TRIA: Are More Changes in the Offing beyond the New Senate Bill?
November 2007
The holidays appear to have arrived early
for supporters of the federal Terrorism Risk Insurance Act (TRIA). On October
17, 2007, the U.S. Senate Banking Committee made the future of the federal terrorism
program a virtual certainty with the passage of a reauthorization bill (by a
remarkable 20–1 vote).
by James
Macdonald
Navigant
Consulting
The new Senate bill immediately received George W. Bush Administration support
from Treasury Secretary Henry M. Paulson. Although it looks like the new law
is now essentially complete, some surprises may be in the offing as we approach
the year-end expiration of the current 2005 Terrorism Risk Insurance Extension
Act.
In this article, I consider the important similarities and differences between
the new Senate bill and the House bill approved in early August.1
I then consider some possible changes that may surface in December that could
present significant concerns to policyholders.
Comparison of New House and Senate TRIA Bills
The new Senate Banking Committee bill is surprising in that, unlike the bill
passed in late 2005 that contained almost no new features, the new legislation
includes or at least formally considers at least five important issues addressed
in the House bill (HR2761). There are two likely reasons for the Senate's more
open-minded approach:
-
Unlike Republican Senator Richard Shelby who chaired the committee in
2005, the new committee chairman, Chris Dodd (D-CT), is an expressed supporter
of the program.
-
On October 10, a week prior to the Senate committee vote, the RAND Corporation
published its much-anticipated report on the federal backstop program. Importantly,
the RAND analysts concluded that, contrary to the position of many TRIA
critics, taxpayer risk has actually been lowered
by having the program in place. Also, TRIA has been highly effective in
ensuring the availability of affordable insurance for most conventional
terrorist attacks with minimal exposure to federal taxpayers.2
In
Table 1, I summarize the important features in the House and Senate
bills. This article will briefly consider each point.
Program Duration
Although it is less than half the 15-year extension proposed in the House
bill, the 7-year extension in the Senate bill is 2 years more than the minimum
of 5 years that many legislators sought. It is also more than three times the
modest 2-year extension enacted in 2005. The strong support for a longer program
term reflects the widespread opinion in the public and in the intelligence community
that the threat of another major strike inside the United States will remain
a serious concern for the foreseeable future.
Domestic Terrorism
The Senate's willingness to include all acts of terrorism, regardless of
whether they are foreign sponsored, comes as a pleasant surprise. In the wake
of the bombings in Madrid and London, many of us thought this change would be
made in the 2005 extension act. Eliminating the requirement that an act be committed
"on behalf of a foreign person or foreign interest" will make it clear that
a major attack by independently acting sympathizers of Al Qaeda (or other foreign
organizations), as well as acts by domestic terrorist groups, would be included
in the federal backstop.
"Hardening" the Annual Cap
Since the initial TRIA bill was enacted in late 2002, one of the points of
considerable uncertainty has been exactly what responsibility insurers would
have to pay claims from a certified loss in the event that the annual $100 billion
cap is exceeded in any given year. Lack of certainty on this issue has arguably
limited the capacity that the private sector insurance and reinsurance markets
are willing to provide, particularly for a major attack involving a nuclear,
biological, chemical, or radiological (NBCR) agent or device. Both the House
and Senate bills include language that would "harden" the program by clarifying
that no further payments would be required once the annual cap is exceeded.
Require Insurers To Offer NBCR Coverage
Although the federal backstop program does not explicitly exclude coverage
for NBCR events, the law's "make available" requirement subordinates all terrorism
coverage to the other policy terms and conditions that otherwise apply. Many
insurers do not believe that NBCR attacks are insurable, arguing that such an
attack would be the equivalent of an act of war. Also, due to the relative lack
of reinsurance for this exposure (discussed in my
prior article), there is no certainty that standard limitations in commercial
policies (such as the nuclear, pollution, war, or contamination exclusions)
would not preempt coverage for losses resulting from an NBCR attack.
The House bill addresses this issue by requiring insurers to offer NBCR coverage.
The Senate bill does not include this requirement. Instead, the Senate proposal
delays possible action until further research on the best ways to address this
issue is provided through a required report to Congress by the Comptroller General
(and most likely by the GAO).3
Insurance Capacity in High Risk Areas
In a Congressional hearing earlier this year, a representative from Silverstein
Properties reported that his insurance advisers have concluded that the total
market for terrorism property insurance in Manhattan's financial district is
only a small fraction of what is needed and nowhere near adequate to meet the
needs of the new Freedom Tower. To encourage more capacity in what the Secretary
of the Treasury would be authorized to designate as high risk areas, the House
bill proposes a calibrated, lower deductible for insurers based on the size
of a subsequent attack (with a minimum of 5 percent of the prior year direct
earned premium). This so-called re-set provision became a major point of controversy
in the House legislation and is not included in the Senate bill. Instead, along
with the NBCR issue, the Senate bill requires further research into this matter
by the Comptroller General.
Group Life Insurance
Because of the lack of any market disruption in the aftermath of the September
11, 2001, terrorist attacks and because of the competitive nature of the market
and the reported abundance of traditional reinsurance, group life insurance
has not been included in the federal program. Critics of the TRIA program argue
that there is no basis for including this line in what they feel is already
a far too generous "subsidy" of the now highly profitable insurance business.
Group life insurers have argued strongly that they should be in the program
because of the potential exposure they face from an attack at a large meeting
of employees, possibly entailing thousands of casualties. The House bill includes
group life but the Senate has opted to continue to exclude it.
Conclusion: More Changes Are Likely
The probable reason for the Senate's decision to continue to exclude group
life, and why more changes are likely in the offing is the need for new domestic
spending bills to be "revenue neutral," i.e., increased government costs in
a bill need to be offset by other features in the given bill. As we see in
Table 2, the Congressional Budget Office (CBO) estimates on the short-
and long-term costs of HR 2761 versus the Senate bill show that the limitations
in the Senate bill produce lower spending and budget deficit costs, particularly
in the projected costs beyond 2017.
I am quite sure that the CBO would agree that estimating the future costs
of a risk as unknown and subject to change as terrorism is, at best, a calculated
"art" and not a "science." Despite the significant cost reductions in the Senate
bill, however, several more changes may be necessary to achieve revenue neutrality
(if "pay-go" applies). Here is a quick summary of the changes that may be in
the offing and my estimates of which ones are most probable.
Introduce an upfront premium charge for the federal
reinsurance protection. This is one of the favorite changes recommended
by TRIA's staunchest critics. It is interesting that neither the House nor Senate
bills include this option. My best guess is that the practical complexities
of introducing a federal pricing scheme, as discussed in the CBO's important
overall August 2007 assessment, may have removed this alternative from short-term
consideration.4
Increase the required insurer deductibles, coinsurance,
coverage trigger, or the mandatory post-loss policyholder recoupment surcharge.
The Senate bill leaves these four important metrics alone, with the insurer
deductible remaining fixed at the 2007 required 20 percent of prior year direct
earned premium and coinsurance continuing at 15 percent of certified losses
above the deductible. The Senate rejected the House proposal to reduce the "coverage
trigger" from $100 million to $50 million, but its bill leaves it unchanged.
The mandatory, post-loss policyholder surcharge was also left unchanged (at
a maximum 3 percent surcharge on the amount of the federal loss payments between
the total of insurer losses and a 2007 "insurance marketplace aggregate retention"
of $27.5 billion).
Of the four, the most likely metric to be increased appears to be an increase
in the mandatory post-loss recoupment. For example, the House committee considered
an amendment to H.R. 2761 that would have required what the amendment's title
calls "full recoupment" from policyholders, i.e., "premiums in an amount equal
to the total amount paid by the Secretary." This potential major change was
narrowly defeated, by a vote of 24 "nays" to 19 "yeas."
I think a large increase to the mandatory, postloss policyholder recoupment
is a real possibility. An increase in the coverage trigger is a second possibility,
with an increase from $100 million to $500 million an outside possibility. Needless
to say, both of these changes would be negative for policyholders. An increase
to the coverage trigger, for example, could greatly reduce the ability of captives
to provide terrorism insurance capacity.
Eliminate more commercial lines from the law.
Another way to cut back the program's costs would be to reduce the commercial
lines that are included in the law. In 2005, the Extension Act eliminated several
lines including commercial auto, surety, and professional liability (other than
directors and officers liability). More cutbacks seem unlikely this year. Workers
compensation and most forms of property insurance appear to be the most "untouchable"
forms of insurance. As discussed in my prior article,
other liability (including umbrella and general liability) seems to be the most
likely target for further reductions.
Agree to a shorter program duration. One
final, less obvious way to reduce the program's costs, counterintuitive as it
may seem, is simply to agree to a much shorter term than even the 7 years in
the Senate bill. The Bush Administration would clearly prefer the shortest extension
negotiable. Democratic legislators may also see a tactical advantage in a short-term
extension. Simply put, why agree to a long-term bill that does not address the
issues they consider most critical when a new president, and quite possibly
a New Yorker, will be taking office in January 2009? I think this is a real
possibility, and I will not be surprised if we see another 2- or 3-year extension.
"Hello, Rudy? Hello, Hillary? This is Barney Frank and Chris Dodd. Let's talk
TRIA!"
Overall, more changes are probably coming. December will likely once again
present surprises as the federal terrorism insurance program enters its third
chapter. Best bet? The Senate bill will be enacted with no changes other than
a shorter duration with pragmatism trumping politics in anticipation of a new,
TRIA-friendly executive branch.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
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