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Terrorism Risk Insurance

September 11, 2001 changed this country in more than the obvious ways. Before 9-11, our terrorism exposures were limited to smaller-scale bombings and hijackings. While events like this were certainly newsworthy, they weren't of such a significant magnitude that life in our country was disrupted.

But on 9-11, thousands of people were killed and billions of dollars in property were destroyed as the result of terrorist acts. Besides the obvious issue of national security, 9-11, raised a variety of insurance-related concerns... mega targets, multiple targets, mass destruction, risk accumulation, and industry surplus at risk. For the first time, there was concern for insurance company solvency on a large scale. Was the insurance industry prepared to handle the mass destruction of a similar terrorism attack? tria 2

The answer to that question wasn't clear. After 9-11, reaction by the insurance industry ranged from withdrawal of reinsurance capacity, to state regulators becoming uneasy about allowing primary companies to exclude terrorism coverage, to primary companies becoming vulnerable to insolvency.

Consequently, the insurance industry lobbied the federal government to initiate a federal reinsurance program specifically for terrorism risk. But Congress was reluctant to become involved. In the wake of 9-11, they already supported the airline industry and were apprehensive about offering “government welfare” to another large industry.

Then the Bush administration began to see the economic impact of not stepping in and President Bush supported a federal program that was signed into law November 26, 2002. The Terrorism Risk Insurance Act of 2002 (TRIA) is a federal program that will support the insurance industry in the United States in the event of a major terrorist attack. It offers both a quasi reinsurance program and an overall cap on financial responsibility for terrorism loss for both the insurance industry and the U.S. government.

TRIA is administered by the Department of the Treasury which sets the overall parameters of the program, but allows states to continue rate and form regulation. TRIA applies to commercial lines of property and casualty insurance, commercial excess insurance, Workers Compensation insurance, and surety bonds. It DOES NOT apply to personal lines insurance; reinsurance or retrocessional insurance; or life, health, or medical malpractice insurance.

Individual insurance companies must meet a participation deductible, in addition to a $5 million event threshold. The participation deductible is a percentage of the insurance company's previous year's direct earned premium for lines of business covered in the program. TRIA also contains a 90 percent coinsurance participation on all losses in excess of the deductible.

The program has been extended until 2027.

Now insurance companies must notify their policyholders that terrorism coverage is in place on the policy, and is available on new policies, if they elect to pay the premium. Policyholders may reject the coverage on all lines except Workers Compensation.

So how does TRIA affect the typical commercial policyholder? If they carry Workers Comp coverage, policyholders must retain the coverage and pay the premium. With the other commercial coverages, they must decide whether to accept or reject the coverage.

The ultimate question is, “Do I really need this coverage?” While models for loss scenarios are new, most suggest major metropolitan areas are by far the most likely targets. And while few properties are high profile (the Sears Tower, for instance), properties in the immediate area would likely suffer collateral damage. In addition, certain lines of business have greater loss potential. For example, with Workers Comp insurance, the mobile nature of workers and susceptibility to chemical and biological agents creates more loss potential.

Other types of coverages, like General Liability, Umbrella, and Auto Liability, are less likely to be affected.

The best thing to do is talk to your independent insurance agent to determine if terrorism coverage is right for your business.