Terrorism Insurance Backstop Expiring
The loss of life and property during the 9/11 attacks led to an estimated $32.5 billion dollars in insured losses. In the wake of the attacks, terrorism risk insurance became either extremely expensive or unavailable. The Terrorism Risk Insurance Act (TRIA) was enacted in 2002 to address concerns over the economic impact caused by the limited availability and affordability of terrorism risk insurance. TRIA established a government reinsurance system, also known as the federal backstop, which allows the insurance industry and federal government to share the losses created by a catastrophic terrorist attack.
TRIA’s federal backstop does not apply to all terrorist attacks, and the government does not cover 100 percent of insured losses resulting from acts of terrorism. Before federal assistance becomes available to insurers:
- The event causing large claims must be certified as a terrorist act
- A single terrorist act must cause at least $5 million in losses
- Aggregate losses must cost more than $100 million in losses
- Insurers must pay at least 20 percent of their annual direct earned premium from commercial property and casualty lines
Insurers and businesses reliant on TRIA are uncertain of the future of the act, given its upcoming expiration on Dec. 31, 2014. The expiration of TRIA could potentially impact the availability and affordability of terrorism risk insurance. It isn’t just property insurance that’s an issue for insurance carriers. TRIA’s expiration could also impact the cost of Workers’ Compensation. When compared to other insurance lines covered by the act, Workers’ Compensation provides insurers less flexibility to control terrorism exposure. As a result, should TRIA expire, insurance companies could choose to limit their exposure by refusing to provide coverage to employers that face high terrorism risk. This could force employers to obtain coverage in markets of last resort, which can result in higher costs.
As TRIA’s Dec. 31 expiration date approaches, there is a debate surrounding the future of TRIA. The two primary considerations are:
- The scope of the federal government’s role in supporting private insurers
- The health of the terrorism insurance marketplace
Congress could approve a short-term extension of the program and address a long-term reauthorization in 2015. No matter what form of reauthorization is ultimately approved; it appears that private insurers will be required to assume a greater share of the risk in providing terrorism insurance. In the meantime, businesses can expect a disruption in the market dynamics for terrorism risk insurance. Observers point out that prices for terrorism risk insurance are already increasing. Preparing for these changes and the possible significant coverage gaps and costs will be important.
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