Terrorism Risk Insurance Program an Industry Priority in 2014

Winter 2013

The U.S. Capitol was consumed this fall with budget showdowns, government shutdowns and legislative gridlock. As a result, weighty public policy issues of importance to the commercial real estate industry — including the future direction of tax policy, energy legislation and transportation funding — have been left unresolved. As we move into 2014, we can add to this list of unfinished business another item: renewal of the federal terrorism risk insurance program, which is due to expire at the end of 2014. Unless this program is renewed early in the year, commercial real estate developers and investors will face disruptions in the availability of property and casualty insurance that offers terrorism coverage, a key requirement for financing major projects.

After the terrorist attacks on the World Trade Center and Pentagon that occurred on September 11, 2001, property and casualty insurers began to exclude explicitly coverage for any damages caused by intentional acts of terrorism. (Before then, it was presumed that terrorism was covered under property and casualty insurance.) The insurance industry, however, sustained about $40 billion in losses (in 2010 dollars) as a result of the 9/11 attacks. The ensuing disappearance of terrorism coverage in what was already an atmosphere of uncertainty and fear created an additional hit to the commercial real estate industry. Without adequate insurance, building owners would have been unable to finance property sales or refinance existing debt, resulting in a lack of liquidity that would have severely hampered commercial real estate markets.

Congress responded by passing the Terrorism Risk Insurance Act of 2002 (TRIA). Originally intended to be a temporary program to allow the private insurance market to develop its capacity to cover acts of terror, the program has been updated on two separate occasions and extended through the end of 2014. TRIA created a federal risk-sharing program with the insurance industry, providing some certainty to the industry that losses would be limited and requiring that insurers make terrorism risk coverage available in their policies. In order to protect the taxpayer, Congress included payback mechanisms that were to become effective after a terrorist incident took place. These mechanisms were designed to recoup any amounts paid to insurers under the program.

Under TRIA, an act of terrorism first would have to be certified as such by the secretary of the treasury, the secretary of state and the attorney general. The federal government would share in the insurer’s losses only if the insurance industry’s aggregate losses exceed $100 million. Each insurer is responsible for paying out a certain amount in claims (its “deductible”) before receiving federal coverage. The amount of the insurer’s deductible is proportionate to its size, equaling 20 percent of the insurer’s annual earned premiums of commercial lines specified in the legislation. 

Once losses exceed the $100 million threshold and each insurer has paid out its deductible, the federal government will cover 85 percent of the losses, with insurers paying the remaining 15 percent. There is an aggregate program cap of $100 billion, after which there is no federal coverage nor any requirement that insurers offer terrorism insurance. After the occurrence of a terrorist incident in which the federal government pays out under TRIA, the secretary of the treasury is required to put in place recoupment mechanisms — primarily surcharges on future insurance premiums — to recover the costs from insurers.

Although TRIA was meant to be temporary, the reality is that the private insurance market has not developed the capacity to provide adequate terrorism coverage. Unlike other insurable events such as hurricanes, for example, for which insurance companies have developed the capacity to project expected losses and calculate what they need to charge as premiums, intentional acts of terrorism and their potential damage do not lend themselves to actuarial analysis. Extending the TRIA program therefore is critical for the commercial real estate industry, to ensure that terrorism coverage remains available.

NAIOP, as a member of the Coalition to Insure Against Terrorism, is an active participant in negotiations on Capitol Hill to renew the program. Continuation of TRIA, however, will be an uphill climb because of the opposition of many in Congress, on both the right and the left, to perceived government “bailouts” of industry. Congressman Jeb Hensarling (R-Texas), the chairman of the congressional committee with jurisdiction over TRIA, was an opponent of the original legislation. He has stated that he will approach renewal of TRIA “with an open mind, but not an empty one,” meaning that he will demand changes to the program. One thing  is certain — NAIOP will be there to advocate on behalf of its members on this important issue.