Magazine article Risk Management

What to Expect When TRIA Goes Away

Magazine article Risk Management

What to Expect When TRIA Goes Away

Article excerpt

The two-year extension of The Terrorism Risk Insurance Act of 2002 (TRIA), announced on December 31, 2005, saved the day for insureds and prevented a frenzy within large companies and the insurance marketplace.

The extension increases the industry's coinsurance levels and the annual aggregate deductibles of individual insurance companies, introduces new program loss triggers and, most importantly, raises the industry's overall "annual aggregate net retention"--or, the level of loss the industry must absorb before federal payments--by 66% and 83% in 2006 and 2007, respectively. The extension also eliminates certain lines of business.

Furthermore, the U.S. Treasury Department released a questionnaire soliciting industry input regarding the long-term availability and affordability of terrorism insurance in the U.S. marketplace. The findings of the questionnaire are expected to echo the findings of the June 2005 Treasury Report recommending against the further extension of TRIA. These are all indications that the U.S. government is looking to exit the terrorism risk business and is not likely to extend the act beyond December 31, 2007.

Unfortunately, the extension does not contain any of the changes needed to encourage the industry to create a long-term solution, thus, severely exposing companies to terrorism risk after 2007. A long-term approach would have enabled companies to reserve, on a tax-free basis, for future terrorism losses, provided for an additional year of TRIA coverage in 2008 and created a dedicated commission to explore long-term TRIA alternatives.

Today, commercial property and casualty markets are most concerned about the sizeable and complex risks associated with large businesses, such as terrorism capacity and pricing restraints. The markets today are not as troubled by terrorism risk for small and midsize commercial businesses, and carriers do not generally impose exclusions for terrorism if these types of businesses are located outside of high-risk geographic locations. These risks tend to carry low loss limits and low aggregation of value concerns. All of this could change, however, in the blink of an eye.

In the future and on a macro level, most carriers will elect to exclude or to sub-limit terrorism exposures. …

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