Congress returned last week from an extended spring recess with few legislative days left on the calendar before the mid-term elections and a long list of must-do legislation. One piece of legislation that seems certain to get attention will be a bill reauthorizing the Terrorism Risk Insurance Act (TRIA). In testimony presented over the last year before committees in the House of Representatives and the Senate, insurance industry representatives have made it clear that the federal backstop provided under TRIA is still relevant and essential to ensuring that terrorism risk insurance is both widely available and affordable. This has led to bipartisan and bicameral support for a reauthorization of TRIA that now seems certain to happen. Only two questions remain: when will Congress move forward and what changes will be made to TRIA to further protect taxpayers from unreasonable risk?
One consequence of 9/11 was that insurance coverage for terrorist attacks quickly became unavailable. As a result, Congress passed TRIA and President Bush signed it in November of 2002. TRIA was enacted because the government recognized that no viable private market for terrorism insurance was possible without a federal backstop that effectively limited the losses that the insurance industry would have to absorb in the event of another major attack. The statute requires that insurers make coverage for terrorism available to their commercial policyholders. In return, the industry’s liability is capped.
TRIA is activated once an event has been certified as an “act of terrorism” by the Secretaries of the Treasury and the Departments of State and Homeland Security. There is presently a $27.5 billion annual aggregate retention level, meaning that industry-wide commercial and worker’s compensation claims from a terrorist attack must exceed $27.5 billion before TRIA kicks in. The statute also has an 85/15 co-pay; above $27.5 billion, the federal government pays 85% of the loss and the insurance industry pays the remaining 15% up to a cap of $100 billion. Finally, each individual insurance company has a deductible that it must fund equal to 20% of its total property and casualty insurance premiums.
TRIA has been dramatically successful in resuscitating and stabilizing the domestic market for terrorism coverage, but it was originally intended as a temporary program. As a result, the 2002 act was given a three year sunset date. It has since been reauthorized twice in 2005 and 2007, but the present iteration expires on December 31st of this year.
As more business interests from outside the insurance industry have begun to openly express support for a long-term reauthorization of TRIA, more members of Congress have come to understand not only the continued need for the program but also the impact that the uncertainty surrounding reauthorization is already having on long term investment and development. Even more members understand the potential impact should Congress fail to reauthorize TRIA. Businesses that are renewing policies that run beyond the current year end expiration of TRIA are already faced with steep premium increases for terrorism coverage once TRIA is allowed to expire. Other insurers have simply indicated they will not offer coverage following the expiration of the statute.
Based on the growing calls for reauthorization, it now appears that both the House and Senate are prepared to move forward. This is evidenced not only by the bipartisan support for a reauthorization bill recently introduced by Senator Chuck Schumer but also by House Speaker John Boehner’s recent inclusion of TRIA in a list of three reauthorizations that must be completed in the next few months. While Senator Schumer’s bill is a straightforward effort to move reauthorization now, the Speaker’s statement appears to be a message to Representative Jeb Hensarling, Chairman of the House Committee on Financial Services and an opponent of TRIA, that it is time to move a bill reauthorizing the Act. Chairman Hensarling recently butted heads with House leadership over his opposition to reauthorization of the National Flood Insurance Program and may want to avoid a repeat confrontation when it comes to TRIA.
As both chambers move towards reauthorization, differences will have to be worked out. Senator Schumer’s bill, which would extend the program for seven years and which increases co-pays to an 80/20 split and increases the aggregate retention level to $37.5 billion, could move quickly. This would be a win for Senate supporters of TRIA and put more pressure on the House to act. Aides for Chairman Hensarling and Representative Randy Neugebauer, Chairman of the Financial Service’s Subcommittee on Housing and Insurance, have indicated that the two are working on a bill that would make significant cuts to the program with an overall goal of abolishing it. While most details of their approach remain unclear, what does seem clear is that they are setting a confrontational course with supporters in both the House and the Senate that does little to provide certainty on the timing of reauthorization and even less certainty on the details of the renewed program.