Terrorism Risk Insurance Act

The Terrorism Risk Insurance Program, originally created in the wake of the September 11th attacks, is scheduled to expire on December 31, 2014. The Terrorism Risk Insurance Act (TRIA) of 2000 established the Terrorism Risk Insurance Program, which has been extended twice. Congress is actively debating whether it should be reauthorized and how it can be modernized.

If the Terrorism Risk Insurance Program is extended, amendments could make it look significantly different than it does today. The possibility of increasing the deductibles for insurance companies, reducing the amount of the federal government’s share of losses, providing explicit coverage for cyber terrorism, and adding a mandate to offer coverage for nuclear, chemical or biological attacks is under discussion.

Under the current iteration of TRIA, if aggregate industry insured losses resulting from an “act of terrorism” exceed $100 million, insurers will be reimbursed for 85 percent of their losses above a deductible of 20 percent of their direct earned premiums for U.S. commercial property and casualty business during the previous year – up to a cap of $100 billion. Whether a particular act of terrorism will be certified under TRIA is determined by the Treasury Secretary, the Secretary of State and the Attorney General.

In order to benefit from this public-private partnership, commercial insurers must make terrorism coverage available in a manner that does not differ materially from the terms, amounts and other coverage limitations applicable to losses arising from events other than acts of terrorism.

The Treasury is authorized to recoup payments made under TRIA from insurers. Insurers may impose an annual surcharge on policyholders as part of the recoupment process. The surcharge may not exceed three percent of the policy premium.

There have been several congressional hearings about TRIA and a number of bills are currently under consideration. Given the uncertainty of the reauthorization efforts, insurers should be making plans for the dual possibilities of 2015 renewals without a federal backstop for terrorism risk insurance or with a reduced backstop and higher participation requirements.