The Terrorism Risk Insurance Program: Current Issues, Legislation, and Background

The Terrorism Risk Insurance Program:
Current Issues, Legislation, and Background
Baird Webel
Analyst in Economics
Government and Finance Division
Summary
After September 11, 2001, many businesses were no longer able to purchase
insurance protecting against property losses that might occur in future terrorist attacks.
Addressing this problem, Congress passed the Terrorism Risk Insurance Act of 2002
(TRIA, P.L. 107-297, 116 Stat. 2322), creating a temporary three-year program to share
future insured terrorism losses with the property-casualty insurance industry and
commercial policyholders. The act required insurers to offer terrorism insurance to their
commercial policyholders, preserved state regulation of this type of insurance, and
directed the Secretary of the Treasury to administer a program for sharing terrorism
losses. Once certain conditions were met, the initial program covered 90% of insurer
losses up to $100 billion each year. Responding to concerns that three years was
insufficient time to allow the private sector to develop the capacity to insure terrorism^th
risk, the 109 Congress passed the Terrorism Risk Insurance Extension Act of 2005
(TRIEA, P.L. 109-144, 119 Stat. 2660) to extend the program two additional years.
TRIEA left the program essentially intact while increasing the private sector’s exposure
to terrorism risk through a higher trigger, higher deductibles, greater industry loss
sharing and exclusion of certain lines of insurance.
With little time left in the extended program, concerns are again being expressed
that the private market will be unable to provide terrorism insurance without a
government backstop. The House and Senate have passed different versions of H.R.
2761 to revise and extend the program, with the House version being substantially more
expansive than that passed by the Senate. No conference committee was convened to
reconcile the differences. Instead, on December 12, 2007, the House took up and
passed, on a vote of 303-116, a new bill (H.R. 4299). H.R. 4299 contains the text of the
Senate-passed H.R. 2761 along with additional language, much of which was originally
in H.R. 2761 as it passed the House. A Presidential veto has been threatened for H.R.
4299, and whether the Senate will consider the bill is unclear. This report provides an
overview of the current TRIA program, general background on the issue, and a summary
of current legislation. It will be updated as significant legislative events occur.

Current Terrorism Risk Insurance Program
The current Terrorism Risk Insurance Program, as created by the Terrorism Risk
Insurance Act of 2002¹ and modified by the Terrorism Risk Insurance Extension Act of²
2005, “provides for a transparent system of shared public and private compensation for
insured losses resulting from acts of terrorism.”³ The TRIA program is often described
as a reinsurance backstop. It does not offer policies directly to insurance consumers, but
operates by sharing losses due to a terrorist attack with the insurance companies which
have sold policies to businesses. After certain thresholds are reached, it steps in and pays
insurers for a portion of covered losses due to a terrorist act. Depending on the total size
of the losses, the federal payments made to individual insurers may or may not be
recouped through assessments on all those covered by TRIA in the years following the
attack. TRIA is limited to covering $100 billion in insured losses and relieves insurers
of liability for losses over this amount. What, if anything, that could be done in the event
of losses exceeding $100 billion is a question left to a future Congress.
TRIA Thresholds
^!TRIA applies only to an act of foreign terrorism (as certified by the
Secretary of Treasury in concurrence with the Secretary of State
and the Attorney General).
^!TRIA applies only to commercial property/casualty insurance,
excluding federal crop insurance, private mortgage insurance, title
insurance, financial guaranty insurance, medical malpractice
insurance, health or life insurance, flood insurance, reinsurance,
commercial automobile insurance, burglary and theft insurance,
surety insurance, professional liability insurance (except for
directors and officers liability), and farm owners multiple peril
insurance.
^!Aggregate industry insured losses in a given year must exceed
$100 million (the “Program Trigger”).
^!Before payments are made to an individual insurer, that entity’s
losses must exceed 20% of the value of its direct earned premiums
from the previous year (the “Insurer Deductible”).
Once these thresholds are met, TRIA covers 85% of the insured losses caused by a
terrorist attack. If the total insured losses are under $27.5 billion (the “Aggregate
Retention Amount”), then all of the insurers covered by TRIA would be assessed a
recoupment fee, not to exceed 3% of premium, until the federal share of the losses has
been repaid. The Secretary of the Treasury has the authority to set the exact recoupment

¹ P.L. 107-297, 116 Stat. 2322. See CRS Report RS21444, The Terrorism Risk Insurance Act of

2002: A Summary of Provisions, by Baird Webel.

² P.L. 109-144, 119 Stat. 2660. See CRS Report RL33177, Terrorism Risk Insurance Legislation
in 2005: Issue Summary and Side-by-Side, by Baird Webel.
³ U.S. Treasury Department, Treasury Terrorism Risk Insurance Program, Overview, available
at [http://www.ustreas.gov/offices/domestic-finance/financial-institution/terrorism-insurance].

percentage, as well as the authority to extend the recoupment fee and require payment to
the government beyond the $27.5 billion amount required by law.
Unlike private reinsurance, the TRIA program charges no premiums for the
reinsurance coverage provided by the program. The law, however, does place
requirements on insurers. Specifically, all insurers are required to offer coverage for
terrorism risk “that does not differ materially from the terms, amounts, and other coverage
limitations applicable to losses arising from events other than acts of terrorism.”⁴ The
policyholders, however, are not required to purchase this offered terrorism coverage.
Background on Terrorism Insurance and TRIA
Prior to the September 2001 attacks on the United States, insurers generally did not
exclude or separately charge for terrorism risks. The events of September 11, 2001,
however, changed this, as insurers realized the extent of possible losses from terrorism.
Estimates of insured losses from the 9/11 attacks are around $36 billion in current dollars,⁵
the largest man-made insurance disaster on record.
The heaviest insured losses were absorbed by foreign and domestic reinsurers — the
insurers of insurance companies. Because of the lack of data on or modeling of terrorism
risk, reinsurers felt unable to price for such risks, and they largely withdrew from the
market for terrorism risk insurance. Once reinsurers stopped offering coverage for
terrorism risk, primary insurers, who also suffered from a lack of data and models, also
withdrew or tried to withdraw from the market. In most states, state regulators must
approve policy form changes, and state regulators generally agreed to insurer requests to
exclude terrorism risks from their commercial policies, just as they had long excluded war
risks. Terrorism risk insurance was soon unavailable or extremely expensive, and many
businesses were no longer able to purchase insurance that would protect them in future
terrorist attacks. Although most data were anecdotal, this problem was widely thought to
pose a threat of serious harm to the real estate, transportation, construction, energy, and
utility sectors, in turn threatening the broader economy.
Responding to the perceived problem, Congress passed TRIA in November 2002.
TRIA’s stated goals were to (1) create a temporary federal program of shared public and
private compensation for insured losses to allow the private market to stabilize; (2) protect
consumers by ensuring the availability and affordability of insurance for terrorism risks;
and (3) preserve state regulation of insurance. The act’s initial structure is essentially still
in place. The federal government’s liability in the event of a terrorist attack, however,
was higher at the beginning of the program, and it has decreased through the life of the
program. This decrease in the federal liability, and resulting increase in private liability,
was intentional; it was hoped that this would spur the private market to develop the
financial capacity and other infrastructure necessary to begin insuring terrorism risk
without a government program.

⁴ 15 U.S.C. § 103(c).
⁵ See “Terrorism Risk and Insurance,” Insurance Information Institute website, available at
[http://www.iii.org/ me di a/hottopics/insurance/terrorism/].

The development of a private market for terrorism risk did not proceed with the
speed hoped for when TRIA was passed. Soon after TRIA’s enactment, the insurance
industry and others, worried about a possible absence of terrorism insurance and viewing
terrorism risk as essentially uninsurable, began calling for an extension of the program,
or some other longer-term solution. Responding to concerns about a continuing lack of
private market in terrorism risk insurance, Congress passed a two-year extension bill,
TRIEA, near the end of 2005. This act continued the first act’s trend of decreasing the
federal government’s liability in the case of a terrorist attack. Not only were the monetary
thresholds increased, but additional lines of insurance were also excluded. Table 1 details
the evolution of the various aspects of the TRIA program through the five program years
to date.
Table 1. TRIA Program from 2002 to 2007
²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^P^r^og^ram^T^r^ig^g^e^r^{$5 m}^illion^{$5 m}^illion^{$5 m}^illion^{$50 m}^illion^{$100 m}^illion
^In^s^u^{rer D}^e^du^ctⁱ^b^l^e^7%^10%^15%^17.5%^20%
^In^du^s^t^ry^R^e^ten^tion^$10^billion^{$12.5 billion}^{$15 billio}ⁿ^{$25 billio}ⁿ^$27.5^billion
^F^e^deral^S^h^are^90%^90%^90%^90%^85%
^Ex^clu^d^ed^f^e^{deral crop in}^s^u^ran^{ce, priv}^{ate m}^o^rtg^a^g^e^A^s^bef^o^{re pl}^u^s^:^com^m^e^rci^a^l
^In^s^u^ran^{ce L}ⁱⁿ^e^sⁱⁿ^su^r^aⁿ^{ce, title in}^su^r^aⁿ^{ce, f}ⁱⁿ^aⁿ^c^{ial g}^u^a^r^aⁿ^t^y^au^to^m^o^b^{ile in}^su^r^aⁿ^ce,
ⁱⁿ^s^u^ran^{ce, m}^e^{dical m}^a^{lpractice in}^s^u^ran^ce,^b^u^r^g^lar^y^an^d^th^ef^{t in}^su^r^aⁿ^ce,
^h^eal^t^h^{or l}ⁱ^f^{e i}ⁿ^s^u^ran^{ce, f}^l^{ood i}ⁿ^s^u^ran^ce,^sur^e^ty^insur^a^nc^e^,^p^r^o^f^e^ssioⁿ^a^l
^reiⁿ^s^u^ran^c^e^liab^ilityⁱⁿ^su^r^aⁿ^{ce (}^e^x^cep^{t f}^o^r
^directors^an^{d of}^fⁱ^cers
^liab^ility⁾^,^an^d^f^a^r^m^o^wⁿ^e^r^s
^m^u^ltip^{le p}^e^r^{il in}^su^r^aⁿ^c^e
The passage of TRIEA exposed significant policy differences between the House and
the Senate on how to deal with terrorism risk insurance. The Senate bill (S. 467, 109^th
Congress), which was backed by the President and eventually enacted,⁶ kept the same
TRIA structure while further scaling back federal involvement. The House bill (H.R.
4314, 109^th Congress) was more varied. H.R. 4314 would have extended TRIA and also
would have revised the program extensively. Changes that H.R. 4314 would have
implemented included expanding the program to cover domestic terrorist events;
increasing the types of insurance covered to include group life and specific coverage for
nuclear, biological, chemical, and radiological (NBCR) events; implementing a different
insurer deductible for different lines of insurance; and creating TRIA Capital Reserve
Funds (CRF), which would allow insurers to set aside untaxed reserves to tap in the case
of a terrorist event.

⁶ S. 467 was first passed by the Senate on November 18, 2005. The House replaced the text of
S. 467 with the large majority of the language from H.R. 4314 before passing S. 467 on
December 7, 2005. The Senate then responded by replacing the House text with S.Amdt. 2689,
a slightly modified version of S. 467 as the Senate had previously passed the bill. This version
of S. 467 passed the Senate on December 16, 2005 and the House on December 17, 2005.

TRIA Extension Legislation in the 110^th Congress
Both the House and the Senate held hearings early in the 110^th Congress on the future
of TRIA. The Senate Banking, Housing, and Urban Affairs Committee acted first with
a hearing on February 28, 2007, entitled “Examining the Terrorism Risk Insurance
Program,” while the House Financial Services Committee’s Subcommittee on Capital
Markets, Insurance, and Government Sponsored Enterprises held two hearings. The first
“The Need to Extend the Terrorism Risk Insurance Act” was a field hearing held in New
York City on March 5, 2007, and the second “Policy Options for Extending the Terrorism
Risk Insurance Act” occurred on April 24, 2007.
Terrorism Risk Insurance Revision and Extension Act of 2007
(TRIREA). Representative Michael Capuano, along with 23 cosponsors, introduced H.R.

2761 on June 18, 2007. The House passed the bill on a vote of 312-110 on September 19,

2007. Significant amendments were made to the bill as it moved through the committee
process. The following is a summary of the bill as it passed the House. For more
complete information on the bill, see CRS Report RL34025, Terrorism Risk Insurance:
Issue Analysis and Legislation and CRS Report RL34219, Terrorism Risk Insurance
Legislation in 2007: Issue Summary and Side-by-Side, both by Baird Webel.
H.R. 2761 as passed by the House on September 19, 2007, included provisions that
would make the following changes to the current Terrorism Risk Insurance Program:
^!Extend the TRIA program for 15 years, until the end of 2022.
^!Make spending by the program contingent on passage of a future joint
resolution.
^!Add coverage for domestic terrorist acts in the program.
^!Add the Secretary of Homeland Security to the certification process.
^!Add group life insurance to the program with a separate set of retentions
and deductibles.
^!Return farmowners multiple peril as a covered line.
^!Reduce the general trigger to $50 million.
^!Require insurers to cover nuclear, biological, chemical, and radiological
(NCBR) terrorist attacks starting in 2009.
^!Lower insurer deductible for NCBR attacks to 3.5% immediately and
then raise that number by 0.5% per year in the future.
^!Increase the federal share of NCBR losses from 85% to as high as 100%
for attacks causing over $100 billion in losses.
^!Temporarily preempt state laws on rate and form filing for NCBR
coverages.
^!Provide the possibility of relief from NBCR requirement to smaller
insurers.
^!Reset individual insurer deductibles to 5% and the program trigger to $5
million in the aftermath of a future terrorist attack (or series of attacks)
that causes more than $1 billion in damage. Deductible reset would be
only for insurers who suffer losses.
^!Increase the post-reset insurer deductibles by 0.5% per year.
^!Establish a “Terrorism Buy-Down Fund” that would essentially allow
insurers to put aside reserves that would grow tax-free to cover future

losses that are not reimbursed by TRIA. The fund would also be
available to the Secretary of the Treasury to cover the federal share of
TRIA losses.
^!Restrict life insurers’ use of foreign travel as an underwriting tool.
^!Index the dollar amounts in the program to future inflation.
Terrorism Risk Insurance Program Reauthorization Act of 2007
(TRIPRA). The Senate Banking, Housing, and Urban Affairs Committee marked up this
original bill on October 17, 2007, and ordered it favorably reported to the Senate by a vote
of 20-1. It was introduced by Senator Christopher Dodd as S. 2285 on November 1, 2007.
The Senate inserted TRIPRA’s language, plus additional language increasing and
accelerating the recoupment provisions, into H.R. 2761 on November 16, 2007, and
passed the bill by unanimous consent the same day.
TRIPRA is a relatively straightforward reauthorization of the existing TRIA
program. The two primary changes that it would make to the program are (1) extend the
program for seven years, until 2014, and (2) add coverage for domestic terrorist attacks
to the program. In addition, it would modify slightly the annual liability cap and require
the Secretary of the Treasury to promulgate regulations on determining payments should
losses exceed $100 billion, rather than leaving this determination to a future Congress.
The bill would also call for reports from the Government Accountability Office (GAO)
on the possibility of insurance coverage for NCBR events (within one year) and on the
affordability and availability of terrorism insurance in specific markets (within 180 days).
In addition, the President’s Working Group on Financial Markets would be tasked to
continue its analysis of the longer term availability and affordability of terrorism risk
insurance and report on this subject in 2010 and 2013.
H.R. 4299. Introduced by Representative Barney Frank on December 6, 2007, this
bill shares the TRIPRA title with S. 2285 and H.R. 2761 as passed by the Senate. H.R.

4299 includes the Senate-passed language, plus provisions that would do the following:

^!Add coverage of group life insurance with a separate deductible,
retention pool, recoupment amount, and policy surcharge amount.
^!Decrease the individual insurer deductible in 2008 to 5% for terrorist
attacks that exceed $1 billion, and then increase this amount by 0.5% per
year after 2008.
^!Reset, after a $1 billion attack, the trigger to $5 million and the insurer
deductible to 5% with a 0.5% increase per year thereafter.
^!Restrict life insurers’ use of foreign travel as an underwriting tool.
^!Reduce the program trigger to $50 million.
Administration Reaction. The Office of Management and Budget has released
two Statements of Administration Policy on TRIA legislation in 2007. The first, dated
September 17, threatened a veto for H.R. 2761 as it ultimately passed the House. The
second, dated December 11, threatened a veto if the Senate-passed version of H.R. 2761
were amended with the language that was passed by the House in H.R. 4299.