The Financial Services Committee (FSC) of the House of Representatives recently held a hearing on the reauthorization of the Terrorism Risk Insurance Act, also known as TRIA, which expires on December 31, 2020. This risk-financing mechanism has proven to be very useful — providing substantial market and economic stability through a treasury-based risk transfer backstop for an industry with limited ability to accurately predict losses. The Committee passed TRIA, by a vote of 57-0. Now comes the critical next steps to move this through the House, Senate and finally, to the president’s desk for a signature of approval. It may seem like there’s plenty of time for this process, but the nature of renewals and market perceptions suggest that time is of the essence. Not surprisingly, the immediate aftermath of the vote reflected consistent praise from a wide spectrum of players in the commercial and personal lines industry.
The 2015 TRIA renewal was delayed two weeks past expiration before it was signed by former President, Barack Obama. After months of procrastination, Congress adjourned for the holidays, leaving the industry with unfinished business. Its inaction meant that, as of January 1, 2015, the U. S. government no longer offered a backstop to the private insurance market for terrorism coverage. In other words, many markets underwriting terrorism risk would likely be assuming more risk than they were comfortable with, and faced the prospect of withdrawing or reducing coverage for many types of property and casualty insurance products. In effect, many insureds faced a major gap in coverage for the two weeks before the Act was finally reauthorized.
While the proposed reauthorization bill discussed at the hearing reflected a 10-year period, the passed version of the bill was reduced to seven years – still two years longer than the previous renewal. While the nearly two and a half hour hearing covered many topics, two things stood out: the discussion on why the original bill was tagged as a “temporary” measure after initial passage and three subsequent rounds of reauthorization activity, and the unclear application of the current law and proposed bill to cyberterrorism, an issue on everyone’s minds. The first issue acknowledges that while the 9/11 tragedy was hoped to be an isolated incident, foreign and domestic terrorism is not going away. In fact, it’s morphing and growing to greater exposures as new sources of terrorism and ways to terrorize emerge.
The proposed bill requires a report that’s already underway by the U.S. Government Accountability Office on cyberterrorism risks. This report will include an analysis of overall cyber vulnerabilities and the potential costs of cyberattacks to U.S. infrastructure. It will also cover whether “cyber liability provisions” in property or casualty lines of insurance is adequate coverage for an act of cyberterrorism, whether cyber risks can be adequately priced, and whether the risk-sharing mechanism under TRIA is appropriate for a cyberterrorism event. Recommendations on how Congress could amend the Act to meet the next generation of cyber threats will also be included.
Appropriately, the hearing contained testimony from representatives for Marsh (the CEO), the National Association of Insurance Commissioners (NAIC), the Reinsurance Association of America (RAA), the Congressional Research Service, AXA XL Re and United Educators (a university sponsored risk retention group). Witness testimony from this group was 100% in support of passing the bill (HR4634) as written. While the hearing itself had disapprovingly low attendance, the highlights of the testimony included:
- A universal concern for cyberterrorism risk coverage, and both related capacity and cost, especially now that we’re in a rising rate market for the first time in a quite a while
- Consensus recognition of the highly dependent nature of the workers’ comp market on this backstop (including nuclear, biological and chemical sources) that cannot exclude terrorism in primary policies, per statute
- Consensus agreement that the risk remains highly unpredictable, impacting market comfort with pricing and risk acceptance/sharing, especially in the absence of the backstop – frequency, severity and correlations are “unlike any other insurable risk”
- The high-priority needs for the backstop to enable uninterrupted commerce, timely and budget-friendly renewals of most property and casualty insurance programs, and minimizing general market uncertainty about this exposure
- Acknowledgement of the program design that minimizes risk to taxpayers as a function of the recoupment provisions
- Clarity on the maximum payable amount ($100 billion) which would be approximately $140 billion in “real dollars terms”
- The direct tie to industry solvency interests, both regulatory and from buyers’ perspectives
Interestingly, it was noted by the RAA that, of the $46 billion in insured 9/11 losses, the reinsurance industry picked up two thirds of the total. Also, since TRIA backstopped policies have been issued in 2003, more than $36 billion in premiums have been collected. The legislators were keenly interested in knowing what the industry had done with these monies to build surplus, improve market capacity, mitigate the risk, etc. Witnesses didn’t seem anxious to answer questions and their answers satisfied the legislators.
As a practical matter, the industry and most risk managers have come to rely upon this U.S. Treasury mechanism to keep their cost of risk in check, while ensuring adequate protection for these events that while not probable, are still possible. So, while TRIA limited financial protection based on very specific loss parameters, it does bring great comfort to insurance markets that, much like equity markets, don’t like uncertainty. And while we may still experience a certain level of uncertainty, Congress adds to it unless they act quickly to move the reauthorization through approval.
Residual markets could help alleviate the impact of this uncertainty as WC insurers cannot exclude the terrorism risk like other line writers can. This area of exposure poses the most potential problem for buyers, quickly followed by projects that have come to rely on terrorism insurance to ensure their viability. Unfortunately, smaller companies are likely to feel the biggest impact, as greater risks typically have large retentions, or are self-insured for many exposures. However, these same larger players have, in many cases, leveraged their captive insurance companies which have also been advantaged by TRIA – issuing terrorism insurance to themselves, and reinsuring significant portions of the exposure to the program. This alternative risk financing strategy may be most at risk because corporate will quickly react to losing this protection through captive facilities.
So, is TRIA reauthorization really at risk? Well, not yet, and I remain hopeful that Congress will do the right thing and address this bill sooner rather than later. A delay would be disruptive, even if it ultimately gets passed before expiration. Increasing uncertainty leads to increasing risk aversion, which affects quality decision making – hampering innovation, growth and even global economic stability.
In the meantime, I suggest risk managers consider the following actions to improve the chances that the TRIA reauthorization is passed:
- Engage your broker and insurers to determine what immediate impact TRIA's expiration will have on current policies or upcoming renewals so you can properly inform management and your board.
- Ensure that all lending agreements and covenants are reviewed to determine what terrorism coverage requirements are implicated.
- Begin communication with your lender(s) on how best to address TRIA's potential non-reauthorization considering terrorism coverage requirements.
- If your policy contains a sunset provision for terrorism, work with your broker and/or insurer to see what alternatives, if any, are available. This may include stop-gap provisions that will provide short-term coverage until a better solution can be found, or until the government passes some version of TRIA.
- Consider utilizing the residual market if you are unable to obtain coverage as part of your traditional program. (Note: these programs will likely come at a higher cost.)
- Revisit your 2021 insurance budget forecast and develop a contingency plan for TRIA’s potential expiration. Then, ensure you communicate the alternative scenario impacts to your stakeholders.
Acts of terrorism are a given in the post 9/11 era. Strong risk management considers all relevant possibilities for assessing the exposure – crafting risk financing and prevention strategies, and deploying tactics that make sense for your organization. Doing this well will strengthen the likelihood of success for your firm in executing its mission. For more information about TRIA, this hearing and related issues, visit https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404481