Thursday, December 18, 2014

Congress Adjourns - No TRIA Re-Authorization Yet

Will the federal government reauthorize "TRIA" and reinforce workers’ compensation insurance markets? The answer remains “I don’t know.” 

In the Hollywood classic, Fast Times at Ridgemont High, a history teacher, Mr. Hand, asks the protagonist, Mr. Spicolli, a relatively simple question. Mr. Spicoli answers in a classic, clueless “I don’t’ know.”  Mr. Hand sarcastically writes this answer on the board “for all my classes to enjoy.” What a great answer, right? It is a lighthearted moment, in which a rudderless teenager’s inability to postulate or even speculate is made light of. 

Unfortunately, Congress adjourned this week without addressing the reauthorization of the federal program that provides a government risk-sharing, or "backstop," when an act of terrorism causes significant insurance losses. The news has been full of what congress did accomplish in the waning days if this session, but this omission may have a significant impact on workers’ compensation.

Workers’ compensation is mandated for at least some employers in 49 United States jurisdictions; Texas and Oklahoma have made workers’ compensation optional. Some argue that it has long been optional in New Jersey also, but that contention will raise an argument. So call it 48 states and D.C. There are businesses that do not have to have workers’ compensation even in the 49 jurisdictions, typically small employers. There are many variations in the how and how much of what workers’ compensation must provide. It is a state-run program, but with federal influences and involvements.

One aspect of states’ workers’ compensation has been federalized with little fanfare following the terrorist attacks on September 11, 2001. That attack illustrated the risk associated with “employee concentrations.” That is, the risk of having significant portions of any carrier’s risk pool concentrated in one geographic area.

The insurance industry is built upon a foundation of spreading risk across large populations, so that there may be loss in any one location or population subset, but the absence of losses in other subsets will offset the loss. If the potential risk is fire, the idea is that one house may burn in Indianapolis, but the carrier’s other insured buildings in Columbus and Scranton do not burn.

All of the policyholders pay premium, but most of their homes do not burn. In another example, wind damage is much more likely in the hurricane beach-front environment than in Tennessee. While a carrier might insure a Pensacola home against wind damage, it might not want to insure a large volume of Pensacola homes in that regard. If it did choose to, a single wind event like Hurricane Ivan might present significant losses. Likewise a carrier might insure some homes against earthquake, but not a large volume of San Francisco homes.

In the context of workers’ compensation, underwriters can predict the probabilities of loss in a given geographic, occupational, age, or other demographic. What is more difficult to predict, more so perhaps than even natural disasters, is the probability of loss from terrorism. The injuries and exposures that followed that terrorist attack on September 11 were significant, and concentrated in New York City.

Following September 11, 2001, insurers became cautious about how much casualty risk they underwrote in a particular geographic area to avoid the disproportionate risk of an attack and its effect on predictable underwriting estimates. The losses in New York were in the tens of billions of dollars. Workers' compensation losses from that event continue to this day. 

While there was some effort to exclude terrorism from coverage in general liability policies and property policies, that is impractical in workers’ compensation policies. Unlike other casualty policies, workers’ compensation coverage is required by law. Coverages became difficult to obtain in some metropolitan areas. Prices in most states are set by state regulation, and therefore, carriers’ choices were limited regarding such risks.

Unable to price their coverage in relation to their perceived terror risk, carriers instead elected to limit their exposure by writing less policies in particular locations. This decreased availability of voluntary insurance coverage drove some employers into what is called the residual market. This includes assigned risk pools and other insurers of last resort where high-risk employers have traditionally sought coverage. 

This had a marked effect on small employers. However, even some large employers felt the effect. One insurance executive related to me that his own company would not insure some of its own operations in Manhattan, and instead had sought to diversify its risk by insuring certain of its business units there with other carriers. Imagine an insurance company unwilling to underwrite its own risk because of geographic location and the risk of terrorism.

The federal government stepped into that uncertainty with the Terrorism Risk Insurance Act (TRIA) passed in 2002. It was reauthorized as the Terrorism Risk Insurance Extension Act (TRIEA) in 2005 and as the Terrorism Risk Insurance  Program Reauthorization Act (TRIPRA) 2007. This law, generally still referred to as TRIA, provides “reinsurance” from the full faith and credit of the United States. In the event of losses in excess of a defined level (currently $100 million), resulting from terrorism, the federal government would step in and provide relief to a carrier, to offset its catastrophic losses from that event.

It is not a government hand-out. The TRIA reinsurance, or temporary cash infusion to the carrier, would have to be repaid by the policyholders thereafter, in what is called a recoupment. And, keep in mind that the reinsurance is only payable to the carriers, under the current law, if the loss exceeds 100 million dollars, and if the event or occurrence is certified as an act of terrorism.

That law will expire in December 2014. That sentence has been uttered many times in the last 18 months, with the conclusion “unless reauthorized.” Much hand-wringing has already been done in the market. Until this week when Congress recessed, there was still much faith (or hope perhaps) that there would be reauthorization before that deadline. That hope was in vain, the Senate adjourned without passing reauthorization. But, it is possible that reauthorization will be passed early in 2015.

There is uncertainty in the marketplace regarding the probability of reauthorization. This U.S. Treasury program (TRIA/TRIEA/ TRIPRA) on terrorism act provides a “shared public and private compensation for certain insured losses resulting from a certified act of terror.” The program is not a federalization of workers’ compensation per se, but an example of the federal government exerting influence in the state workers’ compensation risk market. 

According to a report by Marsh (page 8), uncertainty surrounding the future of this “backstop” program has already been contributing to uncertainty in  the workers’ compensation insurance markets.
TRIA/TRIEA/TRIPRA is likely pressuring state premiums upward as carriers prepare for the contingency that such terrorist risks will again be theirs to underwrite without federal assistance, if the program is not extended. Many businesses will renew their workers' compensation and other insurance in the first quarter of 2015.

If the act is not re-authorized, the effects are predicted to be significant. A main focus of the effect may be on small, higher risk, employers in urban centers. The impact could be significant. 

For there to be re-authorization, there may be adjustments needed in specifics, such as the size of the “triggering loss” if it is reauthorized. That was raised from 50 million dollars to the current 100 million in the 2007 re-authorization (TRIPRA). Perhaps there is room for other adjustments or tweaking. 

It is hard to tell whether there is real opposition to re-authorization generally, as compared to there being real debate as to the exact parameters that a re-authorization should contain. Certainly, the concept should be discussed and debated. To anyone who sees no merit in debating re-authorization in some form, Mr. Hand of Ridgemont High might ask “what are you people, on dope?”

The foregoing was adapted from Langham,  How Huge is it,  The Lex and Verum, Volume LVII, June 2014, http://www.nawcj.org/docs/newsletters/newsletter_2014-06.pdf

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