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PrintOn December 22, 2005, President George W. Bush signed a two year extension of the Terrorism Risk Insurance Act of 2002. Occurring nine days before the Act's original expiration date, the extension, for the most part, alleviated the concerns the insurance and real estate industries would have faced. However, the companies affected by TRIA must be aware that this measure isn't permanent. The extension incorporated some changes that may not be viewed favorably – or acceptable – for the long term. Ross Norstrom, managing director, Property and Casualty Insurance, recently shared his thoughts on the TRIA extension and its effects.
| Q: | What changes were incorporated in the TRIA extension? |
| A: | The major changes that were incorporated in the TRIA extension were:
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| Q: | How has the TRIA extension benefited corporations? |
| A: | Corporations have a reduced cost of risk compared to what rates would have been without the TRIA extension. Without the extension, many insurance carriers may have been forced to cease offering sabotage and terrorism insurance, due to the possibility that paying a large loss would be financially catastrophic. With many carriers not willing to risk a situation that may put them out of business, carriers that would offer sabotage and terrorism coverage would be in great demand. As such, that would raise rates substantially. With the extension of the Act, however, insurance companies are able to offer the coverage at (more or less) competitive pricing. |
| Q: | What are the limitations of the current law? |
| A: | The definition of what events can trigger coverage is limited – the Act only covers occurrences of sabotage and terrorism against property and citizens in the United States that are planned by foreign entities or terrorist groups. As such, it does not cover acts that are planned and executed on U.S. soil by domestic fringe organizations, such as the attack on the U.S. Federal Building by Timothy McVey. In addition, now certain major lines of business, such as commercial auto and surety, are not covered by TRIA. |
| Q: | What has feedback been so far? |
| A: | The general belief is that the extension was a political compromise and it is a temporary measure. The insurance industry now needs to come to the table with something more comprehensive and permanent in nature. The biggest complaints about the extension have been that TRIA still does not cover acts of terrorism in the U.S. that are planned and executed by domestic organizations, nor does it cover damage to property owned by U.S. corporations in foreign countries. Most carriers will offer non-certified sabotage and terrorism coverage for an additional charge and endorse it to insurance policies. Terrorism acts in foreign locations typically is covered by a separate insurance placement. |
| Q: | How are these exposures covered in other countries? Are those methods preferable? |
| A: | There are a number of countries that have methods to handle sabotage and terrorism insurance. In most countries, the insurance industry, under general supervision from the country's insurance authorities, has instituted a risk and premium pooling arrangement. With this arrangement, any insurer can write sabotage and terrorism coverage, and the risk and premium are placed in a shared pool. Each insurer then receives a premium based on their market share percentage. When losses occur, they are paid by the same calculation. The method to rate the policies is standard throughout the industry and can be adjusted once per year. In a few countries, this coverage is compulsory and is levied on each and every policy. I think that this type of method is actually preferred by the federal government as it relieves them of the risk transfer and insurance aspects, and it is preferred by the insurance carriers since the premium and loss payment methodology is clear and easily understood. |
| Q: | What are your final thoughts on TRIA? |
| A: | I would urge companies not to look at the two year extension of the Act as a final product. The insurance industry and government need to develop another mechanism that would be permanent. The major insurance companies have already started discussions with legislators and state regulators. We recommend that when permanent measures are discussed, all interested parties continue to contact their senators and congressional representatives to voice their support for a comprehensive and early solution. |
Ross authored an article on the necessity of this extension to TRIA in July 2005. Click here to read his initial thoughts on why the extension was imperative, especially for the future of the insurance, banking and real estate industries.