Terrorism Risk Insurance Legislation in 2005: Issue Summary and Side-by-Side
Released: 2006-01-12T00:00:00

Introduction

Prior to the September 11, 2001 terrorist attacks, insurance covering terrorism losses wasnormally included in general insurance policies without a specific premium being paid. Essentiallymost policyholders received this coverage for free. The attacks, and the more than $30 billion ininsured losses that resulted from them, caused a rethinking of the possibilities of future terroristattacks. In response to the new appreciation of the threat and the perceived inability to calculate theprobability and loss data critical for pricing insurance, both primary insurers and reinsurers pulledback from offering terrorism coverage. Many argued that terrorism risk is essentially uninsurableby the private market due to the uncertainty and potentially massive losses involved. Becauseinsurance is required for a variety of economic transactions, many feared that a lack of insuranceagainst terrorism loss would have wider economic impact, particularly on large-scale developmentsin urban areas that would be tempting targets for terrorism.

Congress responded to the disruption in the insurance market by passing the Terrorism RiskInsurance Act of 2002 (1) (TRIA), which was signed by the President in November 2002. TRIA created the Terrorism RiskInsurance Program, which was enacted as a temporary program, expiring at the end of 2005, to calmthe insurance markets through a government backstop for terrorism losses and give the privateindustry time to gather the data and create the structures and capacity necessary for private insuranceto cover terrorism risk.

Terrorism insurance has become widely available under TRIA and the insurance industry hasgreatly expanded its financial capacity in the past three years. It appears, however, that less progresshas been made on creating terrorism models that are sufficiently robust for insurers to return tooffering widespread terrorism coverage without a government backstop, and that practically noprogress has been made on a private pooling mechanism to cover terrorism risk. Some see the pastthree years as proof of the argument that the private market will never be able to offer insurance tocover terrorism risk and continue to see the possibility of wider economic consequences if terrorisminsurance again is unavailable. Others, notably the U.S. Treasury Department, respond that TRIAitself is retarding the growth of this private market and should be allowed to expire, or at least bereduced from its current form.

Legislative Action

Congress responded to the impending expiration of TRIA with two different bills thatinitially passed the respective houses. The Senate bill, Senator Christopher Dodd's S. 467 , was approved by the Senate on November, 18, 2005. The large majority of the language fromthe House bill, Representative Richard Baker's H.R. 4314 , was inserted into S.467 and passed by the House on December 7, 2005. S. 467 was entitled theTerrorism Risk Insurance Extension Act, whereas H.R. 4314 was entitled the TerrorismRisk Insurance Revision Act and the titles did reflect essential differences between the two bills.

Senate Legislation (S. 467)

Senator Dodd introduced S. 467 on February 18, 2005. As introduced, it wasidentical to a bill, S. 2764 , introduced by Senator Dodd in the 108th Congress. S.467, as introduced, would have explicitly extended TRIA for two years, until the end of2007, and would have added a "soft landing" year by changing the definition of an insured loss sothat policies written in the second year and extending into a third year would be covered. Theindividual insurer deductible was to remain at 15% of earned premiums during the extension, whilethe insurance industry aggregate loss retention amount was to increase from the current $15 billionin 2005 to $17.5 billion for 2006 and finally $20 billion for 2007. S. 467 also would havedirected the Treasury to promulgate new rules including group life insurance under TRIA.

On June 30, 2005, the Department of the Treasury released a report on TRIA accompaniedby a letter from Secretary Snow indicating that TRIA had achieved its goal of stabilizing theinsurance market and that the Administration would not support an extension without significantchanges reducing the taxpayer exposure from the program. On November 16, 2005, the SenateCommittee on Banking, Housing, and Urban Affairs marked up S. 467 and substitutedan amendment by Chairman Richard Shelby for the original text. It then reported the bill favorablyto the full Senate by voice vote.

As amended, S. 467 would have extended the current program two years andfurther increased the private sector's exposure to terrorism risk over the life of the act, as did theoriginal legislation. During the three years covered by the initial act, insurance industry deductiblesand aggregate retention rose each year. S. 467 continued to increase these. It would havealso reduced the types of insurance covered by the program and increased the size of a terrorist eventnecessary to trigger the program. Specifically, it removed commercial auto, burglary and theft,surety, farm owners multiple peril, and professional liability (except for directors and officersliability), as covered lines; raised the insurer deductible to 17.5% in 2006 and 20% in 2007;decreased the federal share of insured losses from 10% to 15% for 2007; and raised the event triggerto $50 million in 2006 and $100 million in 2007.

S. 467 was brought to the Senate floor and passed by unanimous consent onNovember 18, 2005. The House brought the bill to floor and amended it with most of the text of H.R. 4314 before passing it on December 7, 2005.

House Legislation (S. 467 as Amended with Text from H.R. 4314)

H.R. 4314 was introduced by Representative Baker on November 14, 2005, andmarked up by the House Financial Services Committee on November 16. Three amendments, byChairman Michael Oxley and Representatives Barney Frank and Debbie Wasserman Schultz, wereadopted in committee by voice vote. (2) Chairman Oxley's amendment made a number of changes,including adjusting the exact deductibles for various insurance lines, reducing the program triggeramount in program years after the second year and striking language that would have preemptedsome state laws relating to rate and form filing. Representative Frank's amendment increased thesize needed by a company or municipality to be considered an "exempt commercial purchaser" ofinsurance. Representative Wasserman Schultz's amendment added the requirement that life insurersnot deny insurance coverage based on lawful overseas travel. The amended bill was favorablyreported to the full House by a vote of 64-3. In the 108th Congress, the committee had reportedfavorably a straightforward extension of TRIA with relatively minor changes. H.R. 4313 , however, went well beyond the previously reported House bill or the changes recommendedby Secretary Snow.

H.R. 4314 as reported would have limited the types of insurance covered byremoving commercial auto insurance. However, it would have expanded the program to coverdomestic terrorist events and increased the covered types of insurance to include group life andspecific coverage for nuclear, biological, chemical, and radiological (NBCR) events. It would haveraised the event trigger to $50 million in 2006 and added an additional $50 million to this for everyfuture year the program is in effect. It also would have changed the insurer deductible but wouldhave done so differently for different lines of insurance, raising it to as high as 25% for casualtyinsurance but lowering it to 7.5% for NCBR events. H.R. 4314 would have lowered thefederal share of insured losses to 80% for events under $10 billion but raised it gradually to 95% forevents over $40 billion. In the case of a terrorist act, the deductibles and event triggers would havereset to lower levels, with deductibles possibly as low as 5% in the event of a large attack. It wouldhave removed the cap on the mandatory recoupment provision so that all money expended underTRIA would be recouped by the federal government through a surcharge on insurers in the yearsafter the attack. H.R. 4314 also would have created "TRIA Capital Reserve Funds (CRF),"to allow insurers to set aside untaxed reserves to tap in the case of a terrorist event.

With a few changes, notably the addition of language striking Section 107 of the originalTRIA, the language of H.R. 4314 as it was reported was inserted into the Senate-passed S. 467 , and this amended version of S. 467 passed the House 371-49 onDecember 7, 2005. Shortly after passage, the House called for a conference committee to resolvedifferences with the Senate and appointed conferees.

Administration Reaction

The Executive Office of the President issued a Statement of Administration Policy supporting S. 467 on November 17, 2005. It also indicated that the Administration would stronglyoppose "any efforts to add lines of coverage, including group life insurance." On December 7, 2005,a Statement of Administration Policy was issued that specifically opposed the House-passed versionof S. 467.

Final Passage

Following the House appointment of conferees on December 7, 2005, the Senate did notappoint conferees. Instead, it took up and passed a further amendment ( S.Amdt. 2689 )to S. 467 by unanimous consent on December 16, 2005. The House followed this withpassage of this version of S. 467 by voice vote on December 17, 2005.

P.L. 109-144

S. 467 was signed by the President on December 22, 2005, becoming PublicLaw 109-144. P.L. 109-144 closely follows S. 467 as initially passed by the Senate onNovember 18, 2005. The significant difference is an increase in the aggregate retention amount from$17.5 billion and $20 billion to $25 billion and $27.5 billion for 2006 and 2007.

Table 1. Side-by Side: Terrorism Risk Insurance Act of 2002, Initial Senate- and House-passed Legislation,andTerrorism Risk Insurance Extension Act of 2005

Notes: The initial House-passed S. 467 would strike essentially all of 15 U.S.C. 6701 note (which sets out sections 101-108 of P.L. 107-297 )and replaces it with a similar structure, including in some cases, identical language. The section numbers for this House-passed S. 467 citedin this side-by-side are, therefore, those that would appear in the Code if the bill were enacted, except for the provision entitled "Litigation Management." In contrast, both the initial S. 467 and P.L. 109-144 simply amend 15 U.S.C. 6701 note. The section numbers cited in this side-by-side are thusthose of the bill and law.