5/K - Federal Terrorism Insurance

Question 1

History of Federal Terrorism Insurance

Answer 1

Prior to 9/11/2001:

• Terrorism coverage included in business insurance policies
• No extra premiums

9/11 Effects on Insurance Industry

• $40 billion in damage
• Costs mainly distributed to reinsurers
• Insurers began excluding terrorism due to:
  a. possibility of extensive damage
  b. unpredictable nature of attacks

Companies most susceptible to attacks are essential companies, which provide:

• Transportation
• Construction
• Energy
• Utilities

Uninsured threats to these companies = major threat to U.S. economy

Question 2

Terrorism Risk Insurance Act (TRIA)

Answer 2

• Became a law under George W. Bush in 2002
• Requires commercial insurers to offer terrorism insurance
• Created a reinsurance program as backup for commercial insurers
• Has been amended/extended several times
• Current version, Terrorism Risk Insurance Program Reauthorization Act (TRIP), is set to expire in 2027
• For TRIP to apply, Secretary of Treasury must officially declare an attack to be an act of terrorism

Question 3

Coverage

Answer 3

Act of Terrorism:
Any violent act that is dangerous to human life, probably, or infrastructure and results in damage within the US (or to an air carrier, a US-flagged vessel, or on the premises of any US mission), which is committed in an effort to coerce the US civilian population or influence policy or the conduct of the US Government through coercion

TRIP Coverage

• Insurers required to offer property and casualty insurance to businesses
• Policies must list premium amounts and available government assistance
• TRIP coverage must have same terms, conditions, and coverage as other available coverage as other available coverages from insurer
• TRIP covers residual markets and workers’ compensation funds, but not personal insurance (ex. HO and auto)

Question 4

Insurer Deductible

Answer 4

• Insurer must pay deductibles for TRIP claims before getting help from the government
• Deductible amount for each claim: 20% of premiums collected the year before
• Terrorism Insurance Plan:
  a. until end of 2015, paid for 85% of covered losses
  b. went down by 1% each year until it reached 80%
• Insurers cover remaining losses
• $100 billion cap per year for federal assistance and for insurer payouts

Question 5

Program Trigger/Aggregate Retention

Answer 5

TRIP Thresholds
No federal assistance for terrorist attacks until:
a) The losses from attacks exceeds a certain amount (the program trigger), which:
- in 2015, was set at $100 million
- goes up to $20 million each year
- has stopped increasing in 2020, and is set at $200 million
b) The amount all insurers pay in deductibles and copayments exceeds a certain amount (the aggregate retention), which:
- was set at $27.5 billion per year
- increases by $2 billion every year
- settled at $37.5 billion as of 2020

Question 6

Recoupment/Reporting

Answer 6

When an attack qualifies for TRIP assistance:

• Secretary of Treasury must get back 140% of total payouts
• Policyholders pay extra surcharge of up to 3% of annual premiums to meet this goal

Participating insurers must file yearly reports with Secretary of Treasury, relaying information such as:

• Terrorism losses they cover
• What they earn on terrorism insurance premiums
• How much reinsurance they have bought for terrorism insurance

Information gathered/reviewed, and meetings with NAIC and congress are meant to:

• Identify challenges to insurers who offer terrorism insurance
• Encourage insurers and reinsurers to provide terrorism insurance without federal assistance