Sunrise or sunset: agents and brokers fear an end to TRIA could signal an end to the industry.

Key points

* TRIA was intended to be a temporary measure to help the insurance industry recover from the terrorist attacks of Sept. 11, 2001; the law expires Dec. 31.

* Agents and brokers want TRIA extended while a permanent solution, akin to European risk pools, is worked out.

* Although the federal government in June recommended not to renew TRIA, it is still gathering input from industry leaders.

If the Terrorism Risk Insurance Act of 2002 sunsets at year's end, the effect on the insurance industry could be cataclysmic, say agents and brokers who've closely monitored congressional hearings on the expiring law with anticipation and trepidation.

Going back to the way mega-insurance losses were handled prior to TRIA would be a nightmare for the industry, they said.

"We've been there when it wasn't there. It was 11 months of H-E-L-L," said James A. Fenniman, executive vice president of the New York Division of Bollinger Inc. "Before TRIA, there was that unsettled time between Jan. 1, 2002, and Nov. 26, 2002. It was complete turmoil, and we're heading right back to it."

At risk in New York alone are "$2 billion worth of projects and 17,000 jobs," said Fenniman.

As the Dec. 31 deadline draws near, agents and brokers nationwide are urging lawmakers to extend TRIA by two years to give lobbyists more time for input, and legislators more time to develop a permanent solution. TRIA was enacted as a three-year measure to get the industry back on its feet after the Sept. 11 attacks on the United States. Insured losses for the World Trade Center alone were estimated at $33.5 billion.

Some fear another terrorist attack on the United States could be even costlier.

"As we know, in the event of a terrorist attack in New York City, that can be $30 billion, or it can be $300 billion if they attacked 20 buildings instead of two," said James H. Costner, senior vice president and senior resource consultant for Willis North America, New York. "The object of the terrorist is to create fear and dislocate the Western European and American economy. The biggest problem is the threat of insolvency for the whole insurance industry."

Costner said terrorism insurance is unique because the potential losses are so huge,"that in the absence of some permanent risk financing plan, you could bankrupt the industry."

"If there is no terrorism insurance and a terrorist act happens, who pays for the damages?" said Sharon Emek, chair-elect of the Independent Insurance Agents and Brokers of New York State and a partner at CBS Coverage Group, New York. "That's a very big concern for businesses, and we don't have a solution."

If TRIA fails to renew, short-term implications could include a decrease in agency sales, its agents are unable to help their clients buy the product they need, Emek said. In the long term, Manhattan businesses that require terrorism insurance and can't get it could go out of business.

"And now, especially after the bombing in London at the train stations, there's heightened concern here in Manhattan that [it] could happen very easily here, and without TRIA, it could have real dramatic impact," Emek said.

A pact between the U.S. government and the insurance industry is "perhaps one of our most important economic weapons in the war against terror," said New York State Superintendent of Insurance Howard Mills, who testified before the House Financial Services Committee hearing on TRIA July 27. Mills prefaced his testimony with a New York Post column in which he listed "significant disruptions in the insurance marketplace" in the months following the Sept. 11 attacks:

* Large businesses scrambled to gather coverage from varying sources, which was not in itself, adequate.

* Smaller businesses found it harder to secure adequate coverage in all fines.

* Some insurers considered lowering the amount of insurance they carried.

* Other insurers considered such cost-cutting measures as re-evaluating expansion plans and reducing employee benefits.

* Many businesses suddenly found they had to pay higher premiums for less coverage, or even forgo insurance altogether.

"Without a federal backstop in place, you will see initially lower availability and higher costs for terrorism insurance," said Charles Symington, vice president of public affairs and federal relations for the Independent Insurance Agents and Brokers of America. "That's big. I would see those effects as quite severe, with a negative impact on the overall economy."

"I think we'll be in the same situation we were in 2002, when construction loans and other loans dried up because terrorism insurance wasn't available," Costner said. "The effect on the economy will be immediate."

Reform Expected

A report by the U.S. Treasury issued June 30 indicated the administration would not back a straight renewal of TRIA, but would back a reform if it contained certain additional measures. In an accompanying letter, Treasury Secretary John W. Snow stated that any extension should recognize several key principles:

* The temporary nature of the program.

* The rapid expansion of private market development (for insurers and reinsurers to grow capacity).

* The need to reduce taxpayer exposure.

* A significant increase to $500 million of the event size that triggers coverage.

* An increase in the dollar deductibles and percentage copayments.

* Elimination of certain lines of insurance such as commercial auto, general liability and other smaller lines.

Currently, TRIA requires a $5 million trigger event for coverage, and insurance companies have to put up 15% of the hit before the government kicks in with 90% reinsurance; the administration would like to hike that 15% deductible up to 20%.

"Aside from some language, the real negotiating ploy is the retention: We all know that $5 million is too low, but we all know that the $500 million is too high," Fenniman said. "The $500 million retention is way overboard. It would only affect the largest players."

"Insurance companies want to buy reinsurance to protect themselves, but there is not a viable marketplace for that 15% tot insurance cost to protect themselves," said Joel Wood, senior vice president for government affairs for the Council of Insurance Agents and Brokers in Washington, D.C. "if on Jan.1 they can't find reinsurance for 15% of the risk, much less for 100% of the risk, every insurance company is going to be betting the company to stay in the market."

Symington is hopeful that lawmakers will approve a revised TRIA, with a deductible and copay the market can handle:"There has to be the insurer's capacity, and more important, the reinsurer's capacity to insure those deductibles."

Wood said without TRIA, prices for terrorism coverage--if it's even available--would "go up exponentially for certain consumers in vulnerable areas," especially where insurance companies have aggregated risks. 'I represent conservative business folk. They don't like government programs, but at the end of the day, they want to be making sure their policyholders don't have Swiss cheese coverage."

Marjorie Young, vice president of broker E.G. Bowman, New York, said in a statement that if lawmakers do not extend TRIA, they either expect the insurance companies to pick it up, or the businesses to self-insure against terrorism. That could prevent brokers from obtaining terrorism coverage for clients based on how fast the insurance companies fill up their capacity in any given location.

"For agents or brokers, this means an increased marketing effort and responsibility to aid their clients in obtaining adequate limits and manageable deductibles at reasonable prices, it possible," Young stated.

Fenniman said it all comes down to two options: "If TRIA is extended, you have terrorism [coverage]. If it's not extended, you're naked."

Current Effects

For some, the effects of a waning TRIA are already being felt.

"As policyholders, our members have already been subject to a variety of 'pop-up exclusions' and 'sunset clauses' and other restrictions the insurance industry has begun to impose on renewal of policies running through Dec. 1, 2005. These exclusions are in anticipation of a possible disappearance of the TRIA backstop," James E. Maurin testified before the House committee July 27.

Maurin, a past chairman of the International Council of Shopping Centers and founder of Stirling Properties, Covington, La., spoke as a client and as a member of the Coalition to Insure Against Terrorism, which represents commercial policyholders in the construction, entertainment, manufacturing, real estate, retail and transportation industries. As a client, he can't write his own insurance or decide what levels of risk or capacity his insurers can undertake: "I am the end-user and as a policyholder, I am being squeezed by both sides in this debate regarding the future of federal terrorism insurance."

Also testifying was John T. Sinnott, the long-time chairman and chief executive officer of Marsh & McLennan Cos., who rejoined the firm this summer as vice chairman after a two-year retirement. Sinnott spoke on behalf of the firm and as a member of CIAB, which represents commercial insurance agencies and brokerage firms nationwide.

Short-term federal government involvement is "critical to avoid serious disruptions in the marketplace," Sinnott stated. "The issue is critical to Marsh and members of the Council because terrorism coverage is critical to our clients. Commercial insureds need terrorism coverage not just for peace of mind, but for their businesses."

Just one terrorist claim could have the potential to wipe out the industry, TRIA proponents said.

"The property insurance industry and the reinsurance industry, stand at $600 billion currently. That $600 billion has to support all kinds of insurance, from homeowners to personal auto to property insurance on skyscrapers," Costner said. "So it" you have a terrorism claim that's $200 billion, you impair the industry to write workmen's comp and homeowners and general liability."

Many agents and brokers would like to see an extended or permanent TRIA that's all-inclusive: with workers' comp, employee benefits, life and auto insurance, and coverage for biological and chemical warfare. Workers' comp is mandatory in a commercial policy per most state regulations and should be part of terrorism coverage, according to Mills: "A single, midsized employer with 250 employees at one location can represent a potential exposure to an insurer of tens of millions of dollars in the event of a terrorist attack."

What's Next?

Sinnott and Wood offered three options outlined by CIAB for going forward on TRIA:

* Take no further action and let TRIA expire;

* Modify and extend the current TRIA program per the administration's guidelines in the June 30 Treasury report; or

* Facilitate the creation of a permanent private market solution that allows TRIA to sunset, including a pooling mechanism with a limited federal backstop that would phase out over time.

"It would sunset into an independent mutual company with no federal backstop," Wood explained. "It allows evaporation of the federal role. It allows a pooling mechanism that currently doesn't exist (that would have tax benefits to it). It also would include a taxpayer protection portion of it, perhaps with a repayment schedule similar to the existing TRIA2."

"The problem is. the clock is ticking," Wood said. "It took us 11 months to pass TRIA to begin with."

TRIA supporters noted the program has been a success thus far, and not one penny has been paid out of it to date. Many echoed remarks by Federal Reserve Board Chairman Alan Greenspan, who testified before the House committee this summer on private market limitations with respect to extreme acts of terrorism: "So long as we have terrorism that has the capability of a very substantial scope of damage, there is no way you can expect [the] private insurance system to handle that."

"The real question that policymakers face over TRIA is, how do we efficiently finance terrorism risk to support economic growth?" Costner said. "The answer to that question has always been commercial insurance--whether the risk is fire, terrorism, windstorm, explosion."

Wood called July 27's Congressional hearing "a fabulous springboard for behind-the-scenes drafting" that could lead to a bill that will pass the House of Representatives. "You basically had an unanimity among all industry and policyholder groups that solutions can be found that roughly meet the criteria set by the administration."

Costner concurred: "I felt very good about the hearings ... the reaction of Congress on both sides of the aisle to the testimony was good. The mindset is there to extend TRIA and to develop a permanent solution."

The final decision on TRIA "will probably come out in the heat of hand-to-hand combat," Fenniman said. "Last year we almost had it, and it fell apart in the second week of October. It was very close."

Top 5 Costliest Terrorist
Attacks by Insured
Property Loss **

($ Millions)
Adjusted to 2004 Price Level

9/11/01
Sept. 11 Terrorist Attacks $34,670

4/24/93
Bomb Near NatWest Tower in London $967

6/15/96
IRA Car Bomb Near Manchester Mall $794

2/26/93
Bomb in World Trade Center $773

4/10/92
Bomb in London Financial District $716

* Madrid bombing in 2004 cost insurers an
estimated $110.9 million. ***

* Oklahoma City bombing in 1995 cost
insurers $125 million.

** Includes property, business interruption and
aviation hull losses.

*** Merrill Lynch estimate, Euros 93 million,
converted to US$ using exchange rate
July 7, 2005.

Source: Swiss Re: Insurance Information Institute

RELATED ARTICLE: What is TRIA?

The Terrorism Risk Insurance Act of 2002

TRIA was enacted Nov. 26, 2002, to ensure that adequate resources are available for businesses to recover and rebuild if they become the victims of a terrorist attack and to help the insurance industry recover from the losses caused by attacks on Sept. 11, 2001. Under the Act:

* The federal government shares with private insurers the risk of future terrorism losses for three years, ending Dec. 31, 2005; all U.S. property and casualty insurers must offer terrorism coverage.

* The bill is limited to international terrorism committed on U.S. soil causing $5 million in aggregate property and casualty insurance losses, as certified by the Secretary of the Treasury.

* Companies are responsible for a 15% deductible before federal assistance becomes available; the government will cover 90% of claims thereafter, with the company responsible for another 10%.

* Losses covered by the program are capped at $100 billion.

* The Treasury Secretary can recoup some or all of the government's losses through policyholder surcharges, if two criteria are met: Industrywide losses must be less than the insurance marketplace aggregate retention, set at $15 billion for 2005, and individual insurers must have received federal reimbursement. The amount subject to recoupment is the difference between total industry costs (the 15% deductibles plus 10% cost above the deductibles) and the insurance marketplace aggregate retention.

* Excluded from the program are personal lines (auto and home), assumed reinsurance, federal crop, mortgage guaranty, financial guaranty, medical malpractice, flood insurance, life and health insurance, plus such war-risk exclusions as nuclear, biological, chemical and radiological attacks.

Ideally, Agents and Brokers Want:

* A two-year extension, giving the industry more time to understand its needs and model catastrophes better.

* A temporary federal backstop to ensure enough transition time to create a permanent solution, such as a reinsurance company or pool for which the government would supply seed money.

* An increase in existing attachment points by $1 million.

* Less government involvement.

* A law that is all-inclusive: life, personal lines, workers' comp, employee benefits, commercial auto, general liability.

* A deductible that meets the needs of the marketplace (insurers' and reinsurers' capacity to insure the deductible).

Terrorism Insurance
Take-up Rates by Quarter

The take-up rate in the fourth
quarter of 2004 was more than
double the rate in the second
quarter of 2003.

2003 2nd   23%
     3rd   26%
     4th   33%
2004 1st   44%
     2nd   46%
     3rd   44%
     4th   48%

Weighted Annual Averages

2003       27%

2004       49%

Source: Marsh & McLennan Cos.

Terrorism Insurance Take-up and Premium Rates
By Major Metropolitan Areas in 2004

The interaction of pricing and experience has an effect on take-up
rates, as does the hard-to defines notion of "perception of risk."

New York City     54%
Los Angeles       39%
Chicago           58%   Take-up rates
Washington D.C.   60%   Terrorism premium rates
San Francisco     37%
Philadelphia      49%
Boston            69%
Detroit           42%
Dallas            57%
Houston           23%

Note: Table made from bar graph.

Source: Marsh & McLennan Cos.