Immediately after 9/11, the terrorism insurance market dried up completely. Consumers found themselves without terrorism coverage and unable to find it at prices they could afford. Real estate and construction contracts were cancelled or stalled, and an estimated 300,000 jobs were lost as a direct result. The passage of TRIA in 2002 stabilized the situation but, if allowed to expire at the end of 2014, the industry may find itself in a similar position.
The argument for allowing TRIA to expire relies on the belief that the private insurance industry would continue to offer necessary terrorism coverage capacity at affordable rates. A 2009 study conducted by Aon found that this is not the case. Aon calculated that 70% to 80% of the commercial property insurance market would discontinue terrorism coverage if TRIA were allowed to expire. A recent study by Fitch Ratings reinforced Aon’s finding, stating that it is “unlikely that substantial private market capacity would arise as a substitute to TRIPRA coverage if the program is allowed to expire.”
Such a dramatic reduction in capacity would lead directly to a severe rise in prices. Many businesses could find themselves priced out of the terrorism insurance market, forcing them to self-insure, and placing their entire future at risk. Businesses that can afford to absorb these losses will do so at the expense of other business growth objectives. This uncertainty may stunt business growth, thus having a negative impact on the economy as a whole.
Businesses that choose to go without terrorism coverage will find themselves in breach of lender agreements and corporate lines of credit. Most financial institutions for commercial lending require terrorism coverage in order to secure construction and mortgage loans. According to the Coalition to Insure Against Terrorism, more than $15 billion in real estate transactions were stalled or cancelled in the 14 months between the 9/11 attacks and the passage of TRIA in 2002.
These transactions will face similar upheaval if TRIA is allowed to expire at the end of this year, but the uncertainty surrounding the act’s potential expiration will have an impact in 2014. In 2005, as the program neared its first expiration date, many insurers began putting sunset provisions into their policies in order to address the lack of terrorism coverage if TRIA had been allowed to expire. This created confusion as lending agreements required coverage beyond TRIA’s potential expiration, yet policies were to sunset at the end of the year. These same sunset provisions—and the resulting uncertainty—can be expected in 2014 as insurers are forced to confront the possibility of TRIA expiration.
It is important to note that large commercial property owners are not the only ones that would suffer the negative effects of expiration. Without TRIA, workers compensation insurers—who are prohibited from excluding terrorism coverage by the states—will be less willing to offer the same number of workers compensation policies in high risk areas. Employers with a high concentration of employees in major urban areas are already seeing workers compensation rates 5% to 10% higher in 2014 due to uncertainty over TRIA’s future. If TRIA is allowed to expire, these rates may climb even higher.
While the TRIA program has been a success to this point, there is always room for improvement. Currently, insurers are not required to make coverage available for nuclear, biological, chemical, or radiological (NBCR) attacks. There is a high probability that an NBCR attack would result in catastrophic TRIA-triggering losses, and such events should be addressed in any potential revisions of the program. The process by which acts of terror are “certified” can also be improved. Several months removed from the Boston Marathon bombings, there has yet to be a determination made on whether the acts will be certified as an “act of terror.” A deadline for certification would go a long way to bringing certainty and efficiency to the process.