On June 3rd 2014, the Banking, Housing and Urban Affairs Committee of the U.S. Senate took a step forward in the Terrorism Risk Insurance Program Reauthorization Act 2007 extension debate by reporting out legislation (S.2244) to extend the program for seven years. This bill will now go to the full Senate for consideration and a final vote.
The Committee on Financial Services of the House of Representatives has yet to release a formal draft of their legislatives changes, though sources widely anticipate this will be far more limiting than that proposed by the Senate. While the consensus is that some variation of the current legislation will be the basis of an extension going forward, certain key elements of the proposals have raised concerns – particularly those which have been suggested by the House Financial Services Committee staff in their briefing memorandum.
Key Issues Under Debate:
|House proposition||Senate proposition|
|Term of Extension||3 years||7 years|
|TRIPRA trigger||gradual increase by 2017 to $500 million for conventional terrorism; no change to $100 million nuclear, biological, chemical or radiological (NBCR) trigger||no changes|
|Federal government’s share of non-NBCR events||Reduce to 75% co-pay, down from the current 85% by 2017||Reduction to 80% by 2019.|
|Reduction to the annual program cap from $100b to $75b||$ 100b for NBCR; $75 billion for Conventional Terrorism events||No change|
|Insurance Industry post event recoupment||Increase to 150%||gradual revision of current cap from $27.5 billion to $37.5 billion|
Other provisions suggested by the House which are not expected to ultimately survive in the final draft include:
- A roll back in the definition of terrorist event to exclude acts of “domestic” terrorism
- A mandate for insurers to establish a Capital Reserve Fund to hold funds for future loss payments
- Voluntary opt-out from the program’s “make available” mandate for small insurance companies for which offering terrorism coverage would create “financial hardship”
The current momentum bodes well for passage prior to the Fall, however the protracted delay and lack of clarity is negatively impacting the industry. The underwriting of terrorism risk remains challenging due to insurers inability to model the frequency and aggregate impact of an event on an insurers portfolio. Private market insurance, with limited availability in highly concentrated risk areas, remains insufficient to fill the demands of the current marketplace. More specifically, many Workers Compensation insurers, when faced with potential credit rating downgrades in the absence of a solution, have been forced to offer significantly reduced lines or withdraw from the market altogether.