Congress extends terrorism insurance program.

In late December 2005, President Bush signed into law a two-year extension of the Terrorism Risk Insurance Act of 2002 (TRIA), which had been set to expire at the end of the year.

The TRIA requires all commercial property and casualty insurance companies to offer terrorism coverage. In exchange, the federal government shares the risk of terrorism losses above a certain level.

The extension eases fears among real estate firms and other property owners that the TRIA's expiration would make it difficult for them to obtain terrorism coverage.

But the new law--the Terrorism Risk Insurance Extension Act of 2005 (the "Extension Act")--requires insurers to bear greater losses before federal assistance kicks in.

In addition to a devastating loss of human life, the September 11, 2001, terrorist attacks also brought about a crisis in the insurance industry. With 9/11-related property and casualty claims topping $40 billion, many insurance companies responded with dramatic premium increases or simply eliminated terrorism coverage entirely.

Billions of dollars in real estate transactions were placed on hold or canceled because property owners and investors couldn't get the terrorism protection they needed.

To help ensure the continued availability of terrorism coverage, Congress passed and the president signed the TRIA in late 2002. The law requires insurers to make terrorism coverage available in all of their commercial property and casualty policies. Insurers are free to establish premiums as they see fit (subject to any state laws that regulate premiums). But they must disclose--clearly and conspicuously--the premium charged for insured losses covered by the TRIA program as well as the federal government's share of compensation for such losses.

TRIA applies to "acts of terrorism"--that is, acts certified by the Secretary of the Treasury (in concurrence with the Secretary of State and the U.S. Attorney General):

1. To be an act of terrorism;

2. To be a violent act or an act that is dangerous to human life, property, or infrastructure;

3. To have resulted in damage within the U.S. (or outside the U.S. in certain limited circumstances); and

4. To have been committed by an individual or individuals acting on behalf of any foreign person or foreign interest, as part of an effort to coerce the U.S. civilian or to influence the policy or affect the conduct of the U.S. Government by coercion.

Prior to the Extension Act, federal participation was triggered by an act of terrorism that resulted in aggregate property and casualty insurance losses of more than $5 million.

Once an insurer's exposure exceeded a deductible--in 2005, the deductible was 15% of an insurer's earned commercial premiums for the preceding year--the federal government was responsible for paying 90% of the insurer's losses.

The TRIA was meant to be a temporary fix, guaranteeing that coverage would be available while a private market for terrorism insurance developed. Some in Congress were opposed to extending the law, arguing that in the three years since TRIA was enacted, the insurance industry has developed more sophisticated techniques for managing terrorism risks and pricing coverage. Many insurance companies, however, maintained that continued government assistance was needed before the private market could stand on its own.

Lawmakers reached a compromise in the Extension Act, which keeps the TRIA program going for another two years, but scales back the government's exposure.

The act increases the threshold for government participation from $5 million to $50 million in 2006 and $100 million in 2007. It also increases an insurance company's deductible from 15% to 17.5% in 2006 and 20% in 2007. The federal government's share of losses beyond the deductible remains at 90% this year, but falls to 85% in 2007.

The Extension Act also drops certain insurance lines from the program, including commercial auto, burglary and theft, surety, professional liability, and farm owners' multi-peril.

Shifting terrorism risk to the insurance industry may have an impact on some insurers' pricing and capacity. But the two-year extension of TRIA should ensure that affordable terrorism coverage remains available to real estate firms that need it. At the end of 2007, however, the federal government will likely scale back its exposure even further or get out of the terrorism insurance business altogether.

It's difficult to predict how the loss of federal protection against extreme losses will affect the private market for terrorism insurance.

Over the next two years, real estate firms should evaluate their terrorism exposure and insurance needs and develop alternative strategies in the event terrorism coverage is harder to come by in the future.

Marc Wieder, CPA, Partner

ANCHIN, BLOCK & ANCHIN LLP