In January, President Obama signed into law H.R. 26, the “Terrorism Risk Insurance Program Reauthorization Act (TRIA) of 2015,” which extends authorization of the Terrorism Risk Insurance Program through December 31, 2020.
This decision will help avert would could have been a serious economic impact on banks, workers, financial markets, and the broader economy. Since its inception in 2002, developers have credited TRIA with reviving commercial development in New York City and beyond.
Most major insurance carriers have been reluctant to offer terrorism insurance without the federal backstop but the truth is, terrorism insurance is vital to all businesses.
According to a document released by the Council of Insurance Agents & Brokers, major program changes that came along with the extension included the following:
1.Trigger: The Program trigger, which is currently $100 million in annual aggregate insured losses, will be increased in phases to $200 million. The trigger will increase $20 million per year every year for five years starting in 2016.
2. Co-Share: The insurer co-share will increase from 15 percent to 20 percent. Starting on January 1, 2016, the co-share will increase 1 percent a year for five years.
3. Recoupment: The amount that the federal government will recoup increases from the current $27.5 billion to $37.5 billion. The recoupment amount increases $2 billion per year starting in 2015. Starting in 2020, recoupment will be the lesser of $37.5 billion or the annual average of the sum of insurer deductibles for all insurers participating in the Program for the prior three calendar years. Determination of such sum will be made pursuant to regulations to be issued by the Treasury Department. Finally, the rate of recoupment will increase from 133 percent to 140 percent.
Thus, under the reauthorized Program:
- A terrorist act must cause at least $5 million in insured losses to be certified for TRIA coverage;
- The aggregate insured losses from a certified act of terrorism triggering government coverage to begin will increase by $20 million each year from $100 million in 2015 to $200 million in 2020;
- An individual insurer must meet a deductible of 20 percent of its annual premiums for the government coverage to begin;
- Assuming above thresholds are passed, the government covers 85 percent of losses (decreasing to 80 percent by 2020) due to terrorism, up to a cap of $100 billion;
- If insured losses are under $27.5 billion (increasing to $37.5 billion by 2020), the government is required to recoup 140 percent of government outlays. As insured losses rise above the monetary thresholds, the government is required to recoup a progressively reduced amount of the outlays. At a certain high insured loss level, which will depend on the exact distribution of the losses (i.e., if overall losses exceed the industry retention level), the government would no longer be required to recoup outlays, but would retain the discretionary authority to do so.
Commercial Insurance vs. Terrorism Insurance.
Commercial insurance, also known as business property insurance, protects businesses from financial loss due to the physical assets of a business being damaged. These can include the building the business is housed in, its inventory, its equipment and other essential contents. This type of coverage protects against things like fire, lightning, hail, wind storms, explosions, riots and vandalism. Additionally, endorsements can be added to a policy that will protect it further. Common endorsements include those for flood, earthquakes, business income and equipment breakdown.
Unfortunately, according to data from the Congressional Research Service, nearly four out of 10 commercial insurance policies have exemptions relating to terrorism, which would allow insurers to reject business interruption claims. Large office buildings are much more likely to have terrorism insurance than small businesses.
Dealing with the possibility of terrorism can feel overwhelming, but it's essential for businesses to meet the challenge head-on. The first step should be to analyze your current insurance coverage and determine if you are protected in the event of a terrorist attack. Many businesses may have gaps in their coverage relating to terrorism and not even realize it. In addition to physical damage, the potential financial impact of terrorism can be devastating.
As reported by USA Today, Howard Kunreuther, co-author of Insurance and Behavioral Economics, writes that as many as 70 percent of businesses have terrorism insurance. More businesses should take a cue from this, especially those in urban areas. If the worst should happen, proper insurance coverage could be the only thing standing between a business failing or succeeding.
Like all risks, the most important thing to do is to review the exposures with an insurance professional and determine the best way to handle. Not everything can be covered, but you certainly want to do the evaluation and make choices based on the best advice.