Despite the renewal of the Terrorism Risk Insurance Act on Dec. 22, observers say the private insurance market must act quickly to solve the problem of terrorism coverage because the backstop will not be extended a second time.
The act’s renewal was expected by the insurance industry, according to Julie Rochman, v.p. of U.S. trade body the American Insurance Association.
“It has not had a huge impact because people were preparing for either eventuality,” says Rochman. “It was always our belief that Congress knew there would be substantial market dislocation if it did not act. Anybody who didn’t realise by autumn that something would happen was not paying attention.”
The renewal was not a foregone conclusion, however. Rochman says many companies filed conditional endorsements with the U.S. Insurance Services Office in case Tria was not renewed. These would have excluded the terrorism coverage that was included in all commercial lines coverage under Tria – except workers’ compensation – from Dec. 31 if the program had expired. Conditional endorsements were approved in all U.S. states except New York, Florida and Georgia.
Some insurers even opposed the extension. The National Association of Professional Surplus Lines Offices, for example, objected to both the initial version of Tria in 2002 and the revised version in 2005. According to Maria Berthoud, Napslo’s lobbyist in Washington D.C., the association believes the industry has enough surplus to cope with large terrorism losses on its own.
The backstop passed last month differs from the one passed in 2002 in several respects. It places more of the burden of terrorism losses on private insurers, thereby protecting U.S. taxpayers. The act excludes the following lines of coverage: commercial auto, burglary and theft, surety, professional liability and farm owners’ multiple peril.
The Tria extension incorporates higher retention levels than its predecessor scheme. From March 31, the trigger for Tria coverage will be increased to $50 million from 2005’s $5 million threshold. In 2007, the trigger will increase to $100 million.
Insurers’ individual deductibles – calculated as a percentage of the previous year’s direct earned premium in lines covered by Tria – will increase to 17.5% this year from 15% last year, and will rise to 20% in 2007.
The government will pay 90% of terrorism losses above the industry retentions in 2006, leaving the industry liable for the remaining 10%. The government’s share of losses above the retention will fall to 85% in 2007.
To protect taxpayers, the government will claw back Tria payments from insurers using annual industry-wide surcharges of 3% if total losses are below a certain level. In 2005, insurers would have had to pay surcharges if industry losses were $15 billion or below. This will rise to $25 billion in 2006 and $27.5 billion in 2007. Above these levels, private insurers are exempt from the surcharge.
The backstop has only been extended for two years, whereas the original act was in place for three years. The industry and the government have until the end of 2007 to devise a long-term solution to the problem of terrorism coverage.
Many believe a public/private partnership is still the only long-term solution to insuring against acts of terrorism – especially because U.S. foreign policy efforts and the decisions made by the government’s Department of Homeland Security influence terrorist activity.
“It’s been like: ‘Woo hoo, we got it through!’ Now we’ve got a bit of breathing space to get it right before the next time. But there is no consensus yet,” says Stephen Carroll, senior economist at the Rand Corporation, a U.S. non-profit organization.
The U.S. government has already said it will not renew the backstop at the end of 2007. “This administration will still be in power in 2007 and it has made it clear it does not want us to keep coming back for another renewal,” says Rochman. “Of course, that could change if the program is triggered by a large-scale terrorist attack.”
The President’s Working Group on Financial Markets, chaired by Treasury Secretary John Snow, is due to report to Congress with an alternative to the backstop on Sept. 30.