With a withdrawal date of 31 December 2005, Nigel Allen asks whether the insurance market will be able to stand when the support of TRIA is taken away?

The Terrorism Risk Insurance Act (TRIA) was never built to last.

Erected in a matter of months following the terrorist attack on the World Trade Center and signed into law on the 26 November 2002, TRIA is a stopgap, a temporary measure put in place to ensure the continued provision of property and casualty terrorism cover. Furthermore, the legislation is clearly flawed, and since its inception has been dogged by demands for clarification on a number of words and phrases, resulting in a stream of government guidelines, interpretive letters and final rules. This is perhaps unsurprising, as in an interview with Wayne Abernathy, former US Treasury Assistant Secretary for Financial Institutions, last year, he explained, "Because we were creating legislation in a hurry for a temporary purpose, Congress created something which had some what would become long-term inequities if they persisted, but were expedients that we needed to rely upon." But temporary or not, flawed or not, few in the industry want to see TRIA dismantled on 31 December 2005.


Has TRIA achieved what it was created to achieve? The act succeeded in preventing the mass withdrawal of insurers from the terrorism market by legislating that insurers continue to offer terrorism cover for commercial P&C losses, although only for losses in the US resulting from acts of terrorism committed by or on behalf of an international terrorist organisation.

However, it is questionable whether the act has been successful in whetting the appetite of reinsurers for the terrorism market. While the act has achieved stability in a marketplace that was reeling in the aftermath of 9/11, it has failed to nurture a private market capable of taking over where TRIA leaves off, a belief which was echoed by Federal Reserve Board Chairman Alan Greenspan in February. Addressing the House Committee on Financial Services, Mr Greenspan said that he remained unconvinced that the insurance industry was in a position to offer a sufficiently sturdy private market for terrorism insurance without the help of a federal backstop.


"Should this program lapse," according to Charles Symington, senior vice president of federal government affairs for the Independent Insurance Agents & Brokers of America, "it could be difficult, if not impossible for businesses to obtain insurance against losses related to terrorist acts, and that could have serious economic consequences in the event of a terrorist attack on American soil." But it is important to remember that the US government is not a reinsurer, its decision to step into the terrorism cover market was one based on exceptional circumstances, and it has always stressed that it has done so on a short-term basis. But as the deadline of 31 December 2005 approaches, the government is asking the question, what next?

"Because of the importance of this element of the war on terror," Acting Assistant Secretary for Financial Institutions Greg Zerzan told members of the Networks Financial Institute's Regulatory Reform Summit at the beginning of March, "insurers and insureds alike should know that this Administration is fully considering all of the possible options in order to make sure that this front is properly covered." Under TRIA the US Treasury is required to carry out a study into the overall effectiveness of the act, the findings of which are to be presented to Congress on 30 June 2005. "Through our study ..." explained Secretary John Snow, US Department of Treasury, "we are seeking to answer the questions Congress posed in the act, such as the financial capacity of the insurance industry, the pricing and take-up of terror risk insurance, whether risk can be priced and managed, the return of reinsurers to the market, and what is the most efficient mechanism to produce insurance for the risk."

There are many US insurance practitioners who are already convinced of the need for the reauthorisation of TRIA. In recent months, a number of bills have been introduced calling for an extension to TRIA either in its current guise or in an amended form, including HR 4634, Terrorism Insurance Backstop Extension Act of 2004 and HR 4772, "Terrorism Insurance Program", both of which seek to extend TRIA through 2007. Such steps have received universal backing from both industry practitioners and bodies alike. Most recently, Congressman Steve Israel (D-NY 2nd) joined Reps Mike Capuano (D-MA), Barney Frank (D-MA), Paul Kanjorski (D-PA), and Joe Crowley (D-NY) in introducing the Terrorism Insurance Backstop Extension Act of 2005 to reauthorise and extend TRIA. The legislation seeks not only to extend the act through 2007, but also to facilitate businesses in sourcing affordable terrorism insurance by ensuring that policies enacted during the last year of the program do not lose their terrorism coverage before the policy expires; to provide mandatory availability for terrorism coverage for policies written in the final two years of the program; to make terrorism reinsurance coverage available to group life insurance policies; and to require the Treasury Department to develop recommendations on long-term solutions to the terrorism reinsurance problem.


Both industry and government are going all out to devise the best strategy going forward, with the insurers actively seeking to work hand-in-hand with Congress to come up with a long-term solution. But such a solution cannot be one based on the US government leaving its hat in the reinsurance ring.

The US Senate Committee on Banking, Housing and Urban Affairs is scheduled to conduct an oversight hearing on the Terrorism Risk Insurance Program (originally scheduled for 3 March 2005, the hearing was postponed and at the time of writing a new date has not been announced). As of the original date for the meeting, industry practitioners, representatives and officials due to attend include: Dr Douglas Holtz-Eakin, director, Congressional Budget Office; Ernst Csiszar, president and CEO, Property Casualty Insurers Association of America; Brian Duperreault, chairman of ACE Ltd; and Hon Howard Mills, superintendent, New York State Department of Insurance.

Ernst Csiszar has already outlined a number of alternative solutions to tackling the long-term problem, which include:

- Federal support giving insurers and insurance markets more freedom to negotiate terms and conditions of coverage by overriding state requirements on pricing and prohibitions of exclusions.

- Accepting an increase in retention levels so that private insurers accept more of the responsibility for paying terrorism insurance losses, coupled with a program that allows insurers to reduce their own individual retention levels.

- Enabling the industry to form a tax-exempt entity or entities to provide reinsurance or to allow companies to reduce their individual company retention level to some manageable level.

- Allowing the accumulation of funds through the establishment of individual company tax-deferred reserves.

Despite its failings, it is clear that TRIA remains a mainstay for the insurance industry. While the industry cannot and does not expect the US federal government to maintain this financial strut indefinitely, a long-term solution must be found, and it is clear that this can only be achieved by industry and government working together.

- Nigel Allen is editor of Global Reinsurance.


At present, some insurers who are offering terrorism cover are issuing conditional terrorism exclusion endorsements, which allow the carrier to exclude such cover should TRIA not be reauthorized. In its Insurance Market Overview, Aon stated that it believed that if TRIA is not extended, even those who continue to provide cover will seek to limit the extent of their coverage. The report highlights the fact that some policyholders are considering freestanding terrorism cover and the option of purchasing such coverage for a fixed premium. As the pie chart shows, some 56.2% of all Aon property policyholders currently purchase some form of terrorism insurance.


The US Congressional Budget Office (CBO) carried out a study into the potential cost impact to the US government of enacting the Terrorism Insurance Backstop Extension Act of 2004 (HR 4634). Under HR 4634, which seeks to extend TRIA to 2007, insurers would be subject to a 15% retention in 2006, rising to 20% in 2007. The government would cover 90% of any claims up to a limit of $100bn. The act would also see the cover extended to group life insurance policies.

The study findings were released last year, and were based on the act being passed by the end of 2004. The CBO estimated that by enacting HR 4634 and extending TRIA to 2007, this would increase direct spending by approximately $1.1bn over the period 2005-2009, and by $1.3bn over the next ten years, while governmental revenues would rise by $480m over the 2005-2014 period.

Estimates for potential terrorist losses were compiled based on discussions with insurers and information provided by the insurance industry, while the CBO consulted industry actuaries and reviewed terrorism risk models in estimating the expected cost of federal assistance.