National Dec 17, 2014

When TRIA expires: What will it mean to your clients?

The U.S. Senate adjourned Tuesday night without reauthorizing the Terrorism Risk Insurance Act. This leaves the fate of the program in serious jeopardy as TRIA is set to expire on Dec. 31, 2014, and the Senate is not scheduled to return until after the holidays. There still is a chance that the Senate will reconvene to pass an extension of TRIA, however, that possibility seems remote. The more likely scenario is that the terrorism marketplace will be thrown into a state of flux until Congress returns in January 2015. Some predict theres little chance that the program would stay expired for long, as an extension potentially could even be passed retroactively. The expiration would likely cause at least a few weeks of consternation over what coverage insureds still have during the programs anticipated short-term expiration. PIA National issued a statement earlier today.

If/when TRIA does expire what will it mean for you and your clients?

Cancellation of terrorism coverage

o    Many property/casualty policies issued in 2014 were endorsed with sunset clauses that canceled terrorism insurance coverage effective Dec. 21, 2014, in the event of the expiration of TRIA.

o    It will be important now to review your clients contracts to see if they include a sunset provision.

o    If your clients contracts do contain a sunset provision, we recommend you begin looking for replacement coverage immediately.

Market disruption

o    Disruption in the terrorism marketplace is expected in the absence of TRIA.

o    Increased pricing and limited capacity in the marketplace are likely. This will be especially true for risks located in major metropolitan areas and for occupations that are deemed "high risk."

o    The effect on the workers compensation market is expected to be particularly acute:

  In response to the expected expiration of TRIA, the New York Compensation Insurance Rating Board already has voted to raise the charge for terrorism coverage.

A recent study conducted by Marsh found that only about a third of property insurers plan to offer full-term terrorism coverage in 2015. In addition, almost half of the property insurers surveyed indicated they will not offer stand-alone terrorism coverage if TRIA expires.

Terrorism Risk Insurance Act history

Before 9/11, insurers included terrorism coverage in all commercial policies without charging for it because the risk was below their threshold level of concern. But, after paying $44 billion in claims for 9/11-which was the most costly disaster in the history of insurance at that time-most insurers excluded terrorism from commercial policies. The absence of terrorism coverage halted large construction projects around the country because financial institutions were concerned about the viability of their loans. Their fears resembled the concern that organizations such as FIFA and the NFL have with respect to their own liability.

TRIA addresses the insurance supply problem. The federal government provides a financial backup for insurers by covering a portion of insured losses above $27.5 billion, up to $100 billion; giving the insurance industry some certainty as to its maximum exposure. In return, insurers are required to offer terrorism coverage to all business clients, which can decide to purchase coverage or not. About 60 percent of large businesses carry terrorism insurance, indicating strong demand for it.

Now that TRIA has not been (and is not expected to be) reauthorized, insurers will have the right to cancel terrorism insurance policies after Jan. 1, 2015. They are likely to do so for fear of insolvency, should a massive terrorist attack take place with no government backup. By law, only insurance companies offering workers compensation insurance must include the terrorism peril in their policies, whether or not TRIA is renewed. The only way for those insurers to limit their exposure to terrorism if TRIA is not in place-most notably in large metropolitan areas-might be to cancel some commercial insurance policies altogether. Some businesses then would be unprotected against a wide variety of risks, ranging from fire to industrial accidents.