On Thursday, July 17, the Senate passed a reauthorization of TRIA, the Terrorism Risk and Insurance Act, extending the bill for seven years after its expiration at the end of 2014. The bill was passed with a 93-4 vote and made minor modifications to the expiring legislation. This is a promising sign for the insurance industry, which has been lobbying vigorously for a renewal since last year. But before the bill becomes law, there is certain to be opposition from influential members of Congress who favor more significant reductions to the federal government’s participation.
The Senate bill reduces TRIA’s coverage in two key ways: by increasing the industry co-pay from 15% to 20% over a five year period, and by pushing the Federal Government’s “mandatory recoupment” responsibility from $27.5 billion to $37.5 billion. By contrast, a competing bill proposed by Congress calls for even more substantial modifications, most notably raising the program trigger from $100 million to $500 million for all acts of terrorism except those arising from CBRN (chemical, biological, radiological, and nuclear) events.
How the two bills are reconciled will have significant implications for the insurance industry, as any reduction in federal participation will amount to additional risk assumed by insurance carriers. However, property insurers today are more willing to take on terrorism risk that they would have previously excluded, as evidenced by the dramatic drop in terrorism insurance prices over the past decade. A recent study by the Wharton Center for Risk Management downplayed the impact of TRIA changes, noting that while the changes could increase the price of coverage, “firms’ demand for terrorism insurance is not very sensitive to gradual price changes under current market conditions.”
Whatever the case, the ultimate outcome of the TRIA will have a measurable impact on the price and availability of terrorism insurance, primary carriers’ risk appetites in urban areas, and the securitization of terrorism risk, which my colleague Gordon Woo recently wrote about. The U.S. has made great strides in the capability of its counterterrorism operations over the past decade, but even with these gains, insurers and reinsurers must continue managing their pricing, underwriting, and capital deployment strategies to address the risk of future catastrophic acts of terror.