UPDATED: Scroll to the bottom of the article for the latest developments.
The original Terrorism Risk Insurance Act (TRIA) was passed in the wake of the September 11th, 2001 terrorist attacks and signed into law by then-President George W. Bush on November 26th, 2002. Essentially, the law created a federal “backstop” for insurance claims related to terrorist attacks. Claims from a terrorist attack go far beyond property damage and can become an immense mass of claims for insurers in the life, health and workers’ compensation arenas in particular. TRIA has been reauthorized, with modifications, twice since 2002 – once in 2005 and once in 2007. Without Congressional action this month, the act will expire on December 31st, 2014.
What is TRIA and what does it do?
While most state representatives and senators recognize the importance of TRIA to protect the insurance industry, (and especially the reinsurance industry, which took the greatest hit on 9/11) stakeholders disagree mainly on the details, with program triggers and caps being the most significant element from a federal budgetary standpoint. The program’s funds are triggered following the occurrence of an event determined by the Secretary of the Treasury and the U.S. Attorney General to be act of terrorism. Losses from the act must exceed $50 million in 2006 and $100 million in 2007. The total “cap” or limit on the federal assistance currently sits at $100 billion per year. When the program is triggered, the federal government is to pay 90% of insured terrorism losses in excess of the individual insurer trigger, while the insurer pays 10%. In 2007, this ratio rose to 85%/15%.
Commercial lines and workers’ compensation are the only covered lines for the program. However, residual market entities and state funds are included in the list of eligible insurers. TRIA also applies to surplus lines carriers listed on the Quarterly Listing of Alien Insurers published by the National Association of Insurance Commissioners (NAIC.) In addition, captive insurers and other self-insurance arrangements such as workers’ compensation self-insurance programs and state workers’ compensation reinsurance pools are included.
In Louisiana, the most notable potential target for terrorist acts is the Port of New Orleans, but other sites that draw large crowds, like stadiums, or contain hazardous materials, like chemical and industrial plants, pose a concern as well.
Nationally, over 80 businesses plus national sports leagues have formed the Coalition to Insure Against Terrorism (CIAT.) NFL, a major CIAT member, has threatened to suspend the Super Bowl indefinitely if TRIA is not passed.
Why does TRIA matter for workers’ comp?
RAND Corporation published an analysis of how workers’ comp markets could be affected if TRIA is not reauthorized in a timely manner and with adequate protections for insurers. RAND summarizes the effect as follows: “TRIA expiration would affect workers’ comp insurance markets differently from other insurance markets because workers’ comp statutes rigidly define the terms of coverage, such that in a post-TRIA world insurance companies would limit their terrorism risk exposure by declining coverage to employers facing high terrorism risk.”
RAND also weighed in on the effect this “post-TRIA” world would have on local economies. “Because comp coverage is mandatory for nearly all U.S. employers, employers that cannot purchase coverage would be forced to obtain coverage in markets of last resort,” RAND stated. “Migration of terrorism risk to these markets of last resort would increase the likelihood that workers’ comp losses from a catastrophic terror attack would largely be financed by businesses and taxpayers throughout the state in which the attack occurs, adding to the challenge of rebuilding in that state. TRIA, in contrast, spreads such risk across the country.”
The RAND report also calculated the TRIA and non-TRIA cost difference in terms of federal dollars and found that TRIA could actually save the government taxpayer dollars, depending on the magnitude of the attack. Benefits Pro summarizes those findings as follows:
- For terrorist attacks with losses less than about $50 billion, having TRIA in place will lead to less federal spending than if TRIA were eliminated.
- Eliminating TRIA could increase federal spending by $1.5 billion to $7 billion for terrorist attacks with losses ranging from $14 billion to $26 billion.
- The greater federal spending without TRIA would result from less insurance coverage, leading to greater uninsured loss and hence greater demand for federal disaster assistance.
Progress in Congress this year
Back in July, the insurance industry was hopeful that TRIA would be reauthorized without much Congressional partisanship, as the Senate passed their version of the bill in a 93-4 vote. The Senate version extended the bill for a full seven years and increases the co-pay for private insurers from 15% to 20%. The Senate also added legislation creating a national registry of insurance producers, the National Association of Registered Agents and Brokers (NARAB II), as an amendment. The House bill passed out of Committee a month prior to that vote, but was much more limited, and provided for more financial responsibility to shift to private insurers. Since the Senate vote, party leaders on both sides have dug their heels in and continually pushed the legislation to the bottom of the pile, and now, to the “lame duck” session.
Last week, Washington correspondents for Bloomberg reported that House Financial Services Committee Chairman Jeb Hensarling and Senator Charles Schumer are nearing a deal on a six-year extension. The aides, who declined identification by name, also stated that insurers would be reimbursed by the government after their aggregate losses reach $200 million.
One of the primary centers of disagreement in recent weeks has been attempts to tie a compromise on TRIA to other legislation. Hensarling had been seeking to hinge the reauthorization on a shift in funding for the Consumer Financial Protection Bureau and other changes to the 2010 Dodd-Frank Act, despite resistance from Schumer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in 2010 as a reaction to the failures of oversight in the financial industry which led to the Great Recession of 2008. It is a complex piece of legislation that comprehensively changed reporting requirements and regulations for nearly every regulatory body in the federal government related to the financial sector. The act created the Financial Stability Oversight Council, (FSOC) and aims to prevent banks from becoming “too big to fail,” in addition to consumer protections that prevent predatory lending and unethical mortgage practices. Recent reports indicate that the two sides have not worked out how to address the Dodd-Frank changes.
UPDATE 12/17: The Senate has failed to pass the TRIA reauthorization bill approved by the House on December 10th before adjourning. The program will officially end at the end of 2014. The next Congress will have an opportunity to reauthorize it in January 2015 when they reconvene. Insurance companies can begin cancelling terrorism coverage on January 1st, 2015. Industry groups have condemned the failure to reauthorize, especially because the bill died on partisan terms with exiting Republican Senator Tom Coburn voicing his opposition and effectively ending the movement to pass the bill. “It’s unfortunate, but his objection is going to kill TRIA,” Majority Leader Harry Reid, a Nevada Democrat, said last night on the Senate floor. “I’m very sorry about that, but it’s a fact.”
An NFL spokesman assured the media that the Super Bowl will be played, however, stakeholders have generally stated their disappointment and anger that the Senate was unable to pass the bill and ensure economic resiliency in the event of a terrorist attack.
UPDATE 12/16: The House voted on a six-year extension of TRIA last week and overwhelmingly passed it. The Senate is slated to vote on it by the end of this week. Of additional interest is a new Dodd-Frank related provision in this last version of TRIA that requires at least one member of the Federal Reserve’s board to have community banking experience.
According to Insurance Journal, several members of Congress, including the provision’s first sponsor, Louisiana Republican Senator (and upcoming gubernatorial candidate) David Vitter, have urged President Barack Obama to choose a community banker for one of the two vacant spots on the seven-person Fed board.
These Congress members, as well as community bankers, claim that a tightening of bank regulation since the financial crisis has put an unnecessary, heavy burden on smaller lenders and should be targeted more carefully at the major banks involved in the ’08 financial crisis.
Stakeholders cite concerns that large Wall Street firms hold undue sway at the Fed, and believe that adding a community banker to the board will discourage corporate nepotism. The provision would require that at least one member of the Fed’s board have experience working at or supervising banks with $10 billion of assets or less.
Louisiana Comp Blog is closely following developments related to TRIA reauthorization and will update this article as more information becomes available.