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AIA President "Not Optimistic" Terrorism Risk Insurance Program Will Be Extended This Year

Source: A.M. Best - Jeff Jeffrey

Posted on 19 Jul 2013 by Neilson

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TRIAAmerican Insurance Association President and Chief Executive Officer Leigh Ann Pusey said she is "not optimistic" Congress will pass an extension to the federal Terrorism Risk Insurance Reauthorization Act before the end of 2013, which could force some insurers to add terrorism exclusions to property/casualty policies.

TRIPRA is set to expire on Jan. 1, 2014. However, because many policies are written a year in advance, Pusey said insurers may be reluctant to offer terrorism coverage if Congress fails to act before the end of the year.

But with Congress grappling with a number of high-profile legislative matters, Pusey said lawmakers may not have enough time to take up a TRIPRA extension before the end of the year. "I just don't see on Congress' calendar that they're going to have a chance to act on this," Pusey said during a July 18 press event, adding that she is more optimistic about Congress passing an extension some time next year.

AIA has been meeting with lawmakers on Capitol Hill "almost every day," to discuss TRIPRA, Pusey said. She said 82 lawmakers have told AIA representatives that they support an extension of the current Terrorism Risk Insurance Program.

To date, three bills designed to extend the program by either five or 10 years have been introduced in the U.S. House of Representatives. The latest bill, which was introduced in May, already has the bipartisan support of 19 lawmakers. Additionally, several state legislatures, including in New York, have issued resolutions in support of extending the Terrorism Risk Insurance Program, which Pusey attributed to industry lobbying at the state level. "And that's without Congress holding a hearing to discuss the issue," Pusey said.

The program acts as a financial backstop for the property/casualty industry to help drive down the cost of terrorism coverage. For individual events to be covered under terrorism insurance policies, covered losses would have to exceed a minimum of $5 million. Before the backstop kicks in, individual events must be certified as acts of terror by the Secretary of State, the Treasury Secretary and the U.S. Attorney General.

One of the challenges Pusey said AIA has faced in garnering support for an extension to TRIPRA is that many members of Congress are relatively new and have never voted on a terrorism risk insurance bill. AIA has been working to inform lawmakers about the program and how terrorism risk is different from other risks.

Pusey said she is confident that TRIPRA will ultimately be extended. However AIA is preparing for potential questions from lawmakers about ways to improve the law.

Pusey said many lawmakers, including House Financial Services Committee Chairman Jeb Hensarling, R-Texas, are generally wary of government programs and have questioned whether the federal government needs to offer a terrorism risk insurance program. Pusey said she has met with Hensarling on several occasions and that he appears be prioritizing issues related to the housing market, which could affect the timing of any congressional action on TRIPRA. "Challenging the industry to make a case for TRIPRA is a fair thing for him to challenge us on," Pusey said.

One of the key differences from other risks that Pusey said she has worked to highlight is that terrorism is "nearly impossible" to model because much of the data that would go into predicting likely losses is classified for national security reasons. "If, in fact, you could price and model in a more effective way, I think you'd see more competitors in the space," Pusey said. "What we haven't seen since the bill was put in place 11 years ago is that we don't have a lot of people racing into the market, even now with all the hot capital that the industry has been reported as having." The industry's capital surplus reached a record-high $586.9 billion in 2012, according to a report released by the Insurance Services Organization. CFA said that level of surplus is sufficient to cover a large-scale terrorist attack.

Pusey said AIA has also pointed out to lawmakers that the program has not paid out anything in losses. Even if it did, the program is designed to "give insurers significant skin in the game and to protect taxpayers," Pusey said.

For federal funding to kick in, the country would have to exceed $100 million in a given year. At that point, each insurer offering terrorism insurance would be required to cover a deductible amounting to 20% of its annual premium income for TRIPRA-covered lines of business. Once the federal backstop kicks in, insurers would still be required to cover 15% of all claims up to the law's $100 billion cap. The other 85% would be covered by the federal government and paid back over time.

One area of concern for AIA, Pusey said, is the uncertainty about what would happen if a truly catastrophic terrorism event were to occur that caused damages in excess of $100 billion. Pusey said it is unclear how long-tail claims would be treated once the $100 billion cap is exhausted. "The mechanism for that just isn't as clear not for philosophical reasons but because it's a complicated issue," she said.

AIA is also preparing to submit comments for a report from the Presidential Working Group on TRIPRA that is required to be released later this year. The U.S. Department of Treasury published a notice in the Federal Register on July 16, saying that comments were due by Sept. 16.

Meanwhile, Pusey said AIA is working to underscore what she says is the importance of the Terrorism Risk Insurance Program.

"Our view is that the program has worked," Pusey said. "The purpose behind the program was to provide for an orderly economic recovery after an event. From the beginning, there has been a recognition with the program that we couldn't let them win by taking down the economy. We feel the program is designed to keep that from happening."