Terrorism Insurance May Get Very Expensive Very Soon

Corporate buyers insuring against acts of terrorism may see a big spike in pricing next year if Congress fails to act on a key piece of legislation.

CFOs and other financial executives looking to renew their corporate insurance coverage for 2015 will need to deal with a major wildcard in the buying process: whether a government-backed insurance pool will survive.

Following the 2001 U.S. terrorist attacks that crippled the insurance industry with $30 billion in claims, Congress passed the Terrorism Risk Insurance Act (TRIA). TRIA acts as a backstop to the private insurance market, which either refused to write new policies -- or priced coverage beyond the reach of many buyers -- following the 9/11 attacks.

While TRIA's scope  has changed over the past 12 years, the program has survived heavy political wrangling as both Democrats and Republicans agreed it was needed to support the economy.

But that may no longer be true.

A group of conservative lawmakers are pushing to end the program, arguing that it is thwarting the development of a private market for terrorism coverage. The argument against TRIA, according to the conservative Heritage Foundation, is that the program has served its purpose and should be dismantled.

“As stated in the original legislation, the program was a stopgap ‘while the financial services industry develops the systems, mechanisms, products, and programs necessary to create a viable…market for private terrorism risk insurance,’” said Heritage Foundation research fellow Diane Katz in a recent post. “That market now exists. Indeed, the insurance industry today is well-capitalized and fully equipped with the risk management resources necessary to provide terrorism coverage without government subsidies.”

As an interim push toward its eventual dissolution, conservatives would like to reduce the “trigger” point where TRIA would backstop private insurance carriers from $100 million to $50 million, according an article in USA Today. Despite a victory by TRIA proponents in the Senate yesterday, the battle in the House looks less than certain.

Business groups, such as the National Association of Realtors and the Insurance Information Institute, are arguing for TRIA renewal and against any paring down of the program, fearing that changes would throw large corporate buyers of terror coverage into a tailspin. That would be especially true for companies in large cities, or any company that provides workers’ compensation policies.

According to a report issued earlier this year by insurance broker Marsh, approximately only one-third of property insurers it surveyed would include full-term terrorism coverage for policies extending into 2015 if TRIA expires, and almost half indicated they will not offer standalone terrorism coverage after TRIA’s scheduled expiration.

“If Congress does not extend or renew [TRIA], the market dynamics for terrorism insurance will be further disrupted and may result in increased pricing as capacity shrinks,” the report added.