Terrorism Risk Insurance Legislation: Issue Summary and Side-by-Side

Publication Date: December 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Business

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Abstract:

Prior to the September 11, 2001 terrorist attacks, insurance covering terrorism losses was normally included in general insurance policies without cost to policyholders. Following the attacks, both primary insurers and reinsurers pulled back from offering terrorism coverage, citing particularly an inability to calculate the probability and loss data critical for insurance pricing. Some argued that terrorism risk would never be insurable by the private market due to the uncertainty and potentially massive losses involved. Because insurance is required for a variety of economic transactions, it was feared that a lack of insurance against terrorism loss would have wider economic impact, particularly on large-scale developments in urban areas that would be tempting targets for terrorism.

Congress responded to the disruption in the insurance market by passing the Terrorism Risk Insurance Act of 2002 (TRIA). TRIA created a temporary program, expiring at the end of 2005, to calm the insurance markets through a government backstop for terrorism losses and give the private industry time to gather the data and create the structures and capacity necessary for private insurance to cover terrorism risk. In the past three years, terrorism insurance has become widely available and largely affordable, and the insurance industry has greatly expanded its financial capacity. There has been, however, little apparent success on a longer term private solution and fears persist about wider economic consequences if insurance is not available. To a large degree, the same concerns and arguments that accompanied the initial passage of TRIA are still before Congress today.

Congress has responded to the impending expiration of TRIA with two bills that have been passed by the respective chambers. The Senate bill, Senator Christopher Dodd's S. 467, was approved by the Senate on November, 18, 2005. The large majority of the language from the House bill, Representative Richard Baker's H.R. 4314, was inserted into S. 467 and passed by the House on December 7, 2005. S. 467 is entitled the Terrorism Risk Insurance Extension Act whereas H.R. 4314 is entitled the Terrorism Risk Insurance Revision Act. The titles do reflect essential differences between the two bills. S. 467 extends the current program two years and further increases the private sector's exposure to terrorism risk, as did the original act. (During the three years covered by the initial act, insurance industry deductibles and aggregate retention rose each year.) S. 467 continues to increase these and also reduces the types of insurance covered by the program and increases the size of terrorist event necessary to trigger the program. H.R. 4314 extends the program for two or possibly three years, and also substantially revises many aspects of it. Among the notable changes, it excludes some lines of coverage and includes others that were not covered before. It segments lines of insurance, introducing different deductibles for different lines. It includes the concept of resetting the deductibles and the trigger amount to lower amounts if a terrorist attack occurs in the future.

This report briefly outlines the issues involved with terrorism insurance and includes a side-by-side of the current TRIA and the legislation that is being considered to revise and extend it. It will be updated if this legislation advances.