TRIA Extension Must Pass Without NBCR Provision
After the terrorist attacks of Sept. 11, 2001, the market for commercial property and liability insurance in large urban areas was in turmoil, as reinsurance for terrorism became expensive and scarce. Construction slowed or stopped, and the economy wilted. In response, Congress passed the Terrorism Risk Insurance Act (TRIA), a federal backstop that covers only the largest terrorist events.
The original program helped to stabilize the economy and addressed the availability of coverage for terrorist attacks using conventional weapons, as well as coverage for both conventional and nuclear, biological, chemical and radiological (NBCR) terrorism in workers’ compensation policies. In 2005, Congress extended TRIA for two more years, but it is set to expire on Dec. 31, 2007.
The Property Casualty Insurers Association of America (PCI) supports a long-term extension of TRIA, which has successfully protected millions of individuals, businesses and the U.S. economy since its implementation in January 2003. The association believes a long-term TRIA program is needed to ensure that a stable and competitive market for terrorism insurance remains intact.
A bill (H.R. 2761) to extend this critical public/private partnership recently passed the U.S. House of Representatives by an overwhelming bipartisan majority, 312-to-110. The U.S. Senate Banking Committee passed its own version of TRIA (S. 2285), which was heavily influenced by the House product.
With the House bill as an anchor, the Senate negotiators agreed to renew TRIA for seven years or until 2014, and eliminate the distinction between foreign and domestic acts of terror. Additionally, the Senate bill holds the line on triggers and deductibles.
In H.R. 2761, coverage would include most commercial property and casualty lines, including workers’ compensation and farm owners’ multiperil, a provision PCI worked hard to have included as an amendment to the bill.
Triggers
The Senate wants the government program to trigger after $100 million in losses, whereas the House sets the trigger at $50 million. PCI believes that a reduced trigger level (the threshold at which the program would activate) and the elimination of the distinction between foreign and domestic terrorist attacks would enhance the terrorism insurance market and allow more insurers to provide this important coverage to more businesses and the workers they employ. Several other parts of the bill, including a long-term extension and a “reset” provision helping areas previously attacked, would strengthen the program considerably.
Weapons of Mass Destruction
H.R. 2761 has many positive provisions that will benefit not only consumers, but the entire U.S. economy as well, by enabling continued commercial lending and building where lenders would otherwise be hesitant to make loans.
However, the bill’s mandate that insurers be required to make available coverage for attacks using weapons of mass destruction will undermine the very foundation of the program, threaten the solvency of many insurers, and leave many commercial consumers with fewer choices and higher premiums.
The existing program — which does not have a mandatory make-available requirement for NBCR attacks — has had the extremely beneficial effect of transforming an uninsurable risk into an insurable one. Thanks to TRIA, 60 percent of U.S. businesses — of all types and sizes in all parts of the country — can purchase affordable terrorism insurance at lower prices. That financial protection benefits individual businesses, the workers they employ and the U.S. economy.
Recognizing that there is no economic slowdown due to a lack of an NBCR make-available provision analogous to the post-9/11 slowdown caused by a lack of conventional terrorism coverage, S. 2285 does not contain that provision. With potential losses from such an attack as high as $778 billion as estimated by the American Academy of Actuaries, and even with a reduced deductible, it is virtually impossible to price coverage for NBCR losses because historical claims data are nonexistent.
If NBCR coverage were to be required of insurers selling terrorism policies, there would be a variety of negative consequences, including increased insurer surplus at risk; increased insurance prices; less participation in the program, leading to less competition and spreading of risk; and significant operational issues for insurers who are not equipped to adjust claims in areas hit by an NBCR attack.
It is important to note that not only PCI, or insurers in general, have warned of negative consequences to a mandatory NBCR coverage provision. A number of well-respected public and private agencies—including the Financial Services Roundtable, the Government Accountability Office (GAO), the President’s Working Group on Financial Markets, the Risk and Insurance Management Society (RIMS) and the RAND Corp.—have studied the issue extensively and arrived at similar conclusions.
Because there are many positive aspects to the legislation, PCI hopes that the final bill produced by Congress will not include the mandatory NBCR coverage provision. It would be unfortunate for a good bill to be derailed by an unworkable requirement that the industry insure against an uninsurable threat.