As expiration of the Terrorism Risk Insurance Act looms, industry leaders seek solutions
By Phil Zinkewicz
Congress has been known to let federal laws lapse in the past, most notably the federal flood and crop programs. Consequently, the insurance industry is moving now to persuade Congress to act before the 2005 deadline.
On November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act (TRIA). As new laws go, TRIA was a relatively short time in the making. Consider, for example, that it took more than a decade for Congress to finalize a law that brought about financial services deregulation. Even so, the passage of TRIA took longer than insurance industry representatives would have liked, considering the national concerns after the 2001 terrorist attacks.
Following September 11, with the resulting huge losses that were immediate and those that still lay ahead, most insurers recognized the need for a federal reinsurance backup to protect the industry from total collapse should another terrorist attack of the magnitude of the World Trade Center and Pentagon disasters occur. Federal, state and local politicos all called on Congress to pass a backup law. Industries such as insurance, construction and real estate all made their voices heard as they heralded the importance of such legislation. Even President Bush strongly impressed upon Congress the need for a reinsurance backup plan. Finally, after a little more than a year, Congress came to an agreement on how the backup law should be structured.
Upon signing the bill, President Bush put the need for backup legislation into perspective: "The attacks of September 11, 2001, leveled buildings, devastated lives, and seriously, seriously disrupted our economy. Businesses suffered. The stock market halted trading. Many insurance companies stopped covering builders and real estate owners against the risk of attack. Premiums skyrocketed. Protections were diminished. Across America, hospitals and other office buildings and malls and museums and construction jobs and many transportation companies have had difficulty finding terrorism insurance."
President Bush continued, "More than $15 billion in real estate transactions have been canceled or put on hold because owners and investors could not obtain the insurance protection they need. Commercial construction is at a six-year low, and thousands of hard-hat workers have been kept off the job. Commercial mortgage-backed securities have seen their bond ratings lowered, hurting many Americans invested in the bond market, including teachers and police officers and firefighters, who have lost money in their pension plans. By helping ensure that terrorism insurance is affordable and available, the Terrorism Risk Insurance Act will permit many construction projects to move forward and thus help the economy grow."
And so TRIA was born. There were problems with the law, to be sure. A great many gray areas still exist today, and many questions have been left unanswered. Nevertheless, the law has brought some stability to the insurance marketplace.
The problem is that TRIA is set to expire December 31, 2005. That may seem some time away, but Congress has been known to let federal laws lapse in the past, most notably the federal flood and crop programs. Consequently, the insurance industry is moving now to persuade Congress to act before the 2005 deadline.
Brokers speak out
For example, the Independent Insurance Agents & Brokers of America (IIABA) recently joined with The Council of Insurance Agents and Brokers (CIAB), the American Insurance Association, the National Association of Professional Insurance Agents, the Property Casualty Insurance Association of America, the Reinsurance Association of America, the Surety Association of America, and the UWC-Strategic Services on Unemployment and Workers' Compensation to call for "timely congressional action to renew TRIA." In letters to House Financial Services Chairman Michael Oxley (R-Ohio) and Senate Banking Committee Chairman Richard Shelby (R-Ala.), the industry groups urged for extension of TRIA or passage of a modified program. State insurance regulators are also urging Congress to take action.
Says IIABA Senior Vice President of Federal Government Affairs Charles Symington, Jr.: "Since its inception, TRIA has made terrorism insurance available to all types of businesses, including those in areas considered at high risk for terrorist attacks. TRIA has been an excellent public-private partnership, and it has provided the security our free-market system requires to flourish. We must be certain this program, or a similar program, is in place in order to safeguard businesses and consumers against terrorism losses. Without a federal backstop, we risk losing our nation's hard-earned, recent economic gains."
The CIAB recently conducted a survey which showed that 80% of the leading commercial property and casualty insurance brokers say that TRIA should be extended when it expires at the end of 2005. The council represents the nation's largest commercial insurance brokers, who write 80% percent of the P-C premiums and administer billions of dollars of employee benefit accounts annually.
The CIAB reports that one broker from the Northeast says: "TRIA has not motivated the reinsurance markets to provide terrorism cover. Without TRIA, primary carriers will revert to excluding coverage. While mostly a problem for the larger commercial risks in high-profile cities and regions, a lack of coverage would have a negative effect on the economy, jobs and society." Another broker from the Midwest says: "Carriers are already voicing concerns they cannot afford another large event. If TRIA is not extended, the number of clients and locations that cannot obtain terrorism coverage will increase. The commercial property development market will have problems."
According to Ted Pappas, president of the McLaughlin Co. in Washington, D.C., the TRIA situation is particularly problematic for the nation's workers compensation insurers. "TRIA is set to expire in December of 2005. What made anyone think that this should be a three-year program? The terrorism threat is ongoing. TRIA should be as well."
Pappas says the workers compensation problem is particularly troublesome in Washington, D.C.--a "ticking time bomb," he calls it. "There is no time limit on work-related deaths in Washington, D.C. "That means an insurer has to put up about $2 million in reserves for each work-related death. The National Geographic building is about a half-mile from my offices. It houses about 1,100 employees. That would mean an insurer would have to reserve $2 billion should a terrorist event occur. The Washington Post, six blocks from the White House, has 1,500 employees. Areas with a high concentration of employees are particularly at risk--New York, Chicago and D.C."
Lack of capital for comp losses
A recently released study supports Pappas' suppositions. "The private insurance industry for workers compensation (WC) would not have enough capital to withstand potential losses on its own should a catastrophic terrorism event, or multiple events, occur," according to the Workers Compensation Terrorism Reinsurance Pool Feasibility Study conducted by the Tillinghast and Reinsurance businesses of Towers Perrin.
Tillinghast says the study represents the first serious effort the industry has made toward exploring the viability of private market solutions to help manage the threat of terrorism for WC insurance. "The Terrorism Risk Insurance Act (TRIA), which expires on December 31, 2005, was enacted in 2002 in part to provide a temporary window of relief so insurers could develop private market solutions to manage the ongoing risk of terrorism," the study says. "Terrorism and insurance experts have conceived of plausible catastrophic terrorism events that generate workers compensation losses of $90 billion or more, roughly three times the $30 billion in capital backing the workers compensation line of business."
The study acknowledges the potential value of a voluntary reinsurance pool to some individual insurers, but points to its limitations as a meaningful industry solution, particularly absent some form of ongoing federal backstop protection. "A voluntary WC industry reinsurance pool would not create 'new' capital in and of itself to support catastrophic terrorism losses, though it would diversify risk and thereby increase the efficiency with which existing capital is deployed," the study says.
"Although the idea of an industry risk-sharing pool has been considered one of the most promising private market solutions for managing terrorism risk to date, the study concluded that this alone falls well short of addressing industry needs," says Charles Wolstein, who led the Workers Compensation Terrorism Study on behalf of the firm. "The study serves as a starting point for further discussion; its analysis should help those evaluating the need for a federal backstop to understand the magnitude of the problem and the limitations of the private market's capacity to manage this risk. It also will be an excellent resource for those looking to structure any new federal backstop program."
"Terrorism is still very much a concern for U.S. business, and the recent bombings in Madrid further underscore the possibility of future attacks. A public/private partnership is critical to managing future terrorism risk for WC insurance post-TRIA," says Stephen Lowe, Tillinghast's global P-C insurance practice leader. "The industry needs to begin working with Congress now on developing such a partnership to avoid the potential for significant marketplace disruption in the event of major losses from future terrorist attacks."
According to the study's authors, the statutory nature of workers compensation insurance makes it fundamentally different from other lines of insurance, creating a unique situation for the WC market. Unlike property insurance, WC providers cannot introduce terrorism coverage exclusions, nor can they limit their potential losses on any policy. WC insurers are obligated to pay wage loss and medical benefits to workers injured on the job--without regard to cause and without limit.
"The complexities and magnitude of terrorism risk are extraordinary and there would be vast implications for the WC insurance market and U.S. businesses should a major terrorism event occur without a federal reinsurance mechanism in place," says Lowe. "A major event could be greater than the entire base of capital that is supporting the WC insurance market, tearing away a structurally critical piece of the economy. Since WC insurance is required in virtually all states, the absence of a functional WC insurance market would interfere with the conduct of business throughout the economy."
Hard choices
"Post-TRIA, insurers will be left with two options to manage the risk of catastrophic losses from terrorism--curtail workers compensation policies or obtain catastrophic protection from a third party," says Bruce Hockman, principal and workers compensation practice leader for Tillinghast's reinsurance business. "However, without a federal backstop in place, it is unlikely that commercial reinsurance, the industry's traditional source of catastrophe protection, would be available in sufficient quantities, or at affordable prices, to meet marketplace demand."
"We're now midway through TRIA and are starting to see the industry thinking about how their businesses will work without it, as the very real prospect of TRIA's expiration looms," says Wolstein. "Although TRIA remains in effect until December 31, 2005, policies written as early as January 1, 2005, will extend beyond TRIA's coverage, presenting a significant dilemma for insurers."
Adds Wolstein: "The study laid the foundation for future work on an industry pool. It's a reasonable possibility that a pool could be created someday; however, the sponsors concluded that it would only make sense to pursue further dialogue 'if and when' the form of ongoing federal backstop protection becomes clearer." He notes, "Hypothetically, a pool can only address 10% of the problem. Until the other 90% is addressed, it wouldn't make sense to undertake the considerable effort necessary to develop the pool. Currently, a federal mechanism appears to be the only viable means of addressing the lion's share of terrorism risk for workers compensation."
Pappas says that Congress should be considering the renewal of TRIA right now, in advance of the renewal date. "It shouldn't become a political football as we've seen happen to the federal flood program and the federal crop program. TRIA should not be held hostage by Congress and special interest groups," he declares. *