Traditionally, losses from terrorism events were included in general insurance policies at no real added cost because the risk was considered to be negligible. That changed on 9/11.
Since then, businesses were forced to reassess their need to guard against the risk of a terrorist attack. Meanwhile, more insurers began to exclude the coverage from general insurance policies, instead offering specialized terrorism risk coverage that in many cases proved prohibitively costly.
The change in the landscape was felt throughout the insurance industry. Wendy Peters, a senior vice president and terrorism risk practice leader at Willis Group, says the firm created a specialty practice focused on terrorism risk as a direct response to 9/11.
In the ensuing months, the private insurance market experienced a drastic shortage of terrorism coverage. The situation grew dire as the ripple effects of the capacity shortage were felt across the national economy. In 2002, a Real Estate Roundtable survey found that $15.5 billion of real estate projects in 17 states were stalled or cancelled because of a continuing scarcity of terrorism insurance.
Later that year, on November 26, 2002, Congress stepped in, passing into law the Terrorism Risk Insurance Act, a $100 billion annual safety net. TRIA was designed to provide reinsurance coverage to insurers in the event of heavy losses caused by terrorist attacks.
As originally conceived, TRIA created a three-year program in which the government would share some of the losses with private insurers in the event of a terrorism event in the United States resulting in at least $5 million in damages. Among many other provisions, TRIA required all property and casualty insurers to make terrorism coverage available and included a recoupment mechanism and a cap on annual liability.
Congress renewed the law, after some significant tweaking, in 2005 and again in 2007 (under the changes enacted in 2007, acts of domestic terrorism were to be covered by TRIA). But Congressional renewal came only after much debate over the government’s proper role in the private insurance marketplace. Now the law is scheduled to expire at the end of 2014, and the arm-twisting has already begun.
The Council has worked with members in an effort to persuade Congress to support TRIA’s renewal. It is by no means a sure thing. Rep. Jeb Hensarling, R-Texas, the chairman of the House Committee on Financial Services, has already come out in opposition. Some insurance industry insiders express serious doubts about the likelihood that Congress will extend the law this time around, and they forecast an assortment of doomsday scenarios for the industry should TRIA be allowed to expire.
“The extension is very much up in the air this time around,” Peters says. “There’s a lot of momentum on the side of the insurance industry but a lot of pushback from Capitol Hill, saying they want to see more of a market-based solution to this issue.”
Aaron Davis, a managing director at Aon, says as TRIA’s expiration date approached in 2005 and 2007 the property marketplace responded negatively to the prospect of life without TRIA by effectively looking to exclude terrorism insurance altogether or provide just a small amount of coverage for the risk.
“It’s anticipated that markets will take that position again in the run-up to expiration in 2014,” Davis says. “That will leave 80% to 85% of commercial property markets that will look to exclude terrorism beyond 2014.”
Last summer the Risk and Insurance Management Society (RIMS) released a white paper that explained the organization’s support for renewing TRIA.
“Without adequate coverage organizations may be forced to self-insure thus placing their entire business future at risk in the event of a terrorist attack,” the report said. “Additionally, with limits of terrorism insurance required by lenders unavailable or available only at commercially unreasonable costs, businesses may be unable to secure financing for current and future projects, thus stunting an already fragile economy.”
Under TRIA, the U.S. secretary of state, treasury secretary and attorney general must jointly certify an act as terrorism, and the collective losses of the insurance industry from these acts must exceed $100 million before the private marketplace can tap into TRIA funding. In the 11 years since Congress approved the law, however, not a single act of domestic extremism, including the Boston Marathon bombing, has qualified as a terrorist event as defined by TRIA.