On January 7 and 8 of this year, the House and Senate, respectively, confirmed the reauthorization of the Terrorism Risk Insurance Act (TRIA), ending a week of intense speculation and apprehension in the insurance and finance industries. President Obama signed the bill into law on January 13.
The TRIA, originally enacted in 2002, permits the federal government to supplement insurance losses resulting from catastrophic terrorist attacks after damages reach a certain threshold limit. While some consider the act to be another example of a federal “subsidy” to the insurance industry, others maintain that the TRIA is necessary to promote economic recovery in an age where property damage and other insured losses from terrorist attacks are an ever-increasing reality.
History of the TRIA
“Terrorism insurance” was a term rarely referenced in insurance policies prior to the September 11 attacks. After the enormity of the property damage wrought by the collapse of the World Trade Center’s Twin Towers in New York City was realized, however, commercial general liability insurers felt compelled to begin excluding catastrophic terrorism-related losses from their policies. With an estimated 40 billion dollars in insured losses not only in New York City, but Washington, D.C., and Pennsylvania as well, insurance companies that were now obligated to cover their insureds’ losses had no choice but to either astronomically increase premiums for terrorism-risk coverage, or withdraw from the insurance market altogether unless terrorism exclusions were available. Many filed formal requests with their applicable state agencies for permission to include policy provisions for terrorism exclusions. Because the risk from terrorism in many urban areas was now seen as a growing reality, most such requests were granted.
From there, the domino effect began. As many companies were unable to insure themselves against property loss resulting from the increasing potential of major terror attacks, lenders were more hesitant to provide financing for businesses across all major industries. With the global economy already reeling from the jolt of the attacks themselves, the insurance industry’s response threatened to hamper any attempts at economic recovery. So substantial and appreciable was the risk that Congress responded with legislation less than two months after the attacks, on November 1, 2001. In a then-unprecedented House bill, Representative Michael Oxley from Ohio proposed federal subsidization of insurance property damage from terrorist attacks.
Passed by both houses of Congress and signed by President George W. Bush on November 26, 2002, the Terrorism Risk Insurance Act became law just over a year later, originally calling for the federal “backstop” to kick in after such losses to businesses exceeded $100 million. Credited with breathing life back into industries most adversely affected by the attacks – transportation/aviation, real estate, and construction among them – the act was renewed by Congress in 2005 and 2007 and was scheduled to expire on December 31, 2014.
When Congress failed to renew the Act before the expiration date, largely attributable to opposition by retiring Oklahoma Senator Thomas Coburn, insurance analysts and financial experts again cautioned that financial lending for commercial development would quickly grind to a halt, stalling the already tenuous recovery from the latest economic recession that began in 2008. In response to these concerns, the House renewed the Act with an overwhelming 416–5 vote on January 7 of this year, with the Senate concurring by a 93–4 vote the day after. President Obama signed the bill into law less than a week later.
Current Version of the TRIA and Differences from Original 2001 Version
Unlike the previous versions of the act, the law in its current form will eventually require federal subsidization of insured losses only after annual aggregate losses exceed $200 million. As mentioned above, in the original version of the TRIA, the federal “backstop” kicked in after an insurer paid out only $100 million in annual aggregate losses. Starting in January 2016, the threshold will increase by $20 million every year for five years. While the higher threshold would still permit federal assistance to insurers for truly catastrophic events, a press release issued by Standard & Poor’s cautioned that smaller insurers might be hurt by this amendment. The report observed that “smaller insurers’ overexposure to terrorism risk that is less than their TRIA deductibles could be exacerbated by this amendment.”
Citing an effort to decrease burden on taxpayers, Congress also increased the percentage of losses that insurers are required to pay above that excess amount from 15 percent to 20 percent. This co-pay increase was accompanied by an increase in the minimum recoupment level – the amount of funds required to be paid out by the private sector in such an event – from 27.5 billion to 37.5 billion.
The act in its current form will be effective until 2020. Although the federal government hasn’t yet paid out any insured losses, the public perception of an increasing risk of terrorist attacks likely factored into its sudden renewal.
Significance of the TRIA: Why It’s Needed
While the attack that led to the events that unfolded on September 11, 2001, remains the deadliest and most destructive of its kind to date, similar attacks seem only to have become more commonplace in the past thirteen-and-a-half years. The 2002 bombing of two Bali nightclubs, the 2004 bombing of the Madrid commuter train system, and the 2005 terrorist attack on the London Underground were just a handful of similar terrorist attacks carried out by militant Islamic groups in the years immediately following the September 11 attacks. In more recent years, attacks by varied terrorist groups have claimed the lives of thousands all over the world, and resulted in even greater monetary losses from property damage and destruction. The terrorist attack on the offices of the French satirical newspaper Charlie Hebdo just two months ago serves as one of the most recent reminders of the increasing ubiquity of terrorism risks in the twenty-first century.
That is not to say terrorist attacks were unheard of or even infrequent before the dawn of the new millennium. Terrorist hijackings and bombings of major airliners throughout the 1970s and 1980s, for example, serve as stark examples of the type of terrorist attacks recalled by the generations that came of age before September 11. But the unprecedented property damage and other related insurance losses – including, but not limited to business interruption, general liability, and worker’s compensation – had never before been seen on such a scale before 2001. Although such losses are now more widely anticipated by insurers, the marketplace for terrorism insurance remains uncharted territory due to the difficulties associated with accurately assessing risk and loss.
Unlike risk assessments in other insurance marketplaces such as automotive insurance, for example, the risks of insurance losses from terrorist attacks are extremely difficult to be quantified or measured. There exist few statistics that lend themselves to calculating the probable location, frequency, magnitude or severity of a terrorist attack. Additionally, insurers typically rely on the infrequent nature of such attacks to spread the risk so that the insureds that experience losses can be funded by the premiums of the insureds that do not. Because terrorist attacks are rarely random, but rather carefully planned and coordinated, the losses to insureds are more likely to be concentrated among and borne by similar parties.
In short, insuring against terrorism losses presents an exceptional and daunting challenge for the industry. Without enough data, the risk seems incalculable, but given the nature of terrorist attacks, it can be assumed that losses will be sustained in a manner that is sure to undermine the typical model relied upon by insurers. With such uncertainty, insurers need their own insurance from the government to protect against catastrophic losses that could result from another deadly terrorist attack. Without it, their reliance on exclusions for such coverage sounds alarm bells for lenders that in turn stall financing for real estate, infrastructure, or other construction projects.
Accordingly, the TRIA’s latest reauthorization has been applauded by various groups across the real estate, financial, and insurance industries. The Commercial Real Estate Development Association praised the bill’s passage, claiming that it would give “developers the peace of mind to invest in an industry that contributed $376 billion to GDP” in 2014. Additionally, Leigh Ann Pusey, the CEO of the American Insurance Association, released a statement observing that the TRIA protects “our nation’s economy, policyholders and taxpayers . . . [its] reauthorization . . . will preserve a well-functioning private terrorism insurance marketplace.”
Impact on Real Estate Financing
For obvious reasons, all sophisticated lenders require insurance coverage over investments for property losses that might result from terrorist attacks. Without such coverage, businesses and companies in the real estate industry would be extremely hard-pressed to secure financing for future constructions, transactions, or investments.
Fortunately, the TRIA’s reauthorization will instead encourage insurers to provide terrorism coverage at affordable rates to key parties in the real estate industry by limiting the insurers’ ultimate risks of loss. Correspondingly, there will be no disincentives to lenders that would limit financing to businesses and companies seeking funding, paving the way for growth and expansion in the commercial real estate industry.
Similar Programs: Other Countries
Only three of the 20 most costly terrorist attacks, as determined by insured property losses, have occurred on U.S. soil – the September 11 attacks, the 1993 World Trade Center garage bombing, and the 1995 Oklahoma City bombing. As such, many other countries affected by costly terrorist attacks even before September 11 had similar regulations and laws in place.
In the United Kingdom, where seven of the top 20 most costly attacks have taken place, a “mutual reinsurance” pool for terrorist coverage was created by the government in 1993 in response to several terrorist attacks by the Irish Republican Army. A primary insurer obligated to cover the cost of insured losses from a terrorist attack is entitled to be reimbursed by the pool for losses in excess of a certain amount, adjusted based on the amount of annual events and the geographic location. The government, however, does act as the reinsurer of last resort, and will cover payments above the “industry retention” rate. Spain, too, has had a similar “pooling” arrangement ultimately backed by the government in place since 1941, created largely in response to attacks by the Basque Separatist movement. France, Germany, and Austria all created similar arrangements after the September 11 attacks.
Belgium, by contrast, passed a 2008 law that was more similar to the TRIA, requiring the government to supplement any coverage payouts beyond €700 million, up to the maximum available coverage amount of €1 billion. Similarly, Australia passed legislation in 2003 that permits a federal “back-stop” of payouts from a pooling arrangement. Australia’s law also allows for terrorism exclusions in commercial policies to be nullified in the event a terrorist attack is declared by the government.
Clearly, the United States is not alone in implementing laws regulating terrorism insurance coverage. Neither is it the first such country to do so – Spain and the United Kingdom’s terrorism coverage laws predate 2001. Nonetheless, as shown by the host of countries enacting similar laws in 2002 and 2003, the September 11 attacks were likely the catalyst for a great majority of these programs, making the unparalleled extent to which insured losses could be sustained from terrorist attacks a reality.
With the latest reauthorization of the TRIA, Congress has confirmed both the necessity and effectiveness of the TRIA over the past 13 years. Without the promise of a federal supplement, insurers would be forced to exclude terrorism-related losses, resulting in certain economic arrest. Instead, the TRIA has permitted insurers to provide coverage, providing assurances to lenders and financiers that their investments will be protected, and thus spurring future economic growth. As the world recovers from the latest terrorist attacks in Paris in January, it cannot be denied that damages incurred in such instances are an ever-increasing threat that must be addressed.
While insurance coverage for terrorist attacks is just a single part of the ultimate answer to the terrorism threat, the reauthorization of the TRIA can be considered as a positive step forward. Although terrorist attacks may not be predictable or avoidable, the TRIA, at the very least, insures against economic losses and repercussions that would otherwise result from fear of their mere potential. And that type of insurance is exactly what is needed to combat the ultimate aim of terrorism – coercion or disruption through intimidation.
It may not have the “teeth” of economic sanctions against terrorism-sponsoring countries, or carry the publicity of military raids on terrorist cells, but the TRIA does its part in confirming that the simple threat of future attacks will not bring the economy and livelihood of the United States to a grinding halt – sending a clear message to would-be terrorists. At present, it seems hard to imagine a terrorism-free world. But more messages like this are a step in the right direction.