[author: J.C. Boggs]

In the aftermath of the tragic September 11th terrorist attacks and after suffering steep losses, insurance companies stopped offering terrorism coverage as part of their commercial property policies.  In response to this, Congress stepped in and created the Terrorism Risk Insurance Program to provide a narrow and targeted government backstop for this critical insurance coverage. This program was extended in 2005 and again in 2007.

As originally enacted, the Terrorism Risk Insurance Act (TRIA) of 2002 created a temporary three-year Terrorism Insurance Program in which the government would share some of the losses with private insurers should a foreign terrorist attack occur.  TRIA basically required that insurers make coverage available for terrorism to their commercial policyholders in return for a cap on industry liability.

The current TRIA program expires on December 31, 2014, and includes the following specifics: (1) terrorist act must cause $5 million in insured losses to be certified for TRIA coverage; (2) the aggregate insured losses from a certified act of terrorism must be $100 million in a year for the government coverage to begin; and (3) an individual insurer must meet a deductible of 20% of its annual premiums for the government coverage to begin.  Once these thresholds are passed, the government covers 85% of insured losses due to terrorism. 

In the last year, the Senate Banking Committee held two hearings on the importance of TRIA reauthorization, and on April 10th, Senator Chuck Schumer (D-NY) and several of his Banking Committee colleagues introduced S. 2244, the Terrorism Risk Insurance Program Reauthorization Act of 2014.  That bill would extend the current program for another seven years, while also increasing industry co-shares by one-third under a five-year phase-in period.  The Senate Banking Committee approved the bipartisan legislation on June 3rd by a unanimous vote of 22-0. 

In the House of Representatives, the Financial Services Committee on June 20th approved H.R. 4871, the TRIA Reform Act of 2014, by a vote of 32-27 largely along partisan lines.  The House bill proposes to extend TRIA for five years, increase the insurer co-pay to 20%, and create a new program bifurcation for nuclear, biological, chemical, or radiological (NBCR) type of attacks.

More specifically, the House bill calls for gradually increasing the program trigger for all non-nuclear, biological, radiological, and/or chemical (NBCR) events, from $100 million to $500 million by 2019, effectively phasing out the program for non-NBCR events.  The House bill would also reduce the federal co-pay share of insurers’ losses for non-NBCR-covered events over the course of the reauthorization from 85% to 80%, and proposes to reduce taxpayer involvement by clarifying the terms of the mandatory recoupment mechanism, and increases the assessment rate to compensate taxpayers for the value of their TRIA investments from 133% to 150%.

Following Senate passage of their TRIA extension bill, by a vote of 93-4, Financial Services Committee Chairman Jeb Hensarling (R-TX) threw cold water on quick passage of a similar bill in the House.  The Chairman’s objections were not purely policy related, also citing budgetary problems with the Senate bill.  According to Committee staff, the main concern about the cost of the program revolves around a violation of the House Cut-Go Rule.  The rule requires any increase in mandatory spending be offset by an equal or greater cut to existing mandatory spending.  The Senate bill would require an offset of $3 billion over 10 years. 

Significant differences remain between the House and Senate bills and will need to be ironed out prior to final passage and enactment of the legislation.  Chairman Hensarling continues to express philosophical reservations and has argued in favor of charging premiums for the coverage that reinsurance and large companies receive courtesy of the taxpayers, or in the alternative, increased reserve requirements to further lessen taxpayer exposure.  The end result is that the House is unlikely to take up TRIA until after the November election.

While TRIA is not set to expire until the end of the year, the renewal period for catastrophic risk insurance is quickly approaching, or in some cases has already passed.  Organizations with terrorism policies extending past TRIA’s December 31, 2014, sunset date face potential for conditional exclusions in their policy renewals which could result in significant gaps in coverage and/or additional costs to the policyholder.