Terrorism and TRIA – What’s in Store for the Future’

Two years later, fate of the historic act remains unknown

If a camel is a “horse made by a committee” then the Terrorism Risk Insurance Act (TRIA), passed by Congress in November 2002, is a law made by several committees. The original idea was to create a floor under the insurance industry following the Sept. 11 attacks. In a sense it does.

“Without this legislation, insurers were looking at an almost incalculable risk,” noted the Insurance Information Institute (I.I.I.), shortly after the act’s passage. “While still large, the potential risk to individual companies can be quantified and enables the market to function again.”

In an article last November the Mortgage Bankers Association noted that TRIA “has brought stability to the commercial real estate marketplace,” by creating a “federal reinsurance backstop with initial loss limitations for insurers. It also put a cap on total losses to the private and public sectors at a determined amount, and provided a provision for the review and evaluation of the need for reauthorization.”

While TRIA may have helped stabilize the real estate finance market, it only addresses a very narrow area—the “terrorist” coverage problem. It doesn’t apply to natural disasters—earthquakes, hurricanes, forest fires, droughts, etc.—only to man-made disasters that were intentionally carried out by certified “foreign” terrorists, and then only on U.S. soil. The loss has to have exceeded $5 million, and it must be a commercial loss. Then there are the deductibles. The total for the industry is $100 billion in any one year.

The I.I.I. estimated that the total insured loss for the World Trade Center, Pentagon and Pennsylvania events is $40.2 billion, the biggest single loss event in insurance history. With TRIA, the I.I.I. said in the case of a theoretical terrorist strike that caused $30 billion in commercial property and workers’ compensation loss, the total industry loss would be approximately $11 billion for the remainder of 2002 and 2003, $14 billion in 2004 and $20 billion in 2005. In other words, even with TRIA the industry would still pay out half to two-thirds of the loss.

For these and other reasons, the industry’s reaction to TRIA has been somewhat less than enthusiastic. “The private market hasn’t stepped up to the plate,” explained Sharon Emek, a principal of New York’s CBS Coverage Group. Emek, a vice president of the Independent Insurance Agents and Brokers of New York, who has testified before Congress on TRIA, said that outside of New York, which experienced the horrors of Sept. 11, there hasn’t been a great deal of interest in covering terrorist losses. “There’s just not a big market,” she said. “Even if the companies are required to have it, most people just aren’t looking at it.”

TRIA also suffers from the fact that it insures, or reinsures, a risk that can’t be predicted in any meaningful way.

“Terrorism is basically an ‘un-underwriteable’ risk,” said John Degnan, vice chairman of Chubb Corp., speaking at the Professional Liability Underwriting Society (PLUS) Convention in Philadelphia last November. “You can’t spread the risk, and you can’t anticipate it,” he added, indicating that doing so remains a challenge for which there are as yet no solutions.

At least part of the problem lies in the nature of the word itself. Americans, or at least America’s leaders, are obsessed by “terrorism.” Post traumatic stress after the attacks of Sept. 11 has made the word synonymous with all the world’s evils; yet it remains, for all of its cognitive power, an elusive term. John V. Whitbeck, an international lawyer based in Saudi Arabia, recently noted in an editorial that appeared in the International Herald Tribune, “the word is so subjective as to be devoid of any inherent meaning.”

That doesn’t stop people from using it indiscriminately; it probably encourages it. The term has become a powerful catchall phrase with which to belabor one’s opponents. There are plenty of other terms that actually describe what “terrorists” do—mass murder, suicide bombings, killing innocent civilians, arson, assassination, etc., some or all of which may be “politically motivated”—whatever that means. These terms are unfortunately a bit too specific.

AIG’s Hank Greenberg can call trial lawyers “terrorists,” but not mass murderers. Secretary of Education Rod Paige can label the biggest U.S. teacher’s union with the epithet, but wouldn’t call them assassins. According to Whitbeck, President Bush used the term 23 times in his February appearance on Meet the Press, despite no one asking him a question related to it.

Wars are classically fought between people whose opposing points of view—”this land belongs to us, no it’s ours”—have proven irreconcilable to the point that they resort to killing their opponents in order to prevail. The U.S., however, has developed the notion that wars can be waged against less substantial opponents. How else to explain crusades like the “War on Poverty,” or the “War on Drugs,” and the most recent “War on Terrorism?” Whitbeck concluded that the only workable definition of terrorism was a very subjective one: “violence that I don’t support.” In the socio/political context, it’s so broad as to be objectively meaningless, except for its shock value: “terrorists are people who do things I don’t like.”

TRIA’s very specific provisions have to labor against that increasingly broad background, and they’ve been somewhat submerged by it. Overuse of any term lessens its value. People stop paying attention. After all the discussion over TRIA less than two years ago, it will probably disappear, at least in its present form.

“I don’t think either the Congress or the President wants to see it renewed,” said Emek. “I think they’ll let it ‘sunset’ in December 2005.”

General Re’s CEO Joseph Brandon said the same thing at the PLUS Convention, stating pretty firmly that, “TRIA will not be renewed.”

He also raised another valid point. “It’s the government’s responsibility to protect its citizens in time of war,” said Brandon. “The main problem with TRIA is that it’s not comprehensive enough; you need to spread the risks of loss over all of society. The insurance industry can’t do it alone.”

Essentially, although no one’s happy with TRIA, no one wants to go back to pre-Sept. 11 status either—even if it were possible. Business needs the economic protection provided by the insurance industry, but the industry needs protection, too. That’s why finding some alternative to TRIA still remains a priority for many who worry that time is becoming a factor, especially in a presidential election year.

“There needs to be some bill [setting up TRIA’s successor] by December 2004 or January 2005 at the latest,” said Emek. She explained that the type of coverage where terrorism provisions become important—large commercial risks—take a great deal of time to put together, and agents, brokers and carriers can’t work in a vacuum. “We need to move on the whole program,” Emek stressed. So far, that isn’t happening.

Unless some form of reinsurance becomes available to replace TRIA, the industry could find itself where it was after Sept. 11. The big reinsurance companies, the majority of which aren’t American, will continue to exercise great caution as to what, if any, risks related to terrorism they will reinsure. The primary companies are already changing their underwriting procedures to account for the larger retentions and restrictions. Emek observed that carriers have become very conscious of their aggregate risk exposure. “They can’t write too much in any one location,” she said, citing workers’ compensation as an example of how difficult the market has become. “If you’re trying to insure 100 employees in one location, most companies just won’t write business there.”

Emek’s perspective in New York City differs from what can be expected in the rest of the country. New York is the nation’s financial heart—the biggest and most important city in the U.S. Its people and buildings are under a greater threat from a future attack than elsewhere in the country—perhaps from ideologically motivated foreign-based terrorist groups. In the wake of Sept. 11, many but not all states changed the terms of the standard fire policy to allow exclusions for terrorism. New York (and California) did not. TRIA was supposed to reconcile the two positions, but it has been only partially successful in doing so.

For New York, the question of what will replace TRIA is therefore more critical than anywhere else, except perhaps Washington, D.C. One possibility Emek mentioned would be a change in New York law that would allow certain exclusions, but would also set up a state supported back-up system to encourage companies to write it. This would essentially spread the risks more broadly throughout the state, which would be a solution for New York, but would have no effect on the rest of the country.

The Mortgage Bankers Association has called for TRIA’s renewal. “The importance of reauthorizing TRIA is clear from a 2002 survey of MBA members,” it said in the November article. “The survey determined that inadequate and unaffordable terrorism insurance had a significant impact on the number of deals that were being done. The survey estimated that $3.7 billion in commercial property deals were killed and another $4.5 billion had either been delayed or changed due to the lack of terrorism insurance.”

However, as noted, the insurance industry doesn’t think this is likely, despite the MBA’s plea.

A possible solution would be to establish a federal hybrid reinsurer along the lines of the England’s Pool Re. According to an announcement from the Treasury Department, “Pool Re was set up in 1993 to ensure that terrorism insurance would continue to be available, following withdrawal of insurers from a provision of terrorism insurance for commercial property. HM Treasury is the ‘reinsurer of last resort’ for Pool Re, protecting it in the event that it exhausts all its financial resources following claim payments.”

Under the scheme, the British government collects a surcharge on premiums, which are then “pooled” to pay for losses covered by the fund. It was originally intended to cover losses primarily caused by I.R.A. bombings. Following Sept.11, the government expanded Pool Re’s coverage from “fire and explosion” only, to an “all risks basis.” For example, it can now cover “contamination, impact by aircraft, or flood damage.”

This type of arrangement, which can continue for as long as it is required, was supported by a number of people when TRIA was being debated. Ultimately the British scheme was rejected because many insurers balked at paying the premium surcharges needed to fund it and the government didn’t want to establish a permanent system. As a result, the U.S. got TRIA, and now the country in general and the insurance industry in particular are faced with the task of reauthorizing or replacing it. Hopefully this time around they’ll get it right.