What does this historic federal legislation mean,for property-casualty insurers, producers and risk managers?
The world changed for all of us on 9/11/2001. For those of us in the property-casualty insurance industry--insurance carriers, agents, brokers and risk managers--our world changed again on 11/26/2002. That was the day President Bush signed the Terrorism Risk Insurance Act of 2002.
The legislation, which was more than one year in the making, became law immediately upon the president's signature. Just as quickly, questions started cropping up. How does this legislation really work? What is the federal backstop? How does the federal government define terrorism? How will underwriters view it? What will this terrorism coverage cost? What happens after 2005?
Now that our industry is about a half year into implementing the Terrorism Risk Insurance Act, many of those questions have been answered. However, as the implementation process evolves, new questions are surfacing. As Zurich North America CEO John Amore said, "The Terrorism Risk Insurance Act is certainly not the final answer to managing terrorism risks, but it creates a short-term infrastructure that starts us down that path." The critical test now is to implement the regulatory features of the bill in a manner that fosters a creative and flexible marketplace.
While there are many questions, one thing we know for sure is that the Terrorism Risk Insurance Act has forced risk managers to focus on their terrorism exposure and better assess their risk transfer needs. By now, many of us have worked through the transitional issues presented by the legislation, including the temporary suspension of existing terrorism exclusion and initial policyholder notices. Before exploring the longer-term ramifications of the Act, it is worth recalling the basics:
The three elements of the Terrorism Risk Insurance Act of 2002
* Availability. Insurers are generally required to "make available" coverage for losses resulting from acts of terrorism on the same terms and limits as coverage for other losses. In practical terms, the "make available" requirement means making coverage available without specific exclusions or limitations for acts of terrorism.
* Disclosure. The Act requires insurers to disclose the premium charged for the terrorism exposure and the federal share of any terrorism losses in all new and renewal quotes and policies.
* Federal participation. The federal government will share in certain terrorism losses through 2005. In order to trigger the federal backstop, the "certified" terrorism events in any one calendar year must result in significant losses. By some published estimates, net federal participation does not attach until $10 billion in terrorism losses for 2003 and increasing thereafter.
The "certified" act of terrorism These three elements (availability, disclosure and federal participation) only relate to "acts of terrorism" as defined in the Act. Because an "act of terrorism" must be certified by the Secretary of the Treasury (in concurrence with the Secretary of State and the Attorney General), the shorthand "certified act of terrorism" is often used. …