Reauthorization of Terrorism Risk Insurance Act Enacted

Posted January 16, 2015

On January 12, 2015, President Obama signed into law a bill that reauthorizes the Terrorism Risk Insurance Act (TRIA), the federal terrorism risk insurance backstop. TRIA, which was allowed to expire on December 31, 2014 by the previous Congress, will now be extended through 2020.

What is Terrorism Risk Insurance?

TRIA was originally enacted in the wake of the 9/11 attacks due to concerns that terrorism insurance had become too scarce and expensive. TRIA established a government reinsurance system, also known as the federal backstop, which allows the insurance industry and federal government to share the losses created by a catastrophic terrorist attack. In exchange for the support of the federal backstop, covered insurers must offer terrorism risk insurance with terms, amounts and other coverage limitations similar to non-terrorism insurance.

Since its enactment, TRIA has brought stability to the insurance industry by allowing insurers to more effectively manage their risk portfolios and determine their potential liability. As a result, covered insurers have been able to offer terrorism coverage at affordable prices, despite the continued threat of terrorist attacks.

Revisions to TRIA

The new law extends TRIA for an additional six years through 2020, and maintains the core function of TRIA while gradually expanding the insurance industry’s responsibility for paying for acts of terrorism.

The extension contains annual increases in the amount of total losses from a certified act of terrorism required before TRIA’s backstop kicks in from $100 million to $200 million. The law also increases the federal government’s mandatory recoupment from $27.5 to $37.5 billion. Additionally, the law raises the private industry total recoupment of covered losses from 133 percent to 140 percent.

Significance

TRIA’s renewal brings stability to the property and casualty insurance market. It is welcome news for the real estate, construction and hospitality industries, all of which depend on terrorism risk insurance as a precondition to finance developments and to maintain operations.

In the absence of TRIA, a reported 750,000 private insurance policies were canceled because their creation depended on the existence of the federal backstop. While terrorism risk insurance remained available after TRIA expired, many expected considerable price increases for these policies.

TRIA’s extension also brings more certainty to the workers’ compensation insurance marketplace. Insurers that offer workers’ compensation coverage are required by law to include coverage for injuries caused by terrorism.

Additional Provisions

Among the new law’s provisions unrelated to the TRIA program is a provision that creates the National Association of Registered Agents and Brokers, an organization that would establish standards that insurance producers would have to meet in order to do business in other states—a departure from the current system that requires producers to meet requirements in their home states and every other state in which they operate.

The new law also contains an unrelated measure that exempts farmers, ranchers, small businesses and other nonfinancial end users of derivatives from capital requirements created by the Dodd-Frank Wall Street Reform Act.

This Compliance Bulletin is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.