In a rare show of bipartisanship and, well, effectiveness, the 114th Congress kicked things off Jan. 6 by reauthorizing the briefly lapsed Terrorism Risk Insurance Act, retroactively effective beginning Jan. 1.
President Barack Obama signed it into law -- the first of the year and of this Congress -- on Jan. 12, bringing a sigh of relief to affected industries, along with several changes to the public-private pact.
TRIA was first enacted after the Sept. 11 attacks, when the $40 billion in damages was too much for private industry to shoulder on its own.
The federal government stepped in to carry some of the burden, but the need for a definitive agreement outlining who is responsible for what in the event of another terrorist attack was evident.
Though it has never been invoked, TRIA used the federal government as a backstop for covering these costs, with the private insurance company responsible for up to $100 million in damages, after which the government would step in on a sliding scale.
Both sides would together cover up to $28 billion in damages, after which the government would bear the full burden.
However, any taxpayer money paid out to the range of companies, educational institutions, industrial spaces and large events required to have terrorism risk insurance would eventually be repaid by insurers over the course of 10 to 20 years.
This same, original version of the bill was reauthorized in 2005 and 2007, but did not make it to a vote on the Senate floor in December 2014 due to the positioning of then-Sen. Tom Coburn, R-Okla., and expired Dec. 31.
TRIA 2.0, if you will, was passed 93-4 in the Senate and 416-5 by the House, and tweaked three components of the legislation to place more of the burden on private industry: The event trigger will double from $100 million to $200 million by 2020 in increments of $20 million a year beginning in 2016; the insurer co-share amount will increase from 15 percent to 20 percent at 1 percent a year; and the maximum damages covered by the private partnership with the federal government will increase from $27.5 billion to $37.5 billion in $2 billion increments every year until 2020.
Ron Robinson, founder and executive partner of Berkes Crane Robinson & Seal LLP in Los Angeles and chairman of the Defense Research Institute’s subcommittee on the Terrorism Risk Insurance Acts of 2005 and 2007, said the act was full of compromises between the House and Senate, the most hotly contested of which surrounded the trigger amount.
“There was a big fight over the event trigger,” Robinson said, noting that the original Senate bill made no change to the $100 million level but that the House raised it to $500 million to increase the share of the burden placed on private insurers. “There were certainly hotly contested items, but of the changes made, the only hotly contested one was the event trigger.”
In addition to compromising on $200 million, Robinson said the House originally called for a five-year extension to TRIA while the Senate opted for seven years; a six-year extension through 2020 was able to please both sides.
Tim Bunt, chief risk officer for CBRE, said the commercial real estate firm was relieved to have certainty regarding restored terrorism insurance, but said the six-year extension is still just that -- six years.
“This only takes us another six years. It’s not a permanent fix,” Bunt said. “And through 2020, the vast majority of what occurs here is still shouldered by the insurance industry.”
Bunt also noted that the reauthorized bill requires the Secretary of Homeland Security, in concurrence with the Secretary of the Treasury, to jointly certify an act of terrorism as such before qualifying for TRIA coverage, which he said was a good thing in that it aids in creating certainty and stability to the market.
The previous version of TRIA largely left the definition of an act of terror up to the interpretation of the definition in the legislation.
All commercial real estate developments, as well as certain large-scale events, educational institutions and companies are required to carry this insurance. A public records request from the city of San Diego’s Risk Management Department shows that the San Diego Convention Center pays $23,000 in annual terrorism coverage premiums, with Petco Park paying $37,500 a year.
“The city does not rely on TRIA for its terrorism coverage and purchases the coverage separately at an annual premium of about $54,000,” wrote Claudia Castillo del Muro, claims and insurance manager with the city’s Risk Management Department.
Robinson said private insurers are able to accept more of the cost of the deal after 13 years of collecting these premiums, and expects their share will only increase.
“The amount of private market share has risen so slowly because there’s no way to predict this,” he said, referring to the statistical unpredictability of terrorist attacks compared with car accidents or fires, for example.
“At the end of the life of the act, over the course of 18 years, insurers will have built up a lot of surplus and gambled that if there is a loss, the federal government will partner with them. As time goes on, private markets will take more of the burden,” Robinson said.
This may not be exactly what insurers or the commercial real estate industry wants to hear, but as Bunt said, for now there’s stability.
“In the case of restored certainty, deals will get done, financing will take place and business will go on as usual,” he said.