By Bart Rahe, Westfield Commercial Lines product development leader, and Ken Wulfhoop, Westfield Small Business Accounts underwriter
In January 2015, President Barack Obama signed an extension of the Terrorism Risk Insurance Act (TRIA) into law, extending the program through 2020. As a result of the Terrorism Risk Insurance Reauthorization Act (TRIPRA), more than 1 million
businesses that would have been at risk of losing coverage will retain it, according to the Insurance Information Institute.
This passage was critical, as globally there has been an increase in terrorist attacks, and targets are no longer limited to places of political or economic power as evidenced by recent attacks at nightclubs in Istanbul, Turkey, and Orlando, Florida.
So what does the renewal mean for insurers and insureds? Passage of the act raises the threshold of the program from $100 million to $200 million regarding losses associated with a triggering event, with increases that began in $20 million increments each year starting in January 2016.
The insurance marketplace aggregate retention amount was established at the lesser of $27.5 billion. This will increase the amount that insurers must cover as a whole through co-payments and deductibles as aggregate retentions, increasing annually by $2 billion until it equals $37.5 billion and the aggregate amount of insured losses for the calendar year for all insurers.
According to the National Association of Insurance Commissioners, the insurer deductible was set at 20 percent of an insurer’s direct earned premium of the preceding calendar year, and the federal share of compensation was set at 85 percent of insured losses that exceed insurer deductibles until Jan. 1, 2016. Beginning on that date, the federal share will decrease by one percentage point per calendar year until it reaches 80 percent.
With this renewal, the government is continuing to help alleviate the pressure and strain that a large loss from a terroristic act can place on businesses and their affiliated insurance companies. Insureds want the peace of mind of knowing that, in the event of a loss, they will be restored to their pre-loss position, and insurers need to be positioned to meet that need should it arise.
For example, pressure by a number of multi-national clients resulted in the ACE group increasing its capacity for terrorism, political violence and war risks up to $100 million. Research by ACE shows that 68 percent of risk managers across Europe, the Middle East and Africa believe that terrorism is a growing concern for business, and 75 percent agree that recent global events are causing them to review their security and travel policies. The enactment of TRIPRA and the ensuing government assistance ease the pressure on insurers to meet this growing need.
According to the Global Terrorism Index issued by the Institute for Economics & Peace, the economic cost of terrorism in 2014 reached its highest level ever at $52.9 billion, a 61 percent increase from the previous year and a 10-fold increase over 2000. (These costs do not incorporate the losses associated with the recent attacks in Paris, France and San Bernardino, California.)
According to an article in the Insurance Journal, terrorism today is resulting in the payment of the most damages since the Sept. 11, 2001 terror attacks. However, despite this recent uptick in losses, history has shown that economies are resilient even in the wake of acts of terrorism as a result of insurance companies and governments providing coverage, paying claims and working to get businesses back on their feet.
With the ever-growing threat of movements such as ISIS and domestic terrorism groups, more and more businesses are at risk of suffering losses. As a result, an increasing number of businesses are electing terrorism coverage. It is a relatively inexpensive coverage that businesses too often waive, but in the event of such a loss, it could provide the security that companies need at such a devastating time.
Terrorism is no longer confined to big cities and governmental centers. Businesses everywhere need to be cognizant of this exposure, and insurance companies need to prepare for such losses and the stresses they will place on their operations.