What Terrorism Risk Insurance Means for Banks

WASHINGTON — Banks have stepped up efforts to extend the government's terrorism risk insurance program, fearing that Congress may fail to act before it is scheduled to expire at yearend.

The 2002 Terrorism Risk Insurance Act provides a government backstop to the insurance industry in the event of a catastrophic terrorist event, and has become an important fixture for the commercial real estate market in some high-risk areas. The program was most recently renewed in 2007 after being extended in 2005, and it is again set to expire on Dec. 31, 2014.

But with midterm elections likely to suck much of the oxygen out of the room in coming months, it remains to be seen whether lawmakers will have the time or resolve to address the program or propose substantive changes in short order.

Below we offer some frequently asked questions about TRIA, including what to expect from the Hill later this year.

What is the current status of TRIA?

The program was initially launched to help stabilize the insurance and reinsurance markets in the wake of the Sept. 11, 2001, attacks, and has since become critical for lenders and others involved in the commercial real estate business.

"With government reinsurance, the insurance companies and reinsurance companies are better able to model the risks," said Brandon Barford, a partner at Beacon Policy Advisors. "The more actuarially sound you can model each deal, the easier it is for credit to flow."

Advocates warn that the insurance market still lacks the capital to provide adequate terrorism insurance at an affordable price in the absence of a government backstop, because data on the frequency and severity of attacks is so limited. The program is particularly important for bankers that underwrite and securitize large commercial loans.

"To attract investors you need a credit rating, and you can't get a good credit rating unless the property is insured against the appropriate risks, including terrorism," said Kevin McKechnie, senior vice president of the American Bankers Insurance Association.

If an attack meets certain criteria that certifies it as an act of terrorism, the government will begin providing coverage when losses exceed $100 million and up to $100 billion. Private insurers pay a deductible set at 20% of their annual premiums, and the government will pay 85% of the losses incurred by each insurer beyond that point. Treasury Department can later recoup some of its payout with an industry surcharge.

The 2007 reauthorization also extended coverage to include some acts of domestic terrorism. New questions about the insurance program, which has never been used, arose last April in the wake of the Boston Marathon bombings, but that attack has not been officially certified as an act of terrorism by federal officials.

What's likely to happen in Congress this year?

It will probably be renewed despite ongoing criticism from some Republican lawmakers, although most observers are predicting at most a few marginal changes this time around.

"Republicans could attempt to reduce taxpayer exposure, but barring that I don't believe that they want to have a large policy fight," said Barford.

Efforts to put more of the risk onto the private sector could take several forms. For example, there could be a reduction in the subsidy paid by the government or a higher threshold for losses incurred before government steps in.

So far, three bills have been introduced, all in the House. Two would provide for extensions of the program for five or ten years, respectively, and a third would extend it for ten years and move administration of the program from Treasury to the Department of Homeland Security.

Banking committees in both chambers have held preliminary hearings on the issue, though it has yet to bubble up as a top legislative priority.

Despite initial activity from the House, it's possible than successful legislation could ultimately originate in the Senate, once the Banking Committee is able to take a pause from its work on housing finance reform. Both Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the ranking member, recently called terrorism risk insurance a priority and said they hope to work on a bipartisan approach to the extension.

All three House bills have co-sponsors, with the five-year extension legislation, introduced by Reps. Michael Grimm, R-N.Y., and Carolyn Maloney, D-N.Y., carrying more than 80 supporters.

But House Financial Services Committee Chairman Jeb Hensarling, R-Texas, could prove a roadblock to bringing any of the bills to a panel vote given his stated objections to the program.

"At the time it was thought that originally the TRIA act would give the insurance industry time to re-capitalize and develop new models that they could price for terrorism risks and increase industry capacity," he said at a hearing in September. "In 2007, Congress was back again to stretch the boundaries of modern linguistics by extending TRIA temporarily for seven additional years and expanding it to cover any acts of terrorism, foreign or domestic. So we all must recognize that in just five years TRIA has leapt in scope and quadrupled in length, neither of which I think could be mistaken for facilitating a transition to a viable market for private terrorism risk insurance."

Hensarling expressed similar reservations about recent flood insurance legislation, which was passed first by the Senate and was revised by a small group of bipartisan lawmakers in the House before ultimately being passed over his objections.

On the other end of the spectrum, some supporters have continued to press for the program to be made permanent. But at least for this year, it's more likely that lawmakers would pass another extension, one that is probably shorter than a decade.

When will it be reauthorized?

That's still unclear. There are already reports of headaches in the insurance industry, because contracts need to include a clause stipulating what the pricing for terrorism insurance would be if the program is not renewed.

"There are a lot of policies being written now, and there's been a push because of the desire to retain customers," said Ken Billingsley, an insurance analyst at Compass Point Research & Trading. "Underwriters are having to make assumptions in these policies on what the pricing will be if TRIA is not reauthorized."

Several members of the Senate Banking Committee expressed concern about project delays at a hearing last week.

"This is something we know we're going to extend. We've got some major projects that we know are going to be delayed if we don't get on with this," said Sen. Bob Corker, R-Tenn., who called a potential delay on the extension until after the mid-term elections "irresponsible."

Putting off the issue is likely to increase the cloud of uncertainty hanging over the industry, but the political realities are such that lawmakers, particularly Republicans, probably wouldn't see much upside for approving an extension ahead of the election.

"I don't see why House Republicans would want to do pass such a bill before the elections, because that puts them at risk of being attacked for supporting what many on the right view as crony capitalism — big, urban commercial real estate interests, property and casualty insurers, and reinsurers," said Barford.

But it's always possible such procrastination could have its downsides.

"The longer it's out there, the greater the chances it doesn't get done," said Mark Calabria, director of financial regulation studies at the Cato Institute. "You could easily imagine that Congress doesn't come back after the elections or doesn't do much."

Pushing off the reauthorization until early next year could create even greater hurdles for advocates, particularly if Republicans take control of the Senate and Sen. Richard Shelby, R-Ala., once again becomes chairman of the Banking Committee.

"Shelby was one who gave the TRIA advocates a hard time last time," Calabria added. "Certainly from the industry's perspective, they'd rather deal with Crapo than with Shelby."