The Terrorism Risk Insurance Act

THE TERRORISM RISK INSURANCE ACT (TRIA)

(July, 2018)

BACKGROUND

TRIA was enacted in 2002 to provide a federal level of back-up protection against certified acts of terrorism for all commercial property and casualty lines except for Workers Compensation and against certified acts of terrorism and war risks for Workers Compensation. The covered lines of the insurance part of the TRIA were modified to cover most, but not all, commercial property and casualty lines.

Originally, the program was set to expire in 2005. However, legislative action intervened as follows:

  • Terrorism Risk Insurance Extension Act Of 2005 extended the program into 2007
  • Terrorism Risk Insurance Program Reauthorization Act of 2007 extended the program through 2014
  • Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) extends the program through 2020.

IMPORTANT ELEMENTS OF THE ACT AND ITS EXTENSIONS

Terrorism Coverage Implementation

All insureds and applicants requesting eligible lines of commercial lines property and casualty coverage must be offered terrorism coverage. An exception exists for parties who have arranged for coverage as a captive or via self-insurance. Insurers must use a disclosure form to notify its policyholders about the availability of terrorism coverage when coverage is offered and also at each renewal. The form must offer each policyholder a chance to accept or reject the TRIA coverage. If the coverage is accepted, the policyholder must pay the appropriate charge that is  determined by the applicable insurer.

Notification of Coverage

Policyholders must be given an endorsement that explains what actions are covered. They must be informed of the exact premium amount that will be charged to pay for the coverage. The policyholder must be provided the option to accept or reject the coverage. A rejection may be in writing or it can be indicated by a refusal to pay the premium. If a claim occurs, the insurer will adjust losses using standard company procedures and then submit them to the government for reinsurance payment.

Commercial Property and Casualty Definition

Most lines of commercial property and casualty including excess, workers compensation and directors and officers liability are covered by this Act. The following are specifically excluded:

  • Any type of crop or livestock insurance
  • Private mortgage or title insurance
  • Financial guaranty insurance
  • Medical malpractice coverage
  • Individual or group health and life insurance
  • Flood insurance if provided by the National Flood Insurance Act of 1968
  • Reinsurance or retrocessional insurance
  • Commercial Auto Insurance
  • Burglary and Theft Insurance
  • Surety insurance
  • Professional Liability Insurance (Directors and Officers Insurance is not considered professional liability)
  • Farm Owners Multiple Peril Insurance

Reporting Exception

Whether coverage is really excluded depends upon how the coverage premium is reported on the annual statement lines. If a line of business is reported under the annual statement line for package premiums, then that portion of coverage is subject to reimbursement under TRIA. For instance, if commercial auto coverage is provided in a package policy and the entire premium is reported under a package annual statement line, the auto coverage is subject to TRIA. Similarly, theft coverage and any incidental burglary and theft that is part of a package policy is subject to TRIA provided none of the premium is reported under the Burglary and Theft annual statement line.

Professional Liability is NOT subject to the reporting exception. No matter where and how professional liability premium is reported, it is ineligible for coverage under TRIA.

Farmowners Multiple Peril is a specific line on the annual statement. Any premium reported on this line is ineligible for TRIA coverage.  However, other farm coverages remain subject to TRIA provided they are not providing personal lines coverage.

 

Example: The Precise Pillow Company is covered under a package policy that includes property, general liability, crime and fidelity coverage. One year, the crime and fidelity premium is reported under the burglary theft and surety annual statement lines and therefore is not subject to TRIA. At renewal, their coverage is moved to a Commercial Output Policy where the crime and fidelity coverage is reported under the overall property premium. The crime and fidelity coverage is now subject to TRIA.

 

Certifying Terrorist Acts

The Secretary of the Treasury in consultation with the Department of Homeland Security and  the Department of Justice is responsible for determining whether a given act is certified (therefore qualifying for coverage). Prior to 2014 the certification required both the Secretary of State and the Secretary of Treasury to agree. Now the decision rests entirely with the Secretary of Treasury who is required to only to consult with the other departments. As of the writing of this article, no event has been certified as a terrorist act.

 

The certification guidelines specify the following:

·         An event must be an act of terrorism

·         The event must be violent or dangerous to human life, property or infrastructure

·         The act must cause damage either within the United States or, if outside the U.S., to an air carrier or vessel or on the premises of a United States mission

·         The intent of the act must be to coerce the U.S. population or to affect the conduct of the U.S. government

·         If an act takes place and it is related to a war declared by Congress, the act may be certified for only workers compensation coverage. Further, no action is certified if the commercial property and casualty aggregate losses are less than $5,000,000.

Notes: The term air carrier is defined in section 40102 of title 49, United States code. The term vessel means a vessel sailing under the United States flag or that is based and taxed in the U.S. and subject to U.S. insurance regulations.

 

Example: The Boston Marathon Bombing is considered by many people to be an act of terror. However, according to the definition with TRIA and its amendments, the bombing was not certified by the Secretaries of the Treasury and State as a certified act of terrorism. The reason it was not  certified was that the total aggregate covered loss  was less than $5,000,000. 

There is no timeline as to when the Secretary of Treasury must  determine that a specific act is certified act of terror. The most recent reauthorization specifically calls for a report on how and when the certification should take place.

Insurer Deductible

The insurer deductible is 20% of its direct earned premium for the calendar immediately prior to the program year. A program year extends from January 1 through December 31.

Program Trigger

The coverage under this act does not begin until the aggregate industry insured losses for a certified act of terrorism exceeds the specified amounts:

2018 - $160 million

2019 - $180 million

2020.-.$200 million

Terrorism Loss Reinsurance

Once the program trigger occurs, an insurer can collect coverage of up to 85% of the loss but only after its deductible has been satisfied. Starting in 2016 the percentage will drop by 1% per year until it is at 80% in 2020.

 

Example: National Insurance Company has 2018 direct earned premium of $100,000,000 from commercial property and casualty insurance. The deductible for 2019 would be $20,000,000. If during 2019 National suffers $30,000,000 from certified terrorism losses, National would be responsible for the first $20,000,000 and then would submit $10,000,000 to the government to pay. The government would then pay $8,100,000 while National would be responsible for $1,900,000.

 

Maximum One Year Terrorism Payout

The most that can be paid by all insurers plus the federal government in a single program year is $100 billion. However, before an insurer can move under this cap, it must satisfy its insurer deductible.

 

Example: The terrorism event that National responded to was catastrophic, causing $125 billion in damages. The maximum the federal government and the industry combine will pay is $100 billion. However, more than $100 billion may be available depending on the deductibles the various insurance companies may be required to contribute.

 

The act addresses the concern that some may be paid 100% while others may not be paid at all because of the $100 billion cap. That is addressed within the regulations. The Department of Treasury will establish a pro rata loss percentage (PRLP) that the insurance companies would apply to any adjusted loss. In this manner all insureds would benefit from the cap. The PRLP is to be set conservatively low so that it can be readjusted as further data arrives and additional loss amounts paid out.

Government Recoupment

If the federal government makes terrorism loss payments, they have the right to recoup those losses. However, once the insurance marketplace pays $35.5 billion, as of plan year 2018, for certified terrorism losses in a given year, there will be no recoupment. The act outlines how the recoupment (also called terrorism loss risk-spreading premiums) amounts are to be collected under various circumstances.

The TRIPRA recoupment is $35.5 billion in 2018 and will be 37.5 in 2019After 2019, the recoupment is a calculated amount.

The maximum recoupment for a calendar year after 2019 is  calculated as follows:

Step 1: Determine the deductibles of all insurers participating in the program for the prior three calendar years.

Step 2. Divide Step 1 by three to develop an annual average.

Step 3. The Treasury Secretary issues a rule stating that Step 2 above is the maximum that is can recoup from the insurance marketplace for the current year.

The Secretary of Treasury has the responsibility to recoup a portion of any terrorism loss payouts. If certain conditions exist, the Secretary can require that insurers add an assessment of up to 3% to its policies. This assessment (surcharge) must be applied to the policy year following a government request for recoupment.

Government Reports

The goal of Congress is to eventually eliminate this program once the private insurance market has had sufficient time to properly evaluate the exposure. To this end, a mandatory collection of data is being required. TRIA purchases must be collected and include information regarding geographic locations where the coverage is  purchased, the percentage of offers being accepted and terrorism reinsurance purchases that are finalized. This information must be submitted to congress annually starting in June of 2016. An advisory committee is being formed to aid in encouraging the private market to be more involved in this coverage.

Note: The Report on the Overall Effectiveness of the Terrorism Risk Insurance Program that was prepared in June 2016 is available at https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/ 2016_TRIP_Effectiveness_%20Report_FINAL.pdf

The Impact on Insurance Agents

If a customer is currently written on a policy where coverage is available under TRIA, the customer must be offered terrorism coverage. However, if the coverage is not subject to TRIA, offering coverage is not required. A company may choose to develop rates and provide coverage for lines of insurance that aren't subject to TRIA, but the coverage would not be eligible for TRIA reinsurance.

 

Example: Kelly Foundations is currently written on a BOP with crime, fidelity and hired/nonowned coverage. All coverage is reported under the multi-peril statement line. Kelly Foundations' coverage is cancelled because of losses, so Agent Jim recommends that it move to a new package policy. Kelly still purchases fidelity and crime coverages and hired/nonowned but, since the replacing carrier reports the coverage under their respective annual statement lines, there is no terrorism coverage required or offered for those coverages. In this situation, Agent Jim should advise Kelly of the loss of coverage.

 

If a customer loses coverage with the renewing carrier, the carrier is required to notify the customer of the reduction of coverage. However, if an agency writes a new customer or switches an existing customer from one company to another, the agency is, generally, responsible for notifying the customer of the reduction of coverage.

 

Example: Miller and Sons Dairy's farm policies are currently placed monoline with two different companies, subjecting the policies to terrorism protection. Agent Georgia encourages them to combine their policies into a farmowners product for considerable savings and elimination of coverage gaps. If they do switch, the company is not required to offer them terrorism coverage. However, Agent Georgia is responsible to report the loss of terrorism coverage.