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House Republicans Draft TRIA Proposal Could Mean Big Changes to Come

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Last week, Rep. Randy Neugebauer (R-TX), Chairman of the House Insurance Subcommittee, released to his fellow Republicans a draft proposal to extend the federal terrorism insurance program. That proposal, now made public, would bring drastic changes to a program that has helped to stabilize the market since its 2002 creation. At this point, the proposal is only in outline form with bill language expected over the next few weeks.

The proposal, entitled the Terrorism Risk Insurance Modernization Act of 2014, would extend the TRIA program for only three years while significantly increasing the program trigger limit to $500 million from $100 million, for non-NBCR events, and reducing the annual government assistance cap from $100 billion to $75 billion. The government’s co-share of losses would decrease from its current 85% to 75% beginning in 2017, for non-NBCR events. The government’s responsibility and trigger would remain the same for NBCR certified acts.

The industry has been expecting adjustments to be made to TRIA, upon its extension; however, the numbers included in the Republican proposal are more drastic than many envisioned. Beyond concerns with the changes to the program trigger and co-share percentages, there are additional concerns with language in the proposal allowing for small insurers to opt-out and an implication that domestic terrorism events would no longer be covered by the program.

The requirement that insurers offer terrorism coverage is the backbone of the program, and allowing some insurers to opt-out of offering such coverage could lead to reduced capacity and higher prices for consumers. Excluding domestic terrorism would also be a mistake, as history has shown us that terrorists can come from inside and outside the United States.

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If there is a positive in the House Republican proposal, it is in changes to the certification process. Many industry groups, including RIMS, have been asking for a timeline for events to be certified as “acts of terrorism.” The proposal includes a deadline of 90 days.

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The House Republican proposal is a far cry from the recent Senate agreement. That bi-partisan legislation, S.

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2244, would extend the program for seven years while making much smaller adjustments to the program. If both chambers pass bills along current lines, then the conference committee would have a lot of work to do in order to rectify the two pieces of legislation into a compromise extension.

New Reports Support Call for TRIA Extension

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Two recent reports from the Presidential Working Group (PWG) on Financial Markets and Marsh & McLennan Companies support the argument for a long term extension of the federal Terrorism Risk Insurance Program, otherwise known as TRIA. The much anticipated report from the PWG draws upon comments from many industry groups and interested parties, including RIMS, while the Marsh report is a follow-up to a similar report issued in May 2013.

The “2014 Marsh Terrorism Risk Insurance Report,” released Tuesday, states that “if Congress does not renew or extend the federal backstop, the market dynamics for terrorism insurance will be disrupted and will likely result in increased pricing and limited capacity.” Marsh’s support for a long-term extension of the program is in line with the majority of the insurance industry as TRIA nears its December 31, 2014 expiration. “The potential for adverse economic consequences due to limited or unavailable terrorism insurance should be an impetus for quick congressional action to reauthorize [TRIA].”

Similarly, the PWG study, required by TRIA legislation, made several findings relating to the need for extending the program:

  • Insurance for terrorism risk currently is available and affordable;
  • Prices for terrorism insurance have declined since TRIA was enacted;
  • Take-up rates have improved since TRIA’s passage;
  • The market is currently tightening in light of TRIA’s uncertain future;
  • The private market does not have the capacity to provide reinsurance for terrorism risk to the extent currently provided by TRIA; and,
  • Terrorism insurance would likely be less available should TRIA be allowed to expire

Bi-partisan legislation was recently introduced in the Senate that would extend TRIA for seven years; however, the industry continues to eagerly await legislation from the House Financial Services Committee leadership. While the Senate bill reforms the program, many expect House leadership to ask for more far reaching changes.

Senators Reach Deal on TRIA Extension

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Key U.S. Senators have announced a bi-partisan agreement on a long term TRIA extension. Senators Charles Schumer (D-NY), Dean Heller (R-NV), Jack Reed (D-RI), Mark Kirk (R-IL), Chris Murphy (D-CT) and Mike Johanns (R-NE) are the cosponsors of the legislation that is expected to be introduced in the next day or two.

“In a post-9-11 New York, terrorism risk insurance has proven to be an absolutely essential partnership between the government and the private sector that has turned rebuilding downtown Manhattan from a question to a certainty,” said Senator Schumer. “But there is still more to be done and this crucial bipartisan plan will reauthorize and extend the Terrorism Risk Insurance Act before it expires at year’s end. Redevelopment and economic growth should be encouraged in New York and other high-risk areas across the country, even in the face of unfathomable terrorist events, and I will work with my colleagues to get TRIA passed this year to preserve this essential tool.”

“Chicagoans believe it is our birthright to stand in the shadows of the tallest buildings in the world,” Senator Kirk said. “With its private-public partnership, TRIA will better protect the economy from terrorist harm while protecting taxpayers from financial risk.”

The Senate legislation would extend the program for seven years while raising the recoupment amount from $27.5 billion to $37.5 billion and increasing the industry’s copay amount to 20% from 15%.

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These changes would be phased in over the next five years.

While reaching a deal in the Senate is a key step in getting TRIA passed, and welcome news to advocates of a long-term extension, including RIMS, there is still a long way to go before an extension is passed. The Senate version must still go through the full Senate process, while, on the House side, there continues to be significant resistance from House Financial Services leadership, including Representatives Jeb Hensarling (R-TX) and Randy Neugebauer (R-TX), who remain skeptical of the program. Any bill from the House Financial Services Committee is expected to include more far reaching adjustments to the program.

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TRIA Advocates Testify in Favor of Long-Term Extension

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On Tuesday, February 25, the Senate Banking, Housing, and Urban Affairs Committee held a hearing on “Reauthorizing TRIA: The State of the Terrorism Risk Insurance Market.” Witnesses from several industry groups advocated for a long-term, if not permanent, extension of the program beyond its current deadline of December 31, 2014.

“The availability and affordability of adequate insurance coverage for acts of terrorism is not only an insurance issue, but an economic one,” said RIMS President Carolyn Snow. “By providing a backstop, and assuming some of the market terrorism risk as a reinsurer, the federal government has freed up capacity in the private market that would not otherwise exist.”

Douglas Elliot, president of commercial markets for The Hartford Financial Services Group, and speaking on behalf of the American Insurance Association, argued against any sweeping changes to the current TRIA program. “A number of proposals that have been discussed could-in the name of increasing private market capacity for terrorism risk-actually lead the industry to a tipping point beyond which individual insurers would need to make difficult decisions to safeguard a company’s financial condition instead of maintaining the current level of exposure to catastrophic terrorism risk.”

Many witnesses, including W. Edward Walter, president and CEO of Host Hotels & Resorts, on behalf of the Coalition to Insure Against Terrorism, addressed the effect that TRIA’s uncertainty will have on the lending industry. “The lack of clarity around this issue will likely slow the pace of new financing, especially in the case of properties that are perceived to be a higher risk of terrorist attacks such as high profile buildings and real estate generally located in key gateway urban markets.”

When asked for the ideal duration of a TRIA extension, all of the witnesses asked for a permanent solution with ten years being a minimum timeframe for an extension.

This is the second hearing that the Senate Banking Committee has held on the issue. Committee leadership seemed to understand the urgency and expressed a desire to move on the issue sooner rather than later; however, House leadership has expressed a desire to make changes to the legislation which could slow action on an extension as those changes are debated.