TRIA is due to expire at the end of December 2014. While the future of the TRIA legislation is uncertain, its impact on the property insurance market and the current mechanisms are important to understand, so that impending changes can be viewed in perspective to the current market conditions.
How Does TRIA affect the terrorism insurance market?
The bottom line is that nearly all terrorism insurance, either embedded or standalone, is impacted by TRIA to one degree or another.
As only a government program can do, TRIA regulations are really a mixture of overlapping requirements and applications. TRIA may be viewed as apples and oranges from the insurance industry point of view and the government might call TRIA a basket of fruit- and both would be correct. It’s how the individual regulations are applied that makes the difference and that’s where the inconsistency occurs.
- TRIA is intended as an industry remedy, so it gets a bit fuzzy when drilling down to the account level.
- TRIA applies to US insurance companies only, or US approved non-admitted markets, such as Lloyd’s.
- TRIA only applies to locations in the US & US territories.
- TRIA operates on a “program year” (calendar year) basis, for all aggregate certified claims. It is not an occurrence basis program; all regulations are based on the program year unless specifically noted otherwise.
- There is a 20% primary retention for the insurance companies; it does not affect the policyholder, except that the retention may affect the insurance company’s pre-loss willingness to put up capacity. Please note the 20% primary retention is based on last year’s direct earned premium, not 20% of the loss (apples and oranges…).
- The insurance company also has a 15% quota-share retention, excess of the above noted primary retention. This excess quota-share is again the insurance company’s issue, and for this one, the 15% is a percentage of the loss (again, apples and oranges…).
- A threshold of $27.5B is mentioned in TRIA regulations and often misunderstood by the policyholders. The $27.5B figure is a policyholder issue. When this amount of TRIA payout (not industry loss) is reached, then a mandatory “recoupment” is triggered.In the event of a certified act of terrorism, the law requires Treasury to recoup federal payments for insured losses under the program (excess of insurance company retentions).
The rules are fuzzy on the recoupment, and have changed a couple of times, but basically all “TRIA-eligible” policies (commercial property, GL, WC) would add an assessment to the annual policy premium. The assessment would be collected by the insurance company andthen forwarded to the Treasury Dept.
The first two generations of TRIA pegged the recoupment at 3% of the policy premium with no length of time specified (presume until the $27.5B is recouped). The limitation in the TRIA legislation effective 2008 that surcharges not exceed 3 percent of the premium charged for property and casualty insurance coverage under the policy is eliminated (but remains in the case of a discretionary recoupment).
The current TRIA regulation also gives Treasury discretion on how the recoupment would be put in place and a timeframe for collection. The current mandatory recoupment through policyholder surcharges is accelerated as follows:
- For events occurring prior to 2011, Federal amounts must be recouped by September 30, 2012.
- For events during 2011, 35% of federal amounts must be recouped by September 30, 2012, and the balance by September 30, 2017.
- For events after 2011, Federal amounts must be recouped by September 30, 2017.
As you can see, there is a recoupment time compression as we get closer to these deadlines.
We believe that all policyholders of TRIA eligible policies will have to pay the recoupment assessment, even those that did not incur a terrorism loss. The regulations are silent on this point, which usually means that everyone pays.
- Standalone terrorism may be subject to TRIA regulation, depending on who the insurance provider is. The chart below breaks down the key regulation requirements into three segments:
*Note: Although Lloyd’s is TRIA-eligible, standalone terrorism is placed as if TRIA does not apply. TRIA retentions are handled internally and not a factor in the placement. Aggregate accumulation management is the driver for Lloyd’s companies. Recoupment would apply to Lloyd’s companies and would have to be assessed.
- Since TRIA is such a mixture of apples & oranges, there are six key numbers to keep in mind:
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