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Extension Vs. Expiration | The Uncertain Future of Terrorism Insurance

The 9/11 terrorist attacks changed many things about our nation. In addition to the overwhelming loss of life and property destruction, the attacks upset our economy and rattled the insurance industry. With over $40 billion in covered loss, 9/11 is the largest insurance loss in global history. Terrorism insurance was a big topic after the attacks because coverage became either too expensive or unavailable. In response, the Terrorism Risk Insurance Act (TRIA) was signed into law in 2002.

TRIA requires insurers to offer terrorism insurance and, in return, provides a federal backstop for terrorism-related loss. The Act establishes a system of shared public and private compensation for insured losses resulting from terrorist acts. Initially set to expire in 2005, TRIA has received three extensions (in 2005, 2007 and 2015). The most recent extension – the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA) – is set to expire on December 31, 2020. As this date approaches, many are questioning the future of terrorism insurance.

TRIA’s Evolution
Due to the random nature of terrorist attacks, the private insurance market relies on government help. But for TRIA to cover a loss, the government needs to certify the event as an act of terrorism and loss costs must exceed a certain trigger threshold. The extensions have gradually decreased the government’s financial responsibility and increased the trigger threshold.

The 2005 extension reduced the government’s upfront financial exposure. The 2007 extension accelerated the post-event recoupment provisions and increased the trigger threshold from $5 million to $100 million. It also expanded the program to cover any acts of terrorism, not just foreign threats. The 2015 extension once again reduced the government’s loss share from 85% to 80% and is slowly increasing the trigger threshold to $200 million. It also increased the insurer aggregate retention amount from $27.5 billion to $37.5 billion, while indexing it to the insurer deductible sums over subsequent years.

TRIA critics claim that the extensions are prolonging a financial burden on taxpayers that mainly serves large organizations. They argue that the post-9/11 insurance market has stabilized and there is no need for a federal backstop to maintain affordable terrorism insurance. Meanwhile, TRIA proponents believe that terrorism risk is too unpredictable, making it hard to affordably price coverage. If it’s priced too high, they fear many consumers won’t buy terrorism insurance and opt to take the risk.

And If It Expires?
As the expiration date draws near, commercial insurance carriers are bracing for a market without TRIA. Many are concerned about the consequences of inaction. The uncertainty alone is creating costs as insurers and reinsurers are renegotiating to prepare for a potential loss of TRIA. Terrorism risk is already unpredictable, and indecision on government support and regulations further complicates this issue.

If TRIA does come to an end, industry experts believe policyholders will feel the impact. They expect that consumers will have fewer insurer options, premiums will increase and coverage limits will decrease. These outcomes would be even more likely in high-risk areas.

Wait and Watch
Although TRIA has had bipartisan support over the years, another extension is not guaranteed. This is particularly true as we near another election season and political divisions grow. Discuss terrorism insurance with your risk manager and consider your coverage options if TRIA expires. Our Property & Casualty Team will continue to follow this topic and provide updates as they become available.

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