Terrorism Risk Insurance Legislation in the 114th Congress: Issue Summary and Side-by-Side Analysis
Released: 2015-01-20T00:00:00

Background

Prior to the September 11, 2001, terrorist attacks, insurance covering terrorism losses was normally included in general insurance policies without additional cost to the policyholders. Following the attacks, both primary insurers and reinsurers pulled back from offering terrorism coverage. Because insurance is required for a variety of economic transactions, particularly borrowing for commercial development, many feared that a lack of insurance against terrorism loss would have a wider economic impact.

Congress responded to the disruption in the insurance market by passing the Terrorism Risk Insurance Act of 2002 (TRIA). TRIA created a temporary, three-year terrorism insurance program to calm the insurance markets through a government reinsurance backstop sharing in terrorism losses. The idea was to give the private industry time to gather the data and create the structures and capacity necessary for private insurance to cover terrorism risk. TRIA requires insurers to offer terrorism coverage but does not require commercial policyholders to purchase the coverage. Congress extended the program in 2005 and 2007. In 2005, the extension legislation focused on reducing the government's exposure from TRIA by increasing the minimum covered event size, raising the insurer deductible, reducing the government share of losses, and increasing the post-event mandatory recoupment. In 2007, the primary change was to accelerate the after-the-fact recoupment. Although the prospective government share of losses has been reduced over time, the 2007 reauthorization also expanded the program to cover losses from acts of domestic terrorism. Both the House and the Senate passed different TRIA extension bills in the 113 th Congress, but final legislation was not enacted. Thus, the TRIA program expired at the end of 2014, as provided for in the 2007 extension.

The initial thresholds of the program when it expired were as follows:

1. A terrorist act must have caused $5 million in insured losses to be certified for TRIA coverage. 2. The aggregate insured losses from a certified act of terrorism must have been $100 million in a year for government coverage to begin. 3. An individual insurer must have met a deductible of 20% of its annual premiums for government coverage to begin.

Once these thresholds were met, the government would have covered 85% of insured losses due to terrorism, with the private insurers retaining 15% of the losses. The government did not charge premiums for this coverage. Instead, if the insured losses were under $27.5 billion, the Secretary of the Treasury was required to recoup 133% of government outlays through a surcharge on commercial property/casualty insurance policies. If insured losses rose above $27.5 billion, the Secretary was required to recoup a reduced amount of the outlays. At some high insured loss level, which depended on the exact distribution of losses, the Secretary no longer was required to recoup outlays but retained the discretionary authority to do so. Under the law when it expired, all mandatory recoupment was required to be completed by the end of FY2017.

Since TRIA's passage, private industry's willingness and ability to cover terrorism risk have increased. According to industry surveys, prices for terrorism coverage have generally trended downward and approximately 60% of commercial policyholders have purchased coverage over the past few years. The price drops and coverage increases, however, occurred under the umbrella of TRIA coverage, and it is unclear how the insurance market would have reacted to a lasting expiration of the federal program.

Legislation in the 114th Congress

Terrorism Risk Insurance Program Reauthorization Act of 2015 (H.R. 26/P.L. 114-1)

Representative Randy Neugebauer introduced H.R. 26 on January 6, 2015, and the House passed the bill by a vote of 416-5 with one Member voting present on January 7, 2015. The Senate passed the bill on January 8, 2015, on a vote of 93-4 and the President signed P.L. 114-1 on January 12, 2015.

The language of H.R. 26 / P.L. 114-1 is identical aside from technical corrections to that of the amended version of the 113 th Congress bill, S. 2244 , which passed the House on December 10, 2014. P.L. 114-1 includes provisions to

extend the TRIA program nearly six years, until the end of 2020; decrease the federal loss sharing gradually from 85% to 80%; increase the program trigger by $20 million per year until it reaches $200 million from $100 million in 2015; increase the insurance marketplace aggregate retention amount by $2 billion per year until it reaches $37.5 billion from the $27.5 billion. After it reaches $37.5 billion, the amount is to be set by the Secretary of the Treasury to equal the annual average of aggregate insurer deductibles for the previous three years; extend the various dates for mandatory recoupment by seven years; change the mandatory recoupment provisions to require that 140% of the federal payments be recouped; require the Treasury to study the certification process and issue final rules governing the process, including a timeline; require the Treasury to collect additional data on the terrorism insurance market and include that data in an annual report; and require a Government Accountability Office (GAO) study on the possible effects of instituting insurer premiums for TRIA coverage and requiring capital reserve funds for terrorism.

In addition to the TRIA provisions, P.L. 114-1 also includes a Title II relating to insurance agent licensing, a section relating to the makeup of the Federal Reserve Board of Governors, and a Title III amending statutory provisions originating in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act relating to derivatives and margin requirements for end users. Similar provisions to Title II and Title III passed the House in the 113 th Congress.

Table 1 below presents a side-by-side analysis of the TRIA law as it existed upon expiration and P.L. 114-1 . A side-by-side comparison of legislation in the 113 th Congress can be found in the Appendix .

Appendix. Previous TRIA Statute and 113th Congress Legislation