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One key legacy of the Sept. 11, 2001, terrorist attacks—the federal terrorism coverage backstop—has fulfilled its purpose, and backers of the program are hopeful that it will again be renewed and continue to fill a crucial gap for such coverage in the market.
Industry observers say the backstop, initially created by the Terrorism Risk Insurance Act to run until 2005, brought certainty to a marketplace attempting to confront a risk that could not be underwritten. By doing so, it encouraged economic growth in areas that were perceived to be vulnerable to terrorist attack.
The program since has been amended and extended twice, first through 2007 and then through 2014. As currently structured under the Terrorism Risk Insurance Program Reauthorization Act of 2007, the backstop would respond only after a terrorist attack causing at least $100 million in insured losses. Individual insurers would be subject to deductibles of 20% of their commercial property/casualty premiums before they could receive compensation from the backstop. Insurers also would have to cover an aggregate industry retention of $27.5 billion.
If, after the program begins covering losses, authorities determine that the retention has not been reached, the federal government could recoup the difference between what it paid and the retention. The payment would come from a surcharge not to exceed 3% of premium for lines of insurance covered by the program. The law limits the government's annual responsibility to $100 billion.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Federal Office of Insurance is responsible for overseeing the terrorism insurance program.
According to the New York-based Insurance Information Institute, the 9/11 attacks represented the largest cumulative claims payout in global insurance history until 2005's Hurricane Katrina. The attacks produced insured losses of about $32.5 billion, or $40 billion in 2010 dollars. The losses were sustained across multiple lines of insurance, including property, business interruption, aviation, workers compensation, life and liability.
But terrorism insurance per se did not exist. Insurers paid claims on a loss for which they had collected no specific premiums. Because of its nature, terrorism was a risk considered impossible to underwrite, and insurance dried up for areas—such as Manhattan and Washington—deemed likely targets for future attacks. As a result, risk managers, insurers and business groups pushed for some sort of federal terrorism insurance response.
“It was necessary because America was in shock after 9/11,” said Robert Gordon, Washington-based senior vp-policy development and research with the Property Casualty Insurers Assn. of America who, as senior counsel to the House Financial Services Committee, drafted the first iteration of TRIA. “There were few terrorism events of any magnitude, and insurers had no idea of what their exposure was,” he said.
Mr. Gordon said TRIA was conceived as a one-time program that would allow the insurance market to stabilize. By the time of the first extension, people realized that the program had worked “very well” and that without the backstop, businesses in areas perceived to be at high risk of terrorist attack would not have been able to find affordable terrorism coverage, he said.
“Insurers had so much uncertainty around terrorist risk after 9/11 that the market for coverage either was not existent or unreliable,” said Frank Nutter, president of the Reinsurance Assn. of America in Washington. TRIA “seemed to establish a certainty in the market,” he said, adding that “it's not as if the industry was providing the coverage and pricing for it; it wasn't an anticipated coverage-and-loss scenario.”
“The Sept. 11 attacks were of a nature and scope unlike any other catastrophe in U.S. history, leaving deep concerns about the insurance industry's ability to provide terrorism coverage,” said Jimi Grande, senior vp in the Washington office of the National Assn. of Mutual Insurance Cos. “TRIA improved take-up rates, affordabil—-ity and, frankly, created an opportunity for terrorism coverage to exist in a meaningful way.”
For example, a Marsh Inc. survey found that the take up for terrorism insurance among commercial policyholders nearly doubled in 2004 to 49% from 27% in 2003, the first full year the backstop was in place. A study by the President's Working Group on Financial Markets released early this year said that the take-up rate has remained at about 60% since 2006.
“This public-private partnership has been successful in effectively managing insurers' exposure to acts of terror and has provided some market certainty by establishing statutory caps for insured terrorism losses that apply to both the insurance industry and federal government,” said a spokesman for the American Insurance Assn. in Washington.
Risk managers understandably continue to be among the program's staunchest supporters.
“Looking back, TRIA is arguably one of the most important pieces of legislation to come out of Washington for the risk management community as a whole,” said Bradley R. Wood, senior vp-risk management for Marriott International Inc. in Bethesda, Md.
“Shortly after 9/11, risk managers were faced with little or no terrorism insurance options,” said Mr. Wood, who was active in the effort to establish the backstop. “As soon as TRIA became law, coverage immediately became available and premiums have been gradually declining ever since. This was an immediate success story for risk managers.”
“TRIA is very important to many of our members who feel the risk for terrorism can be managed no other way than through outside financing and the availability of that financing continues to be extremely limited,” said John Phelps, board liaison to the external affairs committee of the New York-based Risk & Insurance Management Society Inc. and director-business risk solutions at Blue Cross and Blue Shield of Florida Inc. in Jacksonville.
“Even today, there's no indication the reinsurance market is picking up the slack,” said Marriott's Mr. Wood. “Until terrorism is eliminated, there will likely to a need for a continued federal role.”
Advocates of a continued federal role feel that while there may be some resistance to renewing the program yet again in 2014, the program ultimately will be extended.
“There has been significant philosophical tension since the beginning of this debate about the appropriate scope of federal backstop,” said Joel Wood, senior vp at the Council of Insurance Agents & Brokers in Washington.
“Nobody should be cocky about it, but I feel reasonably optimistic that as long as the terror threat remains, the backstop will be there to assure policyholders they will be made whole,” he said.
“It is counterintuitive for us to seek federal backstop, and it's never the ideal,” he said. “But the appetite and capacity to deal with a 9/11 event or beyond simply doesn't exist in the private market.”
RAA's Mr. Nutter noted that “politics seem to favor retaining it, because it works well.”
“It's a program that's cost the taxpayers very little considering the economic activity it's enabled,” said PCI's Mr. Gordon.
“The program has helped the market, thankfully hasn't cost the U.S. government any money, and there will be those who will seek to scale it back when it expires in 2014,” said NAMIC's Mr. Grande. “However, the terror risk that America faces has not diminished since 2001.”
One felt the proud white tower shudder. Another witnessed the sight that made it clear the horror was no accident. Two were on airplanes when they heard the shocking news. The fifth was stuck in crawling traffic outside the Capitol, listening to a radio shock jock doubting a caller's eyewitness account. Then she became a witness.