Terrorism and Insurance
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The President signed the Terrorism Risk Insurance Act legislation on November 26, 2002, whereby private insurers and the federal government share the risk of future losses from terrorism for a three-year period. With the President’s signature, all state exclusions for terrorism are rescinded. Insurers, over the next 90 days, must notify existing commercial policyholders of the existence of the federal backstop, offer comparable terrorism coverage and specify the cost of that coverage. Policyholders have the option to accept or decline the coverage, or negotiate other terms. These provisions apply to new policies written after enactment.
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KEY BENEFITS
- This bill brings much needed capacity back to the market at a critical time.
- Without this legislation, insurers were looking at an almost incalculable risk. While still large, the potential risk to individual companies can be quantified and enables the market to function again.
- The bill does not reestablish the status quo that existed before September 11. There has been a fundamental change in the nature of risk in our society -- and the risk of further attacks is real.
- The cost of terrorism coverage will depend on many factors over time, including whether or not there is another event. Current market conditions will not change overnight. There will be added capacity, but individual companies will have to make decisions about the nature and amount of risk they want to insure.
- The reinsurance industry took the most significant hit from September 11, more than half of the losses. They are not currently in a position to assume the same amount of terrorism risk as they were on September 11, which is why the federal backstop is critical.
- Many small- and mid-sized businesses across the country will experience little change. Their premiums are going up for other reasons, but the terrorism coverage itself will not add much to their insurance costs. The major problem remains the threat of chemical, biological, nuclear and radiological attacks on high profile structures or businesses with large concentrations of employees. The bill helps make coverage available, but at least initially, it will be very expensive.
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MAJOR FEATURES OF THE LEGISLATION
- An event has to cause $5 million to be certified as an act of terrorism.
- Each participating insurance company will be responsible for paying out a certain amount in claims – a deductible – before Federal assistance becomes available. This deductible is based on a percentage of direct earned premiums from calendar year 2002. The deductible is as follows:
- 2002 – 1 percent (from enactment through the end of the year)
- 2003 – 7 percent
- 2004 – 10 percent
- 2005 – 15 percent
- For losses above a company’s deductible, the Federal government will cover 90%, while the company contributes 10%.
- If the Federal government pays for insured losses during the course of a year, the Treasury Secretary will be required to recoup the difference between total industry costs (individual insurers’ losses up to their deductibles, plus the industry’s 10 percent cost share above the deductibles) and the following fixed dollar amounts per year:
- $10 billion for 2002 and 2003
- $12.5 billion for 2004
- $15 billion for 2005
- Even with federal support, the insurance industry’s share of the risk is substantial. For example, assuming that the baseline for the program is $125 billion in commercial insurance (direct premium written) and that the next terrorist attack amounts to $30 billion in commercial property and workers compensation loss, the total industry loss would be approximately:
- $11 billion for the remainder of 2002 and 2003
- $14 billion in 2004
- $20 billion in 2005
- The recoupment will be accomplished through a surcharge on all policyholders. The surcharge cannot be more than 3% of the premium paid for a policy in a given year.
- Losses covered by the program will be capped at $100 billion; above this amount, Congress is to determine the procedures for and the source of any payments.
- The III estimates the total insured loss for the World Trade Center, Pentagon and Pennsylvania events is $32.5 billion.
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