The trigger amount for non-NBCR events would increase by $100 million annually from the current $100 million to $500 million, beginning in 2016. The trigger for a NBCR event would remain at $100 million through 2019.
  • Over the next five years, the federal share of insured losses from a non-NBCR event would drop from 85% to 80%. For an NBCR event, the federal government’s share would be 85%.

The legislation provides that the industry marketplace aggregate retention amount would be the lesser of: (1) “the amount that is equal to the sum of the insurer deductibles for the Program Year for all insurers participating in the Program”; and (2) “the aggregate amount, for all insurers, of insured losses during such Program Year.” No changes to the calculation of an insurer’s deducible are proposed.

The legislation also provides a new calculation of the mandatory recoupment amount – the lesser of: (1) the aggregate of industry insured losses that are compensated by the federal government or (2) the insurance marketplace aggregate retention amount.

The mandatory surcharges or the “terrorism loss risk-spreading premiums” will increase from 133% to 150% of the mandatory recoupment amount. As with the current law, these would be imposed in the form of policy surcharges. The legislation also outlines new factors that should be considered by the Treasury Secretary in determining the size of premiums to be charged as part of any recoupment.

The TRIA Reform Act states that a “small insurer” could apply to its domestic state regulator for exemption from participating in TRIA on the grounds of “financial hardship or financial infeasibility” of providing terrorism coverage. The legislation provides that, by regulation, the Treasury Secretary shall define “small insurer.”

The bill would also require:

  • The creation of a nine-member Advisory Committee to encourage the creation and development of risk sharing mechanisms for terrorism risk;
  • The annual collection of information from insurers and reports to Congress on the lines of insurance covered under TRIA, premiums earned on terrorism coverage, geographical location of exposures, terrorism insurance pricing, take-up rates and reinsurance for terrorism risk;
  • An annual study of small insurers’ participation in TRIA and the challenges they face in insuring terrorism risk;
  • A report from the Congressional Budget Office and Office of Management and Budget on the feasibility of applying fair value concepts to budgeting for the cost of federal insurance programs, including the terrorism risk insurance program; and
  • A Government Accountability Office (GAO) study on assessing upfront premiums on insurers participating in TRIA and the effects on the terrorism risk market, the viability of creating a capital reserve fund and having insurers dedicate capital for terrorism losses, and terrorism insurance practices in other countries.

NARAB II Attached to the TRIA Reform Act

The National Association of Registered Agents and Brokers Reform Act of 2013 (NARAB II) was attached to the TRIA Reform Act during the markup held on June 19, 2014. The Federal Insurance Office (FIO) recommended the adoption and implementation of NARAB II in its report on "How to Modernize and Improve the System of Insurance Regulation in the United States." FIO Focus Issue 45 provides additional information on the FIO’s recommendation regarding NARAB II.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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