LIFE AFTER TRIA?

Rough Notes, Oct 2004 by Zinkewicz, Phil

Panel to discuss whether the private market will be able to handle potential terrorism losses without government backup

On November, 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act (TRIA). As new laws go, TRIA was a relatively short time in the making. Consider, for example, it took more than a decade for Congress to finalize a law that brought about financial services deregulation. Even so, the passage of the law took longer than insurance industry representatives would have liked, considering the national concerns after the terrorists attacks of September 11, concerns that have grown even greater since the recent government reports regarding specific terrorist targets in New York and New Jersey.

And, while TRIA was welcomed by the insurance industry, the complexities of the law raised serious questions for insurers and insureds regarding how it would operate in the event of another terrorist attack the magnitude of the World Trade Center-questions which are still being slowly answered today.

However, the big question today is whether TRIA will exist at all in the future-whether it will be renewed by Congress on its expiration date of December 31, 2006, in time to avoid disruption in the insurance community. At the time of this writing, Congress has not shown any clear intention of renewing TRIA beyond lip service. There seems to be a "no rush" attitude on the part of legislators since TRIA doesn't expire for more than a year. But insurance interests have pointed out in no uncertain terms that if TRIA is not renewed before December 31 of this year, January renewals will be in a state of sheer chaos.

The Council of Insurance Agents and Brokers, the Independent Insurance Agents and Brokers of America, PIA National, and other insurance associations and organizations, in addition to other business groups, have written to Congress impressing upon them the importance of renewing TRIA this year. Whether this will happen is open to question.

One insurance broker recently put it this way: "When TRIA was passed in 2002, it provided some very necessary relief to both buyers and sellers of commercial property/casualty insurance. However, we believe TRIA will have a difficult time gaining Congress's approval for extension due to a number of factors, such as the presidential elections and candidates' fear of being branded 'the nominee who's bailing out big business.' There is also a belief among consumer advocate groups that the private insurance market doesn't need government resources to bail it out."

TRIA was enacted in 2002 to provide a temporary window of relief so insurers could develop private market solutions to manage the ongoing risk of terrorism. Terrorism and insurance experts have conceived of plausible catastrophic terrorism events that would generate up to and possibly in excess of $250 billion, roughly 10 times the currently accepted loss estimates for September 11, 2001. But will the private market be able to address these losses without some sort of government backup?

A special PLUS panel, titled "The Terrorism Risk Insurance Act-The Gathering Storm," will address this issue at next month's meeting. Moderator of the panel will be Kim Quarles of Willis and panelists will include: Wayne Baliga, Virginia Surety Co.; Christopher Yaure, GE ERC; and James L. Seale, Berkes, Crane, Robinson & Seale.

Says Quarles: "We'll be looking at the issue from an underwriter's standpoint. How will the disparate demands for protection from catastrophic losses be addressed? What existing public resources, private coverage programs and government/insurance community risk partnerships could or should be implemented to replace or supplement TRIA? What international paradigms exist that could be models for TRIA's replacement? What is the scope of insurability of terrorism exposures for professional liability risks?"

Quarles says that if TRIA is not renewed, we will witness the same scenario that existed prior to passage of the legislation. "Reinsurers will exclude terrorism coverage for primary companies," says Quarles. "Primary companies will go back to regulators and say they need to alter their policies to exclude terrorism cover once again so they are not under any obligation in the event of a serious terrorist attack. Regulators will then have to make a decision, either to allow the terrorist exclusion or retain coverage and then put the carriers in jeopardy. Either the insured firms will lose or the carriers will lose."

The underwriter is facing a serious dilemma, according to Quarles. "How does an underwriter identify and then quantify the possible losses of a trophy target? Even if a trophy target is identified and made secure with sophisticated risk management and security techniques, would that force a terrorist to move to a less protected area? Underwriters are accustomed to dealing with rational behavior, but terrorism is not rational. Underwriters are accustomed to dealing with history when evaluating an exposure, but there is no established history here."