Senate’s TRIA extension threatens insurers with rate hikes
Renewal efforts for TRIA (the federal terrorism insurance backstop) moved forward last month with a legislative proposal in the Senate that would extend the law for another seven years. The bill, introduced by Senator Charles Schumer, D-NY, and co-sponsored by a bipartisan group of members in the Senate Banking, Housing and Urban Affairs Committee, would reauthorize the federal backstop program for an additional seven years. TRIA is currently set to expire on Dec. 31, 2014, which could leave buyers and carriers facing huge spikes in stand-alone and embedded terrorism insurance rates if the U.S. Government halts coverage.
The new measure, brought to the Senate floor just days before the one-year anniversary of the Boston Marathon Bombings includes two major changes to the program that would increase deductibles and co-pays for insurers. Still, some insurer groups are hesitant about the bill’s significant rate increases, which may be necessary to generate Republican support. Specific changes include:
- An increase in the insurer’s copay from 15 to 20%. Current regulations stipulate that in the event of a terrorist attack, insurers are required to pay 15% of the prior year’s direct earned premium for covered lines as a deductible. After that, the U.S. Government covers 85% until losses amount to $100 billion, with the remaining 15% left to insurers. Under the new regulations, that remaining portion would increase to 20%, and the federally covered portion would decrease to 80% (of losses up to $100 billion.)
- Raising the federal backstop’s recoupment threshold of aggregate insurance losses to $37.5 billion, so that the government is required to recoup claims payments from insurers when aggregate uncompensated losses are below that figure. Right now, that number is $27.5 billion.
Extending TRIA guarantees continued government protection for U.S. businesses that face significant property risks from terrorism, as well as non-property insurance lines like builders risk, liability and worker’s compensation markets. However, insurers question whether the new adjustments could also lead to a decrease in market capacity. If retention rates rise, it could negatively impact insurers’ ability to offer coverage. It’s important that congressional efforts to reauthorize the legislation do not hinder market stability and coverage availability. Luckily, with the process already underway (the U.S. House has also reviewed two separate extension proposals), and shows signs of promise as the negotiations continue. Nonetheless, within the next six months both chambers must work in bipartisanship, as well as with insurers, if TRIA is to live on.
We urge all insurance buyers to plan ahead. If your renewal is approaching this year, we advise to seek options now to avoid potential shrinkage of capacity that will result in higher pricing. Taking the time now to explore the different options will prepare your company and help to diminish and avoid uncertainty and chaos as we move closer toward December 31st.
About the Author
Mary Broderick is a Senior Vice President and Leader of WGA’s Property Practice. She is responsible for the design and implementation of complex property insurance programs for WGA’s corporate clients’ and has many years of experience working with complicated Business Interruption (BI) and Contingent Business Interruption (CBI) issues.