Friday, January 9, 2015

Federal Terrorism Backstop Re-authorization Now Seems Certain

In December, Congress adjourned without re-authorizing the federal backstop program for terrorism risks. There has been significant discussion in the news since November regarding what the new Congress would prioritize in the new year. Common discussions included the Keystone Pipeline, Obamacare, and Immigration. With little or no fanfare, Congress acted with swift bipartisan votes in the opening days of 2015 to re-authorize what has commonly been called "TRIA," a backstop for insurance losses in the event of terror attacks in America. TRIA, it turns out, is a priority for the new Congress.

The speed may perhaps have been encouraged by the recent terror events in France. Perhaps news coverage of the start of a major terror trial in Boston this week provides reminders of what can happen. These are tragic events. It is easy perhaps to lump terrorism into one large category. Terror events like Boston and Paris, which are in the news and our collective conscience right now, are troubling and can be risks to the broad insurance industry including workers' compensation markets. The TRIA laws are a backstop for terrorism events in America, but TRIA's application would not apply to these incidents currently in the news, it is limited to events on a very large scale. 

When a terror event occurs there may be significant loss caused in a relatively small geographic area. The September 11, 2001 events are an example of such an event. Something of that magnitude could result in significant losses for insurance companies. And following that attack there was significant doubt in the insurance industry regarding coverage for these kinds of risks. 

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. These laws, generally still referred to collectively as "TRIA," provide “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 after a qualifying terror event, would have to be repaid by the policyholders thereafter, in what is called a recoupment. Thus, it is akin to a loan. And, keep in mind that the reinsurance  or infusion 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.

TRIA/TRIPRA 2007 expired December 30, 2014 because the 113th Congress adjourned without addressing TRIA. The 114th Congress convened Tuesday, January 6, 2015. On Wednesday, the House passed the "Terrorism Risk Insurance Program Reauthorization Act of 2015," or "TRIPRA 2015" on a vote 416 to 5. Hailed as a bipartisan effort. Not to be outdone, the Senate acted Thursday, January 8, 2015, passing the bill on a vote of 93 to 4. If signed, this will extend the TRIA concept through 2020

TRIA/TRIPRA 2015 is not the same backstop, simply reauthorized. The new bill makes changes. Last year, in the event of qualifying losses in excess of $100 million, resulting from terrorism, the federal government would have stepped in and provided relief to a carrier. Under the 2015 plan, that threshold will increase $20 million in each of the next five years, that is in 2016 it will be $120 million, 2017 - $140 million, 2018 - $160 million, 2019 - $180 million, and 2020 - $200 million. 

There is also a "coshare," element of the law, which currently leaves the insurance company responsible for 15% of the loss in excess of the threshold. Under TRIA 2015, that "coshare" will likewise increase incrementally over the next five years, by one percent annually. Thus, by 2020 the "coshare" will be 20%, leaving the federal government to backstop 80% of a qualifying catastrophic terror loss rather than the 85% currently.

There has been criticism of the increased "coshare" and threshold. There will be much discussion as to how the insurance industry may adjust to a marketplace influenced by TRIA/TRIPRA 2015. Actuaries will do the math, carriers will price their products (where they can; some products are generally priced by states, including workers' compensation), and will decide how much risk to assume (how many policies to sell) in particular geographic regions. 

There may be shifts in coverage availability as a result of TRIA/TRIPRA 2015. Some employers may be forced to obtain coverage in some secondary market or state risk pool. The results will be documented, studied, and discussed. When Congress revisits the TRIAsubject in 2020 more will be known as to the effects of these 2015 changes. 

Any such shifts could be immediate as carriers focus on their 2020 horizon, or may occur more subtly over the next five years. Having been faced last year with the expiration of TRIPRA 2007, having stared into the potential of that program ending, it is likely that the insurance industry will be ruminating in coming years upon the "what ifs" of whether there will be a TRIPRA 2020, and if so what that legislation might entail as regards thresholds, "coshare" and more. 

According to a report by Marsh (page 8), uncertainty surrounding the future of this “backstop” program contributed to 2014 uncertainty in  the workers’ compensation insurance markets. The TRIPRA 2015 passage, if signed by the President, alleviates or reduces that uncertainty for the next 5 years. However, if not reauthorized well in advance of expiration, the final year of the extension, 2020, may see similar uncertainty and hesitation as that reported for 2014.

In Baby Hold On, Eddie Money sang "the future is ours to see, whatever will be will be." Then he adds "don't be thinkin' 'bout what's not enough now baby, just be thinkin' 'bout what we got." Perhaps that is the best reaction to TRIPRA 2015. Who knows what the next five years will bring? Well, "whatever will be will be." Who knows what pressures the adjustments in TRIPRA 2015 may bring to the workers' compensation insurance marketplace? It is what we've got, with notable bipartisan support, on the second and third days of the 114th Congress. 

Many predicted the new Congress would address TRIPRA. Some even predicted it would occur quickly. I did not hear anyone predict that Congress would pass TRIPRA 2015 in its first week on the job. 

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