Many in the insurance industry breathed a sigh of relief on January 12 when President Obama signed into law the much-anticipated Terrorism Risk Insurance Program Reauthorization Act of 2015. And that’s understandable. The law reauthorized the Terrorism Risk Insurance Act (TRIA), the federal backstop that’s provided insurers with the confidence to offer terrorism insurance in a post-9/11 world.
But the latest TRIA story isn’t over yet. The law includes a number of modified and new provisions: some that are relatively simple and others that leave the door open for future revisions that could significantly change the landscape of terrorism insurance.
The Simple Changes
During the debate in 2014 over the fate of TRIA, it became clear that the U.S. House of Representatives and the Senate had different ideas about the program’s fate. While the Senate favored a longer-term extension with minor adjustments to federal financial participation in losses, the House was looking at a shorter extension with more substantial changes in the terms of the Act. Those differences, as well as the midterm elections in November, put TRIA on the back burner until December, with only days left on the legislative calendar.
The resulting compromise formed the basis for H.R. 26, introduced in early January, and swiftly passed both chambers and landed on the President’s desk. Some of the changes contained in TRIPRA 2015 are clear, specifically:
- The extension: The Terrorism Risk Insurance Program [TRIP] has been extended through December 31, 2020.
- Certified act: The definition of a “certified act” of terrorism has been modified to require the Secretary of the Treasury to consult with both the Secretary of Homeland Security and the Attorney General. Previously, certification required the Treasury to be in concurrence with the Secretary of State and Attorney General.
- Loss threshold: Beginning January 1, 2016, the threshold for federal participation in losses increases from $100 million to $200 million in $20 million annual increments.
- Federal share of losses: Also beginning January 1, 2016, the federal share in losses is reduced by increasing insurer co-pays from 15 percent to 20 percent in 1 percent annual increments.
- Mandatory recoupment amount: The law increases the mandatory recoupment amount from $27.5 billion to $37.5 billion and makes other changes to the recoupment process.
In addition, there were other minor changes to the Terrorism Risk Insurance Program, as well as several provisions unrelated to TRIA.
The Future of TRIA
Equally as important as those specific changes are several provisions that will play out in the coming years and have the potential to affect the future of the program.
Study of Terrorism Certification Process: One of the provisions is the requirement that the Treasury undertake a study of the terrorism certification process by September of this year. The study is required to examine the development of a reasonable timeline for the Secretary of the Treasury to certify an act as an act of terrorism under the Act and the effect of such a timeline on insurers, policyholders, and taxpayers. Within nine months after the study is presented to Congress, the Secretary is charged with promulgating rules governing the certification process.
Study on Premium Collection: The Treasury isn’t the only area that will be busy conducting studies. The Comptroller of the Currency is charged with exploring the viability and effects of the federal government assessing and collecting up-front premiums from insurers participating in the program, as well as creating a capital reserve fund dedicated specifically for terrorism losses. In addition, the study is to explore how international markets address terrorism risk. The Comptroller’s study is due by January 2017.
Risk-Sharing Mechanisms:The law also directs the Secretary of the Treasury to create a new Advisory Committee on Risk-Sharing Mechanisms. The committee is charged with providing advice and recommendations on the creation and development of nongovernmental risk-sharing mechanisms to protect against losses arising from acts of terrorism.
Terrorism Data Reporting: Finally, the law requires the Secretary to establish data reporting requirements beginning in 2016. The requirements are designed to allow the Secretary of the Treasury to more fully evaluate the effectiveness of TRIP and gauge if any part of the program is discouraging the development of a commercial market for terrorism risk. Annual studies are also required beginning June 30, 2017, that will explore the unique competitive challenges that small insurers face in the terrorism risk insurance marketplace.
What does this all mean? It’s hard to say. But one thing is for sure: From Treasury regulations on the certification process to recommendations to Congress by the various studies and working groups assembled, considerable activity in the coming years will require our careful attention. The new chapter of TRIA has just begun.
If you’d like to learn more about TRIA and ISO’s tools for terrorism insurance, please visit ISO’s online Terrorism Insurance Resource Center. You can also contact me at SClarke@iso.com or 201-469-2656.