On 12 January 2015, President Obama signed the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“TRIPRA”) into law, thereby extending the Terrorism Risk Insurance Program (“Program”) for an additional six years, until December 31, 2020.
On February 3, 2015, the Treasury Department’s Federal Insurance Office published its “Interim Guidance Concerning the Terrorism Risk Insurance Program Reauthorization Act of 2015”. As a result of the changes in TRIPRA and the Interim Guidance by the Treasury Department, the Massachusetts DOI has issued Bulletin 2015-03. This new Bulletin addresses standards and procedures to be used by insurers pursuant to the 2015 Reauthorization Act. The new Bulletin also specifically supersedes a prior Bulletin, Bulletin 2008-04 that applied to the Terrorism Risk Insurance Program Reauthorization Act of 2007.
Bulletin 2015-03 explains 2015 changes to the Terrorism Risk Insurance Program
As explained in the Bulletin, Congress enacted the Terrorism Risk Insurance Program as a result the World Trade Center terrorist attacks of September 11, 2001. The purpose of the Act was to provide a federal guarantee to ensure the continued widespread availability and affordability of commercial property and casualty insurance for terrorism risk, and to allow for the private markets to stabilize and build insurance capacity to absorb any future losses for terrorism events.
The Program requires insurers to “make available” terrorism risk insurance for commercial property and casualty losses resulting from certified acts of terrorism, and provides for shared public and private compensation for such insured losses. The Secretary of the Treasury administers the Program. The Federal Insurance Office assists the Secretary of the Treasury in administering the Program.
Originally, the Terrorism Risk Insurance Program had a sunset provision that would have let the federal guarantee expire in 2005. Because of continued terrorism threats the Program was extended, with changes, in 2005, 2007, and finally again in January 2015.
As specified in the Act and reiterated in more detail in the Bulletin, some of the major changes to the Program are:
- The Program’s renewal will expire in six years or in 2020.
- The Program’s trigger that applies to certified terrorist acts [see below] where any insured losses exceed $100m in 2015 and then the trigger incrementally increases by $20m each year to reach $200m in 2020:
- The Insurers’ portion of any for losses above the Program’s trigger increases by 1 percentage point per year from a base of 15 percent in the first year to 20 percent in the sixth year.
- If a terrorist attack triggered the federal assistance under the Program, the government would recoup its payouts by assessing a tax on commercial property and casualty policyholders equal to 140 percent of the difference between total losses (up to the annual industry retention amount of $37.5 billion in 2020) and the total amount paid by the insurance industry (its deductibles and copayments).
- Increasing the amount that insurers must cover as a whole though co-payments and deductibles, which is known in the industry as the aggregate retention, by $2 billion a year to $37.5 billion from $27.5 billion, starting in 2016;
The following chart taken from Congressional Budget Office’s January 2015 report, “Federal Reinsurance for Terrorism Risk: An Update”, p.5, graphically shows the financial structure of the reauthorized Act as of 2020.
Additionally, the Act also provides for the preparation of various reports, studies and an advisory committee including:
- An annual report from insurers participating in the Program regarding insurance coverage for terrorism losses including lines of insurance with exposure to terrorism losses, premiums earned on coverage, geographical location of exposures, pricing of coverage, the take-up rate for coverage, the amount of private reinsurance for acts of terrorism purchased.
- A study by the Comptroller General of the United States on the viability and effects of the Federal Government assessing and collecting upfront premiums and creating a capital reserve fund;
- A annual study by the Secretary of Treasury beginning in 2017 that is to identify competitive challenges small insurers face in the terrorism risk insurance marketplace; and
- An nine member advisory committee to the Secretary of the Treasury to provide advice, recommendations and encouragement with respect to the creation and development of nongovernmental risk-sharing mechanisms. The nine members have to be directors, officers, or other employees of insurers or other market participants.
Determination of “certified terrorist acts” changed in reauthorization to the Secretary of the Treasury alone
As originally passed in 2002, the certification required that insured losses were caused by “acts or terrorism, needed three federal officials, the Secretary of the Treasury, along with the concurrence of the Secretary of State and U.S. Attorney General, to agree that five statutory conditions had been met:
- The event was considered an act of terrorism;
- The event was violent or dangerous to human life, property, or infrastructure;
- The event resulted in damage within the United States, or specified United States foreign missions or common carriers;
- The event was committed by an individual or individuals, as part of an effort to coerce the US civilian population or to influence the policy or affect the conduct of the US government by coercion;
- The event caused property and casualty losses exceeding $5 million in the aggregate.
The Act now allows the Secretary of the Treasury alone to certify “acts of terrorism” in consultation with the Secretary of Homeland Security and Attorney General. For the prior Act, See Agency Checklists’ April 22, 2013 article, “The Marathon Bombing And The Massachusetts Statutory Terrorist Act Exclusion.”
Although the Treasury Secretary will become the sole decision-maker on the certification of a terrorist event, the Act does require the Treasury to conduct a study on the process by which the Secretary determines whether to certify an act as an “act of terrorism.” The Act prescribes certain factors that the certification study must examine and that the Treasury must submit a report on its results to Congress.
Copies of Bulletin 2015-03 and Interim Guidelines from the Federal Insurance Office
Below are copies of the Bulletin and the Interim Guidelines from the Treasury Department’s Federal Insurance Office.