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Senate bill to renew terrorism insurance backstop includes higher insurer copays

Insurers balk at higher copays, deductibles

Senate bill to renew terrorism insurance backstop includes higher insurer copays

The prospects for the federal terrorism insurance backstop sharply improved last week with the introduction of an extension measure in the U.S. Senate. But insurer groups, while welcoming the development, cautioned that proposed program modifications were too radical.

In particular, increases in the losses insurers would have to shoulder in the event of a catastrophic terrorist attack drew criticism.

The measure was introduced late last week by Sen. Charles Schumer, D-N.Y., and cosponsored by a bipartisan group of members of the Senate Banking, Housing and Urban Affairs Committee.

The bill would reauthorize the backstop, slated to expire on Dec. 31, for seven years. It is the first extension bill introduced in the Senate, although three measures that would extend the program, created by the Terrorism Risk Insurance Act of 2002, already have been introduced in the House.

In addition to the seven-year extension, the Senate bill calls for two major changes to the program. The bill landed in the Senate just ahead of next week's one-year anniversary of the Boston Marathon bombing, an event that has helped focus support for again extending the federal terrorism program.

Under current law, in the event of a terrorist attack, insurers would first pay 20% of the prior year's direct earned premium for covered commercial lines as a deductible. After that deductible, the federal government covers 85% of each insurer's losses until losses total $100 billion, leaving individual insurers to cover the remaining 15%.

The proposed legislation would increase insurers' copay after the deductible to 20% from 15%, with the government covering 80% of each insurer's additional losses. The deductible increase would be phased in incrementally over five years.


The law's provision dealing with recoupment also would change. When aggregate insured losses from a catastrophic terrorist event are less than $27.5 billion, the federal backstop program currently mandates that the government recoup all claims payments from the insurance industry.

The proposed legislation would raise the mandatory recoupment threshold to $37.5 billion, so that the government will be required to recoup claims payments from insurers when the insurance industry's aggregate uncompensated losses are below $37.5 billion.

While welcoming an extension of the program, insurance groups questioned the higher copay for insurers.

“We're encouraged that the Senate recognizes the need for long-term reauthorization,” said Jimi Grande, senior vice president in the Washington office of the National Association of Mutual Insurance Cos. But the trade group was disappointed with the proposed copay increase, he said.

“There continue to be a number of lawmakers who insist on making changes to the program simply for the sake of change, without a defined policy objective,” Mr. Grande said.

Nat Wienecke, senior vice president of the Property Casualty Insurers Association of America in Washington, said the group was pleased with the relatively early introduction of the House and Senate bills, and that it recognized that to garner Republican support the legislation would need to include an increased financial burden for insurers.

“Our concern is the scale of the change — it's a 33% increase, and it's very unclear how the markets will react to that increase,” he said.


The American Insurance Association also has concerns with the proposed legislation, AIA President and CEO Leigh Ann Pusey said in a statement.

“In particular, the insurer co-share increase to 20%, even phased in over five years, could lead to decreased market capacity,'' Ms. Pusey said in the statement. “A key point is that any legislation to reauthorize TRIA must protect the balance achieved by the program and not introduce higher retentions on companies that could end up hurting their individual ability to offer insurance coverage to U.S. businesses, including terrorism risk coverage.” 

The Risk & Insurance Management Society Inc. was encouraged with the introduction of the Senate legislation as the beginning of what might be a lengthy reauthorization process.

“News that the Senate has begun the process of reauthorizing TRIA is encouraging, but we understand that this introduction is just the initial step of a long legislative process,” RIMS President Carolyn Snow said in a statement. 

“The senators who have introduced this bill understand the consequences of TRIA's expiration, and we applaud them for their foresight. We remain hopeful that the House Financial Services Committee also realizes the impact TRIA's expiration will have on all businesses across the U.S.”

A veteran insurance industry lobbyist expressed optimism over the chance for reauthorization.

“Nothing about TRIA has ever been easy or unanimous, but the Senate process on the reauthorization is shaping up to be cooperative, bipartisan and deeply encouraging,” said Joel Wood, senior vice president at the Council of Insurance Agents & Brokers.