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Why Reauthorizing the Terrorism Risk Insurance Act Is Important for States Table of Contents!
Preface ......................................................................................................................................... 2 Introduction ................................................................................................................................... 3 The Evolution of TRIA ................................................................................................................... 4 Chart 1: TRIA and Its Extensions .......................................................................................... 6 The Importance of TRIA ............................................................................................................ 6 How TRIA Works ....................................................................................................................... 7 TRIA Provisions ........................................................................................................................ 7 Fire Following a Terrorism Event .............................................................................................. 8 Understanding the Terrorism Insurance Market ........................................................................... 8 Availability and Affordability of Terrorism Coverage ................................................................. 8 Capacity Issues ..................................................................................................................... 9 Exposure Caps ...................................................................................................................... 9 Growing Demand for Terrorism Insurance .............................................................................. 10 Chart 2: Terrorism Insurance Take-Up Rates by Year ........................................................ 10 Workers Compensation Insurance .......................................................................................... 10 Why TRIA is Still Necessary ....................................................................................................... 11 Terrorism Concerns ................................................................................................................ 11 State Insurance Regulators Position ...................................................................................... 12 Potential Negative Consequences if TRIA is Modified or Expires .............................................. 13 Modifications ........................................................................................................................... 13 Expiration ................................................................................................................................ 14 Economic Impact ................................................................................................................. 14 Insurance Industry Impact ................................................................................................... 15 State Government Impact .................................................................................................... 16 Recommendation: Reauthorize TRIA Now ................................................................................. 16 Conclusion .................................................................................................................................. 16!

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Preface
The Terrorism Risk Insurance Act (TRIA) is vital to protecting the U.S. economy from losses incurred as a result of a domestic or foreign terrorism act. It has been extremely successful in allowing insurers to offer terrorism coverage to commercial insurance customers in multiple markets that are important to the nations economic growth and job creation. The program is fiscally responsible in that it reduces the need for government catastrophe assistance after a catastrophic terrorism event, has cost taxpayers almost nothing so far and is highly unlikely ever to cost taxpayers anything except in the case of the most catastrophic events. TRIA is set to expire December 31, 2014 unless its reauthorized. If TRIA is allowed to expire, the consequences could be disastrous for states and private investors wanting to finance and insure infrastructure projects, large-scale public events as well as for businesses that are required by state law to maintain workers compensation insurance since their coverage could be dropped or rates increased. Why Reauthorizing the Terrorism Risk Insurance Act Is Important for States is a white paper based on research from insurance industry sources and written by My Campaign Group for the Democratic Governors Association, Center for Innovative Policy. This paper explores the federal legislations history and its purpose, and argues why its reauthorization by Congress is necessary to preserving the current health of the nations economy as well as the national and individual state economies in the event that a terrorist act occurs. Democratic governors are encouraged to understand how important TRIA is to protecting their respective states economic interests, and to support its prompt reauthorization in order to adequately safeguard public assets and limit taxpayer losses from a catastrophic terrorist act. State economies depend on TRIA in a number of important and diverse ways. The following are specific state examples: Approximately 70 percent of Californias electricity comes from power plants in the state, and is distributed across hundreds of thousands of overhead and underground utility lines vulnerable to a terrorist attack. Popular events in Delaware, such as Dover Days Festival and Lewes Boast the Coast Maritime Festival, respectively attracting about 25,000 and 10,000 people annually wouldnt be possible without TRIA. TRIA enables the protection of about 1.6 million workers in Connecticut and many private commercial properties, like One Financial Plaza and City Place 1, in addition to protecting thousands of hotels, restaurants and retail establishments serving the millions of tourists that visit the Constitution State each year.
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Illinois multitude of high-value real estate, such as the Willis Tower and Trump International Hotel and Tower, are protected by private insurers because of TRIA, along with popular community events such as the Taste of Chicago that drew up to 1.5 million visitors this year, Bank of America Chicago Marathon, Lollapalooza 2013, the Star Trek Convention and more. TRIA supports 19 projects recently approved under the Massachusetts Economic Development Incentive Program, which are expected to create more than 2,347 new jobs and retain 3,102 existing jobs, while also leveraging nearly $406 million in private investment and supporting construction projects throughout the Commonwealth. Phase 1 of the St. Louis Cardinals Ballpark Village in Missouri, costing more than $100 million and creating more than 1,000 construction jobs and 500 permanent jobs, may not have been accomplished without TRIA. The Greater Burlington region in Vermont contains hundreds of small manufacturers producing a wide variety of products; many national and international manufacturing businesses have plants there that also support attendant service businesses protected by TRIA.

Democratic governors are urged to recognize the need and urgency of maintaining a federal risk management plan for terrorism and whats at stake if Congress modifies TRIA or allows it to expire.

Introduction
Economists and government officials agree that terrorism is one of the greatest threats facing the U.S. economy. Although the federal government and states have enhanced security efforts over the years, terrorism still poses a legitimate and persistent threat to our nation and public assets, as recently illustrated in Boston. Moreover, the nature of terrorist risk continues to change and evolve with conditions in line with U.S. foreign policy and developments across the globe, including Syria, Iran and North Korea. Terrorism is clearly a public risk a risk that needs to be managed through U.S. foreign policy and national security and financed through a continued public-private partnership with the insurance industry. At the same time, terrorism isnt a risk that can be privately insured. Terrorism risk simply doesnt meet the conditions for a privately insured risk (i.e., that insurance can protect from fortuitous yet statistically predictable loss). First, while risk models can project the severity of losses from a hypothetical terrorist attack using conventional weapons, they cannot predict the frequency or likelihood of terrorist attacks and theres no precedent for assessing the potential cataclysmic losses associated with a terrorist attack using nuclear, biological, chemical or radiological (NBCR) weapons. These facts
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alone, combined with little historical and simulated data on terrorist attacks, would make it challenging to price coverage.1 However, second, unlike natural disasters, terrorism isnt a random act of nature, but a purposeful act of a terrorist intent on avoiding detection and inflicting the maximal damage possible to the U.S. economy. As such, the unpredictability of a terrorist act derives not just from a lack of historical data, but also from the terrorists modus operandi to constantly change tactics to avoid interdiction, and thereby invalidate any credible basis for prediction. Third, given the potential magnitude of a large terrorist attack, terrorism isnt an independent risk. A single terrorist attack can create significant loss across a wide array of buildings, structures and insurance policies as witnessed on 9/11/2001. In summary, terrorism simply lacks the conditions for insurability: its not measurable, losses are not independent across policyholders and the maximum size of a loss can easily outstrip industry financial capacity.2 Given this reality, the federal government recognized that its not feasible to assume that the private insurance system can handle this public risk without government support. As a result, Congress created the Terrorism Risk Insurance Act in 2002, as a valuable public-private partnership for managing the risk of terrorism. TRIA has been a success in stabilizing the U.S. economy and fortifying our economic defense against future attacks.

The Evolution of TRIA

Congress passed TRIA on November 26, 2002 following the September 11, 2001 terrorist attacks. The legislation created a federal backstop for insurance claims associated with terrorist events that occur in the U.S. In essence, TRIA is a risk management mechanism for privately insured commercial property and casualty losses occurring from certified acts of terrorism. TRIA was originally intended to do three key things:3 1. Address market disruptions subsequent to the 9/11 terrorist attacks; 2. Ensure commercial property and casualty terrorism insurance is available and affordable; and 3. Enable private markets to stabilize and build capacity, while also safeguarding state insurance regulations and consumer protections.
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Terrorism Risk Insurance Act (TRIA), the Economic Case for a Public-Private Partnership, Swiss Re, Economic Research & Consulting, September 2013, http://media.swissre.com/documents/Terrorism_Risk_Insurance_Act.pdf 2 Ibid. 3 Terrorism Risk Insurance Act Backgrounder, Property Casualty Insurers Association of America (PCI), http://www.pciaa.net/web/sitehome.nsf/lcpublic/6/$file/TRIA_Backgrounder_011813.pdf

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The 2005 Terrorism Risk Insurance Extension Act (TRIEA) amended the original legislation, which was amended again by the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007. Both reauthorizations included modifications from the original legislation. For example, commercial auto, burglary and theft, surety, professional liability (except for directors and officers liability) and farm owner multi-peril insurance were excluded starting with the 2005 reauthorization, although most other types of commercial insurance lines are still covered.4 Terrorism losses attributed to non-TRIA coverage lines, such as group life, private passenger auto and homeowners insurance arent covered under TRIA.5 The Insurance Information Institute (III) reports that less than half of the property and casualty insurance premiums are written in lines of insurance backstopped by TRIPRA.6 The program, however, still covers many, but not all, lines of commercial property and casualty insurance. Chart 1 on the following page provides an overview of TRIA and its extensions.

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!Terrorism Risk: A Continuing Threat, Insurance Information Institute (III), September 2012, http://www.iii.org/assets/docs/pdf/paper_Terrorism_090612.pdf! 5 Ibid. 6 Ibid.!

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Chart 1: TRIA and Its Extensions

November 26, 2002 December 31, 2005 Terrorism Risk Insurance Act of 2002 (TRIA) Covered acts committed by individual(s) acting on behalf of any foreign person or interest to coerce the civilian population of the US or to influence the policy or affect the conduct of the US government by coercion. US only. $5 million $5 million 7% in 2003, 10% in 2004, 15% in 2005: Applied against prioryear direct earned premium. Subject to certain property and casualty insurance lines. 90% January 1, 2006 - December 31, 2007 Terrorism Risk Insurance Extension Act of 2005 (TRIEA) Covered acts committed by individual(s) acting on behalf of any foreign person or interest to coerce the civilian population of the US or to influence the policy or affect the conduct of the US government by coercion. US only. $5 million $50 million in 2006, $100 million in 2007 17.5% in 2006, 20% in 2007: Applied against prior-year direct earned premium. Subject to certain property and casualty insurance lines. 90% in 2006, 85% in 2007 January 1, 2008 - December 31, 2014 Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA)

Term Official Legislative Name

Coverage Summary Territory Certification Threshold Federal Backstop Trigger

Eliminated the distinction between the acts of foreign or domestic terrorism. US only. $5 million $100 million 20%: Applied against prior-year direct subject earned premium. Subject to certain property and casualty insurance lines. 85% Formula will be calculated using several factors: the size of the total loss, the amount of the industry aggregate retention as defined, the amount that the insurers actually retain and the amount the of the federal government reimbursement. Theres no maximum on the amount that will be applied to future policyholders' premiums. For events that occur after 1/1/2012, the mandatory portion of any recoupment must be collected by 9/30/2017.

Insurer Retention Government Share Excess Retention

Recoupment

Included with discretion on part of Secretary of Treasury subject to maximum 3% per year applied to policyholders' premiums.

Included with discretion on part of Secretary of Treasury subject to maximum 3% per year applied to policyholders' premiums.

Source: Marsh Property Practice

The Importance of TRIA

TRIA protects Americas economic resiliency and essentially offers stakeholders a level of certainty they can count on before and when a disaster strikes. The program helps policyholders obtain financial compensation in a timely manner after a terrorist event occurs. According to a research initiative conducted by GS Strategy Group on behalf of the Property Casualty Insurers Association of America (PCI),7 citizens place a great deal of importance on a national risk management plan, like TRIA, being in place to protect the U.S. economy from major losses associated with a catastrophic terrorist
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Terrorism Risk Insurance, survey conducted by GS Strategy Group on behalf of Property Casualty Insurers Association of America (PCI) Research Initiative, January 12-26, 2013

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attack. The public also believes that responsibility for these costs should be a combination of the federal government and private insurance companies, and that the threat of terrorism is a national issue affecting both urban and rural areas.8

How TRIA Works

The TRIA program ensures that terrorism insurance is available to sectors, such as financial services, banking, construction and real estate, of the economy for which its critical. It does this by requiring insurers to offer terrorism coverage and to retain a significant portion of the risk. A federal backstop is available to insurers only in truly catastrophic events. However, the backstop isnt triggered unless a terrorism act is certified by the federal government. Acts committed in the U.S. by both domestic and foreign terrorists are covered. The program is structured so that insurers, not taxpayers, are responsible for the majority of the financial loss. Any federal compensation for insured losses is recouped from the insurance marketplace with the Secretary of Treasury empowered to make exceptions only for the most catastrophic losses. TRIA requires insurers to offer terrorism coverage for commercial property, workers compensation, commercial general liability and various other commercial insurance lines at comparable terms and conditions with other perils. The backstop does provide coverage for nuclear, biological, chemical and radiological (NBCR) terrorism losses as well as cyber terrorism losses, provided that this coverage isnt generally excluded for other risks on the underlying policy. !

TRIA Provisions

Program Trigger: The private sector directly absorbs the costs of any terrorist attacks unless there are more than $100 million in aggregate certified losses in a calendar year. If certified terrorism losses exceed $100 million in a calendar year, then the federal compensation still isnt triggered for any individual insurer unless the losses exceed that insurer's TRIA deductible. Individual Insurer Deductible: An insurer's deductible is 20 percent of its prior year earned premiums from TRIA-covered lines of insurance. No federal payments are extended under TRIA unless both the program trigger and an insurer's deductible have been exceeded, and even then only for a portion of the insurer's certified losses exceeding its deductible.

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Property Casualty Insurers Association of America (PCI) Testimony on Terrorism Risk Insurance before the U.S. House of Representatives Committee on Financial Services Subcommittee on Housing and Insurance, November 13, 2013, http://www.pciaa.net/LegTrack/web/NAIIPublications.nsf/lookupwebcontent/979FF5DBABED815A86257 C22005A254?opendocument

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Individual Insurer Co-Pay: Each insurer is responsible for a co-pay of 15 percent of its certified terrorism losses exceeding its insurance deductible (the government share of compensation for insured losses is 85 percent of amounts exceeding the insurer's deductible limit, subject to the program cap and recoupment). Program Cap: If covered terrorism losses exceed $100 billion, TRIA caps the liability of the federal government and insurers with losses exceeding their deductibles at their portion of $100 billion.

Fire Following a Terrorism Event

Terrorism coverage is also addressed in state law. Before 9/11, 31 jurisdictions had laws that mandated property policies be based on the 1943 New York Standard Fire Policy (SFP).9 It doesnt exclude fire following an act of terrorism. Prior to 2003, a policyholder who rejected terrorism coverage under TRIA would still have coverage for fire following a terrorist act, which is still true for 15 states.10 Fourteen other states, such as New Jersey and Pennsylvania, however, have since revised their SFP statutes to permit exclusions for fire following terrorism based on certain conditions. The majority of states dont have an SFP or a statute that unconditionally excludes fire following terrorism.
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Understanding the Terrorism Insurance Market

Financial institutions generally require commercial policyholders to carry terrorism coverage in order to secure financing for construction projects. If insurers excluded terrorism coverage or canceled policies, borrowers would be in violation of their financing agreements. Risk would also be transferred to lenders, shareholders, pensioners and bondholders, likely impacting the solvency of the entire financial services system, since most debt would technically be in default.11

Availability and Affordability of Terrorism Coverage

Following the 9/11 attacks, coverage lines that included terrorism were harder to come by and often policyholders paid a premium to obtain what little coverage they could purchase. Coverage available at that time generally offered very limited protection from terrorist acts. Certain property owners in high-risk geographic locations, like major metropolitan areas, were sometimes forced to forgo terrorism coverage altogether.
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Terrorism Risk: A Continuing Threat, Insurance Information Institute (III), September 2012, http://www.iii.org/assets/docs/pdf/paper_Terrorism_090612.pdf 10 The 15 states that dont permit terrorism exclusion from SFP policies are: Alaska, California, Georgia, Hawaii, Illinois, Iowa, Maine, Massachusetts, Missouri, New York, North Carolina, Oregon, Washington, West Virginia and Wisconsin. Terrorism Risk Insurance Protection Act of 2007 Update, Willis SECURENET 11 Coalition to Insure Against Terrorism (CIAT), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013

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A Real Estate Roundtable survey found that more than $15 billion in real estate-related transactions were either stalled or canceled, because the availability of terrorism coverage was scarce in the 14 months following 9/11 and the enactment of TRIA.12 According to the Coalition to Insure Against Terrorism (CIAT), the White House Council of Economic Advisors estimated that more than 300,000 jobs were lost due to the lack of availability of terrorism coverage over that time period.13 Enacting TRIA made it possible for insurers to sell terrorism coverage again. Nowadays, terrorism coverage is more readily available, although capacity problems are still reported in certain high-risk locations. Capacity Issues The insurance industry classifies certain locations as Tier 1 and Tier 2 terrorist targets based on their size, location and economic impact if a terrorist attack occurs, due to their high concentration of risk. These highest risk and higher risk targets consist of most major U.S. cities, including New York, Chicago, Boston, Miami, Houston, Los Angeles and San Diego as well as Washington, D.C.14 Demand for terrorism coverage is usually greater in these locations, which causes adverse selection.15 The nonrenewal of TRIA would be felt most directly in these areas, because coverage would likely be less available and less affordable despite demand. However, the indirect economic impact would be felt across all the states. Exposure Caps Insurers must be able to accurately estimate expected losses that come with the transfer of risk and related capital costs in order to ensure widespread availability and maintain affordability of coverage.16 This requires information that enables them to accurately predict the frequency of terrorism events as well as potential losses, which are challenging to forecast. However, since the government cannot realistically share essential information about terrorism risk with insurers, insurers have difficulty pricing their products accurately, which makes coverage less available. TRIA helps resolve this problem by capping and defining the exposure severity. These caps allow insurers to assign an estimated price to terrorism coverage, while having protection against truly catastrophic losses that could impact their solvency. Without the
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Ibid. Ibid. 14 The Treatment of Terrorism Risk In the Rating Evaluation, A.M. Best Methodology, August 22, 2011 15 In this context, adverse selection is the tendency for some businesses to avoid buying terrorism insurance, perhaps because they feel they dont need it, while those in high-risk areas are more likely to purchase coverage. This adverse selection, by those vulnerable to potentially catastrophic terrorism losses, results in much higher premium levels. 16 National Association of Insurance Commissioners (NAIC), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013

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TRIA backstop, insurance companies would experience a significant increase in exposure, ratings pressure from the rating agencies and would likely consider decreasing coverage to policyholders to reduce their terrorism risk relative to capital.

Growing Demand for Terrorism Insurance

According to industry data, the proportion of businesses buying terrorism insurance has increased since TRIA was enacted in 2002 a point thats made in Chart 2. In 2003, the first full year TRIA was in effect, the take-up rate was 27 percent, but has since increased steadily, remaining in the low 60 percentile range since 2009.17 TRIA made terrorism coverage more available and affordable for businesses. Businesses purchasing terrorism coverage come from a wide variety of industries, including but not limited to energy, finance, real estate, transportation, health care and media.18
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Chart 2: Terrorism Insurance Take-Up Rates by Year

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58% 49%

59%

59%

57%

61%

62%

64%

62%

27%

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: Marsh Global Analytics

Workers Compensation Insurance

Every state except for Texas mandates that employers obtain workers compensation insurance coverage. It provides compensation and benefits to employees injured during employment as well as death benefits to the surviving spouse and dependents of workers who die from a work-related event. Workers compensation is a unique line of insurance. Under state law, coverage for injuries resulting from acts of terrorism cannot be excluded from workers compensation coverage, including the terrible injuries that would occur from a NBCR attack. Workers
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2013 Terrorism Risk Insurance Market Report, Marsh, May 2013 Ibid.

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compensation insurers therefore lack some of the freedom to avoid risks that other insurers have. If TRIA expires, it would expose state workers compensation insurance markets to unlimited terrorism-related claims if a terrorist event occurs, which could result in unprecedented losses and destabilize the markets. According to the National Council on Compensation Insurance (NCCI), the absence of TRIA would severely constrain coverage availability and increase costs; employers would have difficulty meeting state regulatory requirements and possibly be forced to lay off workers.19 Even rating agency, Fitch concludes, Recognition of this vulnerability may lead to a withdrawal of insurers underwriting capacity from the workers compensation market, particularly in industries and geographic areas with greater perceived risk of terrorism-related losses. Reduced workers compensation coverage availability would generate broader economic consequences for employers.20

Why TRIA is Still Necessary

TRIA has been a key component of the federal governments terrorism economic protection plan since the legislation was first enacted. Losses from large-scale terrorist attacks are paid out through multiple lines of coverage. For example, the insured losses from the 9/11 terrorist attack totaled about $32.5 billion (in 2001 dollars or about $40 billion today), which were paid out through the following lines business interruption, aviation, workers compensation, property, liability and life.21 Despite this high payout amount, insurance is credited with helping to lessen the overall economic impact of the 9/11 attack, which the Milken Institute estimates at about $200 billion.22 Immediately after 9/11, insurers began dropping or restricting coverage for terrorism where available on coverage lines sold in the U.S. It wasnt until Congress enacted TRIA that insurers resumed the practice of covering terrorist attacks. TRIA is still necessary today, for without it, the availability of terrorism coverage would be limited and possibly nonexistent in certain markets. TRIA is key to economic growth and security as it cushions the economic shock of a large terrorist attack or series of attacks.

Terrorism Concerns
The threat of foreign or domestic terrorism is no less than it was at the time of the 9/11 attacks. The risk is arguably more complex than ever before. Further, a new focus and discussion have arisen related to cyber-based terrorism. A U.S. State Department
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National Council on Compensation Insurance (NCCI), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013 20 U.S. Terrorism Reinsurance: Looming Uncertainty of Program Renewal, Special Report, Fitch Ratings, July 31, 2013 21 Terrorism Risk: A Continuing Threat, Insurance Information Institute (III), September 2012, http://www.iii.org/assets/docs/pdf/paper_Terrorism_090612.pdf 22 Ibid.

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report released in 2012 documented more than 10,000 terrorist attacks in more than 70 countries in 2011 and as high as this figure may seem, it actually represents a 25 percent drop in terrorist-related activity from 2010.23 Despite the loss of top leaders of well-known terrorist organizations, such as al-Qaida, the U.S. State Department warns that these organizations remain a serious threat to our national and economic security. The U.S. also confronts homegrown, domestic terrorist threats. Although the U.S. has successfully thwarted a number of terrorist attempts to harm our citizens, military, political leaders and landmarks and infrastructure, last years terrorist attack in Benghazi and this years Boston marathon bombing are harsh reminders of the clear and present danger that terrorism represents. The magnitude of insured losses that a well-planned attack could cause would likely go far beyond the scope of other insured risks that can be diversified within the private insurance industry.24 For example, a study by catastrophe risk modeler Risk Management Solutions (RMS) found that a nuclear attack in Chicago could cause $530 billion in total loss from both property and workers compensation loss.25 The same study estimates that an anthrax attack in Philadelphia could generate a total loss of $44 billion, with $18 billion from workers compensation loss alone.26 According to Towers Perrin, a release of anthrax in New York City could generate $9.1 billion in insured workers compensation losses.27 A third study by the American Academy of Actuaries showed that a catastrophic NBCR attack on New York City could result in an estimated $778 billion of insured losses.28 Thus, its fair to assume the loss potential associated with terrorism could be insurmountable, especially without a federal backstop in place.29

State Insurance Regulators Position

State insurance regulators have consistently supported TRIA since the legislation was first enacted.30 Working together with the National Association of Insurance Commissioners (NAIC), state insurance regulators have adopted a resolution proclaiming their strong support for renewing this program.31 From their perspective,
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Country Reports on Terrorism 2011, U.S. Department of State, July 31, 2012, http://www.state.gov/j/ct/rls/crt/2011/ 24 Terrorism Risk Insurance Act (TRIA), the Economic Case for a Public-Private Partnership, Swiss Re, Economic Research & Consulting, September 2013, http://media.swissre.com/documents/Terrorism_Risk_Insurance_Act.pdf 25 Qualifying U.S. Terrorism Risk, Risk Management Solutions (RMS) White Paper, Figure 5: Attacks simulated by the RMS Terrorism Model 26 Ibid. 27 Ibid. #$ !American Academy of Actuaries, News Release, Actuaries Disclose Potential Terrorism Costs, March 31, 2006! 29 Qualifying U.S. Terrorism Risk, Risk Management Solutions (RMS) White Paper, Figure 5: Attacks simulated by the RMS Terrorism Model 30 National Association of Insurance Commissioners (NAIC), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013 31 Ibid.

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theres no solid evidence to suggest that the insurance marketplace is either prepared to or would assume a substantial portion of risk associated with covering terrorism without a federal backstop. In fact, its believed that given the chance, insurers would be inclined to exclude terrorism coverage altogether without a state or federal government mandate, because of the unpredictability of terrorism losses and based on conditional exclusions already filed in most states.32 According to the NAIC, conditional exclusions are policy endorsements that add terrorism events to the standard war and military action exclusions, should TRIA either undergo major modifications or not be renewed.33 They apply to commercial property and liability insurance policies in states that havent enacted the New York standard fire policy (SFP).34 The exclusions have been approved for use in every state except for two, New York and Florida. Even if state governments or the federal government were to require that insurers offer terrorism coverage, its likely that it would be too expensive for most businesses. Businesses would then be faced with the choice of paying higher premiums or going without coverage.

Potential Negative Consequences if TRIA is Modified or Expires

TRIA has been very successful in managing and financing terrorism risk. Its absence could significantly alter the reinsurance market, impacting availability and cost.

Modifications
Overall, the programs existing structure performs very well and doesnt support a major overhaul at this time. Nevertheless, a few improvements can be made. For example, TRIA could be renewed with a mechanism that would enable policyholders and insurers to request a certification determination from the Department of Treasury on whether an event constitutes an act of terrorism under TRIA.35 This would help prevent the uncertainty that has arisen with respect to the Boston Marathon bombing, for which the Secretary has yet made no announcement as to when or if a certification decision will be made. Providing some deadlines, while still maintaining adequate flexibility to allow for the collection of loss data, would provide greater certainty for both policyholders and insurers. In addition, Treasury regulations and guidance provide that insurers make NBCR and cyber risk coverages apply only to the extent that coverage for nonterrorism-related NBCR and cyber risks is made available in the underlying policy. This guidance is consistent with original Congressional intent, but given the significant potential liabilities that could arise from these particular risks, statutory clarity would be helpful.
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Ibid. Ibid. 34 Ibid. 35 Coalition to Insure Against Terrorism (CIAT), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013

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On the other hand, proposals to increase coverage thresholds deductibles, co-shares or triggers raise the risk of an adverse effect on consumers, including state governments as well as the overall economy. Such a move places greater capital demands on insurers and could force small- and mid-sized insurers out of the market and consequently limit access to terrorism risk insurance for public and private entities. This could impact financing of construction projects, delay their start and result in job losses, among other potential negative consequences.

Expiration
A common misconception is that the federal government would be less exposed to terrorism if TRIA were to expire, and that the insurance industry would be free to commit significant amounts of untapped capacity to terrorism risk. The reality is that the federal government and ultimately taxpayers would be liable for a larger share of the financial burden without TRIA, as the likelihood for uninsured and underinsured businesses will increase. Its also likely that TRIAs expiration would cause more insurers (especially small to mid-sized insurers) to leave the market and/or exclude terrorism from covered lines. Insurers choosing not to exclude terrorism would likely charge much higher premiums for policies, with more limited benefits in order to justify selling these high-risk coverage lines and meet rating agency requirements. Moreover, should the program not be renewed, market uncertainty could negatively impact the economy. The American Insurance Association (AIA) estimated that the Gross Domestic Product (GDP) could decline by as much as 0.4 percent and lead to a loss of 326,000 jobs absent a federal backstop even without a major terrorist act.36 Economic Impact Businesses unable to afford or obtain terrorism coverage would lack proper insurance coverage, possibly putting their businesses in jeopardy. NAIC received reports from state insurance regulators of policyholders unable to secure construction loans from lenders when TRIA was up for reauthorization in the past.37 A further slowdown in lending on top of the issues businesses especially small- and mid-sized businesses now face, due to more stringent loan requirements, could negatively impact the economy, since mortgage lending and mortgage loan securitization represent a large portion of GDP. State insurance regulators in the Northeast have expressed concern over TRIAs pending reauthorization, fearing that if the program expires, it could severely hamper rebuilding efforts in communities impacted by Superstorm Sandy.38
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36

Economic Effects of Federal Participation in Terrorism Risk, American Insurance Association (AIA), 2004 (original source) 37 National Association of Insurance Commissioners (NAIC), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013 38 Ibid.

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Furthermore, owners of buildings in high-risk locations would likely have a harder time finding tenants if they couldnt obtain proper insurance coverage for their buildings, in addition to tenants who would be less able to obtain workers compensation insurance or insurance for business operations. This expectation is supported by the Analysis Group, which studied the impact on the economy after 9/11; the Group stated: Whether because of exclusions or the tighter underwriting environment, many commercial policyholders faced steep price increases or were wholly unable to obtain terrorism coverage. The lack of coverage, in turn, stalled real estate transactions and construction projects, disrupted product flows and reduced employment.39 Insurance Industry Impact
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Insurance industry participation providing terrorism risk insurance has increased since TRIAs enactment and subsequent reauthorizations. However, 92 percent of companies writing TRIA lines of insurance are small- and mid-sized firms.40 Together they write more than 21 percent of the TRIA-covered lines of business in the U.S., including a number of specialty lines and businesses.41 The Property Casualty Insurers Association of America (PCI) contends that if TRIA is reauthorized with higher deductibles, then the retained risk for small- and mid-sized insurers as well as certain large insurers would exceed their maximum acceptable loss limits, effectively forcing them out of the market. These concerns are reinforced in the A.M. Best Briefing As Expiration of TRIPRA Approaches, Rating Pressure Increases, April 1, 2013.42 Another important issue is how the timing of the decision to reauthorize TRIA impacts commercial insurance business cycles. Insurers and policyholders needed to start deciding on policy renewal terms in September 2013 for a coverage period that extends beyond 2015. Yearly policy renewals with effective dates of January 2, 2014, but expiring in 2015 or later wouldnt have the benefit of the federal backstop for a portion of the policy period. This means that insurers will add conditional exclusions to policies that will exclude terrorism coverage after that time if TRIA isnt renewed or is significantly amended. Insurers may not be able to continue to provide terrorism insurance without having a level of security in the industry, like the one TRIA provides. The uncertainty created, as Congress deliberates modifying and reauthorizing TRIA, denies insurers adequate time to make system changes that could impact policy renewals and cause coverage disruptions for policyholders.
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39

The Economic Effects of Federal Participation in Terrorism Risk, Analysis Group; prepared by R. Glenn Hubbard (Dean, Graduate School of Business, Columbia University and Former Chairman, Council of Economic Advisors) and Bruce Deal (Managing Principal, Analysis Group, Inc.), September 14, 2004 40 Property Casualty Insurers Association of America (PCI) 41 Ibid. 42 As Expiration of TRIPRA Approaches, Rating Pressure Increases, A.M. Best Briefing, April 1, 2013,http://www.ambest.com/directories/bestconnect/BestBriefingApr1-2013.pdf !

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State Government Impact TRIAs expiration would activate conditional exclusions for terrorism coverage on many renewal policies. Terrorism coverage could cease to exist or exist on a very limited basis in all states that approved conditional exclusions, which could be disastrous on a number of fronts. In addition, it would be particularly harmful to workers compensation insurers that are prohibited under state law from excluding terrorism risks. Since workers compensation insurance must cover all risks, including terrorism, an insurer wouldnt be able to write a policy that excludes terrorism coverage. Therefore, if insurers stopped offering workers compensation insurance, state residual markets and workers compensation pools would be forced to assume these risks. This would transfer workers compensation risks either back to the same companies required to reinsure the financial results of financial market pools or potentially to state taxpayers if the residual market is a state fund.43 Of the 19 states with active state workers compensation funds, most are also members of their respective states property and casualty guaranty fund. In other words, if a state workers compensation fund were to be compromised, it would affect the financial security of the entire private market. This could drain state budgets, because the exposure for workers compensation would now be concentrated in individual states. States would also need to rethink how their state funds are structured, since theyre presently not designed to absorb substantial risks or a large financial loss.

Recommendation: Reauthorize TRIA Now

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Democratic governors are strongly encouraged to ask Congress to act immediately to reauthorize TRIA, with as few changes and for as long a period as possible. Democratic governors can and should communicate with their respective Congressional Delegations to emphasize the importance of this programs renewal. The uncertainty surrounding TRIAs reauthorization is already impacting state regulators, businesses and insurers nationwide.

Conclusion
By having a plan in place that covers and adjusts claims arising from a terrorist attack, the federal government creates a level of certainty that better serves taxpayers and policyholders impacted by terrorism. The private market isnt capable of providing terrorism coverage without a federal backstop at a level that businesses need, and lack of coverage availability could result in dire consequences for the economy at a time when its just starting to bounce back.!
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American Insurance Association (AIA), Comment Letter to the Presidents Working Group on Financial Markets, September 16, 2013 (current source)!

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