NAIC WORKING GROUP CONVENES TO DISCUSS THE RENEWAL OF TRIA

A conference call of the National Association of Insurance Commissioners (“NAIC”) Terrorism Insurance Implementation (C) Working Group (“Working Group”) of the Property and Casualty Insurance (C) Committee (“Committee”) took place on August 7, 2007.  The Working Group discussed the status of renewing the Terrorism Risk Insurance Act (“TRIA”) of 2002.

The Committee monitors and responds to regulatory issues associated with property and casualty insurance products, including issues regarding their delivery and cost.  Specifically, the Working Group is charged with coordinating the NAIC’s efforts to address insurance coverage for acts of terrorism.  It works closely with the United States Department of Treasury’s (“Treasury”) Terrorism Risk Insurance Program Office and Working Group members meet to discuss long-term solutions for the risk of loss caused by acts of terrorism.  

The Working Group convened to discuss the status of TRIA, including the issues surrounding the debate over its extension.  The Group took no action at this time, other than the review of the below provisions.

TRIA provides a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism.  It applies to commercial property and casualty insurance and is administered by the Treasury.  TRIA of 2002 was signed into law by President Bush on November 26, 2002.  On December 22, 2005, President Bush signed into law TRIA of 2005, extending the temporary program.  TRIA of 2005 is scheduled to expire on December 31, 2007 and, accordingly, Representative Michael Capuano (D-MA) introduced H.R. 2761, titled “Terrorism Risk Insurance Revision and Extension Act of 2007” (“TRIREA”).  The bill has passed the Financial Services Committee and the full House of Representatives will be voting on it next.  Attached please find the text of H.R. 2761, as passed by Financial Services Committee.

The following is an outline of H.R. 2761:

• Extends TRIA for 15 years;

• Includes domestic terrorism acts;

• Requires concurrence by the Secretary of Homeland Security, in addition to the Secretary of State and the Attorney General, for the Secretary of Treasury to certify an event as an act of terrorism;

• Sets trigger at $50 million;

• Inserts a nuclear, biological, chemical, or radiological (“NBCR”) component that:

o Requires insurers to make available NBCR coverage on the same terms and conditions; however, implementation of the NBCR mandatory offer requirement is postponed until the renewal or purchase of a TRIA-covered policy after January 1, 2009;

o Creates a 2-year transition period for NBCR forms and a 3-year transition period for NBCR rates to exempt them from prior approval, in addition to waiting period requirements to further facilitate incorporation of NBCR into TRIA;

o Allows the Treasury, in consultation with State regulators, to exempt insurers with less than $50 million in TRIA premiums from complying with the requirement to make NBCR coverage available if such insurers demonstrate that they would become insolvent in the event of an NBCR terrorist attack;

o Has the Treasury determining whether to treat a covered terrorism act as conventional or as NBCR at the time of certification;

o Establishes a 3.5 percent insurer deductible for NBCR events that increases by 0.5 percentage point each year, and applies the current 15 percent co-payment above the deductible up to the program cap, with a step-down mechanism that significantly decreases the co-payment for larger events;

o Clarifies that pollution exclusions will not apply to covered NBCR terrorism events

• Provides additional legal certainty to insurers by:

o Clarifying the annual cap language to ensure that the program cap takes into consideration workers’ compensation and other State mandatory coverage laws;

o Establishing a new statutory disclosure requirement regarding the cap for insurance contracts covering TRIA losses;

o Providing notice to the industry at $80 billion–allowing for a clear transition period for the industry to make preparations as the cap nears, to cease insurer payments and to unwind and halt the claims process once the cap is pierced;

o Clarifying that the limits of an insurer’s financial exposure are confined to its applicable deductible and co-payments, and providing that claims concerning these limits would be consolidated in a federal court;

o Reimbursing insurers for: (1) payments exceeding the cap that are made before the Treasury notice that the cap has been pierced; and (2) payments exceeding the cap ordered by a court, provided that insurers make a good-faith defense effort (the Treasury will have the right to intervene in such court proceedings);

o Modifying TRIA’s purposes to include language that the law “provides finite liability limits for terrorism insurance losses for insurers and the government;”

• Improves implementation around the $100 billion cap by:

o Requiring the Treasury to notify Congress and the industry:

 Within 10 days after the event, if it is likely to cause the piercing of the cap;

 When losses reach $80 billion; and

 Again when losses reach $100 billion;

o Mandating that the Treasury finalize regulations regarding pro rata allocations within 120 days of enactment and providing the Treasury with emergency rulemaking powers;

• Adds group life to TRIA’s covered lines by:

o Defining group life to include term, accidental death, universal and variable universal, but excluding COLI/BOLI coverage, group life reinsurance and retrocessional reinsurance;

o Creating a separate $5 billion recoupment pool;

o Capping the level of Federal exposure at $1 million per certificate holder under any group life insurance policy;

o Applying “amount at risk” as the metric for determining insurer deductibles and recoupment amounts, instead of prior year premiums;

 “Amount at risk” with respect to group life is defined as face amount less statutory policy reserves;

 “Amount at risk” is used instead of premium for group life because group life premium takes into account different risks that would not be appropriate for, or correlated with, terrorism risk, including age and occupation;

• Requires the Treasury to submit a report to and testify before Congress on market conditions every 2 years;

• Creates a 21-member blue-ribbon commission to propose long-term solutions to covering terrorism risk and report to Congress 5 years (interim) and 8 years (final) after enactment of TRIREA;

• Conforms the definition of “control” to the language in the Bank Holding Company Act;

• Adds multi-peril farm owners’ insurance to the lines of insurance covered by TRIA;

• Updates findings and purposes to reflect group life and NBCR changes;

• Prohibits life insurance companies from denying or reducing coverage based on future foreign travel, except under specified conditions;

• Adds a reset mechanism for significant terrorist attacks (over $1 billion) to lower the deductibles, triggers to rebuild market capacity and then gradually increase private sector obligations over time;

• Creates a voluntary terrorism buy-down fund at the Treasury;

• Modestly builds capacity, provides that the $100 billion program cap is the net of the insurance industry obligation;

o The cap on the federal share will be $100 billion, and the insurance industry obligation (deductible plus co-payment) will be in addition to that $100 billion;

o This change is not intended to increase the co-payment obligation of insurers.

Should you have any questions or comments regarding the above, please feel free to contact this office.