Debating TRIA

TRIA is generally accepted to have resulted in a stable market with terrorism cover widely available. Peter Davy looks at the potential fall out should Congress not renew

Nothing is so permanent as a temporary government programme, Milton Friedman used to say. The ongoing discussions about the future of the Federal Terrorism Risk Insurance Act (TRIA) would probably not have surprised him.

Introduced in the aftermath of the September 11 attacks more than a decade ago, TRIA was introduced as a temporary financial backstop to cap insurance industry losses in the event of another large-scale terrorist event. Discussions on renewing the support now look set to drag on into the New Year.

“I wish I could say that I thought there would be agreement sooner, but I don’t,” says Lawrence Mirel, partner in the Washington DC office of international law firm Nelson Levine de Luca and Hamilton.

TRIA has been renewed twice before – in 2005, at the expiry of the initial three-year period, and again in 2007. On both occasions, renewal has been left to within weeks or days before lapsing. The current law, under the Terrorism Risk Insurance Program Reauthorization Act, is set to expire on 31st December 2014. Moreover, there is significant opposition to renewal this time – partly as a result of a souring towards Federal support for businesses following the bailouts of the financial crisis, and partly due to changes in the makeup of Congress. The House Financial Services Committee considering the case for renewal is now chaired by a Republican Representative, Jeb Hensarling, who opposed previous renewals.

“They see it as a subsidy,” explains Carolyn Snow, board director of US-based professional body, the Risk and Insurance Management Society (RIMS). A recent survey of its membership found 45 per cent expecting lower terrorism coverage limits if TRIA was not renewed and a quarter (24 per cent) thinking coverage would no longer be offered by insurers. “I don’t think members of Congress fully understand the potential economic impact if it doesn’t renew and what is going to happen to people’s insurance programme,” says Snow.

It could have far reaching consequences. “It concerns everyone in the world who has investments in the United States,” says Airmic chief executive John Hurrell.

Splitting the difference

There are arguments on both sides – both philosophical and practical. On the one hand, fiscal conservatives object to support that Washington think-tank the Cato Institute recently branded “corporate welfare”. Some Democrats and insurers point out that government policy plays a big role in determining the terrorism threat, justifying government support.

On the practical questions, however, the sides are closer than they at first appear.

“There is a remarkable degree of agreement about how the program has done so far,” says Mirel. TRIA is generally accepted to have resulted in a stable market with terrorism cover widely and affordably available.

“It’s just how they interpret that that differs. Republicans take the view that it shows we don’t need TRIA any more because the industry has recovered; the Democrats say the only reason it is working so well is because of the government backstop.”

With some notable exceptions, the industry tends towards the latter view.

“The reason why coverage exists in the marketplace today is exactly because there has not been a large-scale terrorist attack and because of the existence of TRIA,” says Robert Hartwig, president of the Insurance Information Institute. In his appearances before the Senate in September and in November at a hearing called by the House of Representative Committee on Financial Services subcommittee on Housing and Insurance, Hartwig has repeatedly called for TRIA to be renewed.

First, he argues, insurers’ ability to model terrorism risk is still “primitive”, both because of the small number of events to include in a modelling process, and because of the nature of the threat, which is dynamic.

“When the United States or other countries adopt strategies designed to thwart terrorists, the terrorists change their techniques. That doesn’t happen with natural catastrophes.” Government also keeps much of the information about the risks to itself in the form of intelligence, he points out.

Moreover, if it’s corporate welfare, it’s very cheap. The programme applies only to losses above US$100 million, and there are provisions for the government to recoup its payments from the industry following larger losses. It’s yet to pay out.

“TRIA has ensured coverage at no cost to taxpayers,” says Hartwig. If it was withdrawn, however, small companies particularly would struggle to provide terrorism cover. Particular regions and sectors would be badly affected.

Coverage would resemble Swiss cheese – “full of holes”, says Hartwig.

It is a worry for the likes of real estate businesses whose financial backers want coverage in place before providing funding. Policies from the start of next year may begin to contain “sunset clauses”, removing terrorism cover if TRIA is not renewed.

The uncertainty is not helpful, says Janice Ochenkowski, managing director responsible for global risk management at real estate firm Jones Lang LaSalle. “Lenders and banks for our lines of credit, as well as our corporate boards, all want to know whether we are covered or not,” she says. “The answer ‘maybe’ is never easily defensible.”

It is not just property cover that is at issue, however. In fact, workers compensation is probably a bigger topic, according to Wendy Peters, senior vice president of Willis’ Terrorism Practice Group.

“That would probably be the most dramatic impact, because in the US an underwriter cannot exclude terrorism, so you can’t write workers compensation cover without including it,” she explains. “A lot of carriers – especially smaller carriers – would rather drop out of the market altogether than continue to write it without the backstop.”

Coming round again

In fact, the most likely outcome is a compromise, according to Pennsylvania University Wharton Risk Center’s Erwann Michel-Kerjan – another to have given evidence to the Senate.

There has been growing recognition of the value of TRIA, he says. The likelihood is therefore a renewal, but with further limits on government support by changes to the deductible paid by each insurer before government support can be claimed (currently 20 per cent of premiums) and the “industry-wide retention”, the sum the government can recover from the industry for any payments it makes (currently US$27.5 billion).

“That’s what happened in 2005; it’s what happened in 2007; and my sense is that it is what will happen next year,” says Michel Kerjan.

Even if this is the most likely outcome, however, the key question as to what impact it would have on the market remains. Previous cuts to government support have done little to dent private sector appetite for providing cover. A central argument from Republicans has been that the price of terrorism coverage has declined by over 70 per cent since 2001. However, that could change.

“Maybe it will continue or it may be that we haven’t seen any disruption because it was still in the range of figures that the markets could absorb and we are now reaching the higher end of that range,” says Michel Kerjan.

“Some in the insurance industry think we are about to reach a tipping point where above that 20 per cent deductible rating agencies are going to start asking questions.”

Ratings agency AM Best has already conducted stress tests of insurers with terrorism exposure and found four per cent failing, putting them at risk of a downgrade if TRIA was not renewed.

There is another possibility, however, which Mirel reckons is more likely: a short-term extension to TRIA with no change.

“It could happen simply because of the inability to agree on anything,” he says.

That would be a solution – but a very temporary one. Insurers, and their insureds, would be revisiting these questions again before too long.

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