It has been 10 years since the creation of the Terrorism Risk Insurance Act (TRIA) in response to the horrific events of 9/11. Drafted originally to provide stability to an insurance market in free fall, TRIA (and its subsequent extensions) is now slated for expiration in December of 2014.
To discuss the viability of the current TRIA program and its potential termination, I will be participating in a panel discussion this morning at RIMS with Shari Natovitz, Risk Manager of Silverstein Properties and Brian Finch, of the Washington, D.C.-based law firm, Dickstein Shapiro, LLC. We will examine how TRIA has provided critical support to corporate America, where the terrorism insurance market is today and the buzz coming from Washington as to the potential legislative quagmire which could develop as the expiration looms.
TRIA – Successes and Failures
One of the main issues for discussion on the agenda will be whether TRIA has provided financial stability and fostered a safer America. 9/11 forced both the government and private sectors to critically evaluate their anti-terrorism measures and implement methods of prevention. That said, while there have been sporadic instances of terrorism in the U.S over the last decade, there has been nothing close to the magnitude of 9/11. Across all business lines, every insurance purchaser must evaluate their unique exposure to the terrorism risk and implement proper risk management procedures to address it.
TRIA has been successful in achieving its initial purpose of allowing crippled insurers to recapitalize and in providing immediate relief to U.S policyholders who had been unable to secure adequate insurance. Yet, since 9/11, policyholder surplus has doubled to well over $500 billion.
On the other hand, we may have been better off if we had followed the model of other government-sponsored terrorism insurance programs, such as Pool Re in the United Kingdom, which has profited from years of contributions to a risk sharing pool, creating sufficient reserves to pay over a $1 billion in losses.
Whose Responsibility is it?
Should TRIA in fact be non-renewed in December of 2014, it evokes the question, “who will fund the terrorism risk if there is no support from the U.S. Government?” The current standalone terrorism insurance market capacity is estimated at only $2.5 billion per risk, with potential total U.S. market capacity estimated at between $6 billion – $8 billion.
As such, at least for the short term, the absence of TRIA will necessarily result in increased premium rates and reduced capacity in highly aggregated areas. To hedge against these variables, current purchasers of TRIA should investigate the practicality of engaging the standalone terrorism insurance market well in advance of the potential TRIA expiration.
While TRIA has achieved its initial purpose of stabilizing the U.S. insurance market, many questions remain for its future applicability. Capacity will continue to be at the forefront of the renewal or expiration of TRIA. Terrorism insurance capacity remains limited in highly aggregated areas despite improvements in modeling and in particular, scenario modeling. Risk managers must continue to utilize all technological, government and private sources to address their terrorism exposure.