Post written by: Craig Corbin
In late 2002, the Terrorism Risk Insurance Act began as the first stage of the federal government’s guarantee or “backstop” of coverage for losses from terrorism. We are now approaching expiration of the federal program.
The Terrorism Risk Insurance Act: What is it?
The current version of the law defines terrorism as foreign and domestic terrorism. The major commercial lines it covers are property, general liability, workers’ compensation, and equipment breakdown. Commercial automobile and burglary are notable exceptions.
For the federal program to react, losses incurred as a result of terrorism must reach $100 million for all companies. Then, the violent act or loss must be “certified” as an act of terrorism by three federal officials, including the Secretary of State, Secretary of the Treasury, and the Attorney General. Insurance companies can begin to recoup their losses from the program, which are subject to a 20% deductible (that’s 20% of a company’s applicable annual premiums) paid at a 15% co-pay per insurer. There is a ceiling, or annual aggregate “cap,” of $100 billion that applies to the program and insurers. No losses would be paid by anyone past that level.
The insurance industry has become accustomed to relying on this federal backstop.
Terrorism coverage is purchased and provided for many kinds of insurers. The market for what many believe is an uninsurable occurrence has remained stable. The original government program was designed to expire after three years (in December 2005); however, it was extended two more years, until December 2007. We are currently in another extension set to expire on December
The Program Will Soon Expire. What’s Next?
Not everyone involved agrees on the need for the backstop or the suitability of the government’s direct participation in this sort of commerce. Two pieces of bi-partisan legislation were recently introduced (Terrorism Risk Insurance Program Reauthorization Act of 2013 and Fostering Resilience to Terrorism Act of 2013) to extend the terrorism act for ten more years – an expiration of December 31, 2024 – but no action has been taken on these bills yet.
Insurers will join this debate individually, through state and federal legislatures as constituents, and as members of trade associations. The industry will watch in anticipation of various outcomes, and preparing for a timely response by amending policies, complying with regulatory bodies and communicating with agents and policyholders.