TRIA-a Flood of Paper, a Trickle of Buyers
December is the most dreaded month for a surplus lines broker. In addition to all the 12/31 and 1/1 renewals, one must deal with underwriters and employees having the gall to go on vacation, holiday parties, holiday closings and trying to go easy on the stacks of holiday chocolates. All of these occurred in December 2002 on top of a “hard” market. Then came the news that every one of our existing, new and renewal policies had to have some action taken on them as a result of the new Terrorism Risk Insurance Act of 2002.
First, we need to wind the clock back and review how all of this unfolded.
Setting the stage
Before Sept. 11, 2001, terrorism was scarcely addressed in property and casualty insurance policies. The CGL policy had the standard nuclear and war exclusions on it. Property policies had similar wording. Hull and P&I forms had watered down war and civil strife exclusions. Professional and D&O forms excluded only nuclear. Financial Institution Bonds excluded riots. Motor Truck Cargo excluded civil commotion. The only form that may have addressed terrorism was Control of Well. It excluded “acts of foreign enemies.”
Following Sept. 11, terrorism exclusions soon started appearing on surplus lines policies. The terrorism exclusions used between 9/11/01 and 11/26/02 were very broad. A typical exclusion applied regardless: whether foreign or domestically inspired; whether there was actual physical damage or not; and if it just “appeared” to be intended to intimidate civilians, disrupt the economy, influence governmental policy or advance a political or religious cause. A claims examiner armed with one of these exclusions would have slept well.
The steps and the rationale leading up to the Terrorism Risk Insurance Act of 2002 (TRIA) obviously began with 9/11. The total loss to the insurance industry was some $40 billion, the largest single loss ever. It may surpass Hurricane Andrew and the Northridge Earthquake combined. The industry effectively said to the public and the federal government after 9/11: We will meet our legal and moral duties to pay for this terrorism event. We will not try to invoke any war-like exclusion in our policies. But, we can not afford to do it again. The federal government should help pay because they are primarily responsible for preventing terrorism. The industry will need a federal program of some kind for any sizeable future event.
The federal government said it would help, but then the debate began over what a terrorism insurance plan should look like. Should it be a loan or a reinsurance arrangement? Should it have tort liability restrictions or not?
The first legislative action came from the Republican controlled U.S. House of Representatives. In November of 2001, they passed a bill that would have created a federal loan program. It also contained bans on any tort liability for businesses and building owners. The Senate, still controlled by Democrats in 2002, preferred a plan that would act as reinsurance and did not restrict tort liabilities.
President Bush grew impatient and got involved in May 2002. He framed the need for a terrorism bill as one to help stimulate a sluggish economy. (It was reported that some $15.5 billion in new real estate projects were being held up for lack of terrorism insurance.)
After the November 2002 elections the momentum for a bill suddenly increased, in part because the Democrats were facing loss of control of the Senate in January 2003. Their bargaining power was not going to improve.
The new law
The TRIA was signed into law on Nov. 26, 2002. It was intended to make terrorism coverage available to any commercial insured who wants it and is administered by the U.S. Department of the Treasury. The law abrogated most existing commercial terrorism exclusions in the U.S. and is only a “stop gap” measure as it expires Dec. 31, 2005. The bill is a federal reinsurance arrangement, not a loan program. It contains a compromise on tort restrictions: No punitive damages are allowed and cases must be brought in federal court. This compromise remains even though the House had wanted caps on pain and suffering and to bar all tort liability for businesses.
Even though the Act was finally passed, the government will not just get out its checkbook following a terrorist attack. First, the loss has to exceed $5 million. Next it has to meet the definition of an “Act of Terrorism:” (1) A violent act; (2) Resulting in damage within the U.S., or to a U.S. Air Carrier or Flagged Vessel, or to a U.S. Mission; (3) Must be committed by a foreign person or foreign interest. Finally, the Secretary of the Treasury, the Secretary of State and the Attorney General have to certify it.
Although the TRIA applies to nearly all insurance companies, including surplus lines, it excludes many types of insurance: Federal crop, financial guaranty, private mortgage, health and life, flood, medical malpractice, personal lines and reinsurance. The inclusion of reinsurance in this list presents a serious problem.
The TRIA required insurers to send notices to all their commercial policyholders advising them of the availability of coverage, the definitions of an “Act of Terrorism,” and how the reinsurance would work. The TRIA allows insurers to set terrorism rates and it gave policyholders 30 days to reject coverage or accept it by paying the additional premium. If rejected, the terrorism exclusion in place on Nov. 26, 2002 would be reinstated back to that date. Pro-rata additional premium was computed as if purchased on Nov. 26.
Most insurers sent the notices direct to policyholders. Lloyds and London Companies were allowed to administer the notices through their U.S. representatives. The terrorism premium charges varied by company, by coverage, and by area of the U.S. Premiums ranged from zero percent to 25 percent of the policy premium. The latter rate is common in cities such as New York and Washington.
In the event of a certified act, insurers would first pay a deductible based on their previous year’s net written premium. Then the federal government would step in and pay 90 percent of the balance. The government’s losses are capped at $100 billion annually and they have a right to recoup their losses through a three percent surcharge on the industry.
Industry reactions
The National Association of Professional Surplus Lines Offices Inc. (NAPSLO) would have preferred a government-sponsored reinsurance pool modeled after the U.K.’s plan for I.R.A. bombings. The new law created a lot of work and expense for its members. They are concerned about the federal government abrogating all existing terrorism exclusions, as it sets a worrisome precedent. Risk managers in the high risk cities are voicing complaints about their rates. Meanwhile, consumer groups believe the TRIA is a bailout for the insurance industry.
Dick Bouhan, executive director of NAPSLO, in a recent interview with Insurance Journal, explained policyholder reaction to the new law and the coverage options it offers:
“IJ: After all of this extra work, have policyholders jumped at the chance to buy coverage?
DB: No, their reaction has been quite the opposite. In our office very few policyholders purchased coverage. In talking to others in surplus lines, they have had the same experience. Most policyholders simply do not believe they have the exposure to warrant the additional premium. Also, my guess is some were taken back by the limited coverage and the multiple conditions necessary to collect.”
The new Act was designed for another Sept. 11, where the damages were huge and the terrorists obviously foreign. It does not protect policyholders from home-grown terrorists or terrorists of unknown background. The $5 million threshhold could be a problem for a small insurer if hit with a single $5 million loss. Another problem we are seeing is that umbrella markets are excluding terrorism. They have to use reinsurers for high limits, and reinsurers are exempt from the TRIA. In short, for us, it was a near futile holiday exercise that added more pressure to an already overloaded season.
Marcus Jensvold is the president of M.D. Jensvold & Co. Inc., Houston, Texas.