[Senate Report 113-199]
[From the U.S. Government Publishing Office]
Calendar No. 438
113th Congress Report
SENATE
2d Session 113-199
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TERRORISM RISK INSURANCE PROGRAM REAUTHORIZATION ACT OF 2014
_______
June 26, 2014.--Ordered to be printed
_______
Mr. Johnson of South Dakota, from the Committee on Banking, Housing,
and Urban Affairs, submitted the following
R E P O R T
The Committee on Banking, Housing, and Urban Affairs, to
which was referred the bill (S. 2244) to extend the termination
date of the Terrorism Insurance Program established under the
Terrorism Risk Insurance Act of 2002, and for other purposes,
having considered the same, reports favorably thereon, with
amendments, and recommends that the bill, as amended, do pass.
INTRODUCTION
On June 3, 2014, the Senate Committee on Banking, Housing,
and Urban Affairs considered S. 2244, entitled ``Terrorism Risk
Insurance Program Reauthorization Act of 2014,'' a bill to
extend the termination date of the Terrorism Risk Insurance
Program established under the Terrorism Risk Insurance Act of
2002, and for other purposes. By a unanimous vote of 22-0, the
Committee voted to report favorably the bill, as amended, to
the Senate.
BACKGROUND
Insurance coverage for losses from terrorist attacks prior
to September 11, 2001, were typically included in general
insurance policies without specific cost to commercial
policyholders. However, large losses experienced by the private
insurance and reinsurance markets resulting from the September
11th attacks dramatically altered the market for terrorism risk
insurance. An estimate of the insurance industry losses from
the September 11th attacks was $31.5 billion at the time, or
$41.8 billion in 2014 dollars.\1\ Following the attacks, many
insurance companies began to exclude losses resulting from acts
of terrorism from their general policies and not offer
standalone terrorism risk insurance. By early 2002, 45 states,
the District of Columbia, Puerto Rico, and Guam had approved
terrorism damage exclusions from standard commercial
policies.\2\ The withdrawal of terrorism risk insurance
coverage following the September 11th attacks impacted the
economy in various ways, most notably in real estate and
commercial lending.\3\
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\1\The estimate is based on eligible lines of insurance were the
Terrorism Risk Insurance Act (TRIA) law at the time of the September
11th attacks. See Tom LaTourrette and Noreen Clancy, RAND Corporation
Policy Brief, The Impact on Federal Spending of Allowing the Terrorism
Risk Insurance Act to Expire (Apr. 10, 2014), http://www.rand.org/pubs/
research_reports/RR611.html, p. 4.
\2\Jeff Woodward, ``The ISO Terrorism Exclusions: Background and
Analysis,'' IRMI Insights, February 2002, available at http://
www.irmi.com/expert/articles/2002/woodward02.aspx.
\3\Richard Hillman, then Director of Financial Markets and
Community Investment for the U.S. General Accounting Office (GAO, which
is now the U.S. General Accountability Office), testified before
Congress in February 2002, stating: ``Even in the absence of an actual
terrorist event, however, there are growing indications that some
sectors of the economy--notably real estate and commercial lending--are
beginning to experience difficulties because some properties and
businesses are unable to find sufficient terrorism coverage, at any
price. If allowed to go unchecked, these difficulties are likely to
increase as more insurance contracts come up for renewal over the next
year. The resulting economic drag could slow economic recovery and
growth.'' GAO, Terrorism Insurance: Rising Uninsured Exposure to
Attacks Heightens Potential Economic Vulnerabilities (Feb. 27, 2002),
http://www.gao.gov/products/GAO-02-472T, p. 2.
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To respond to the market disruption and increasing concerns
about the negative economic impact following the September 11th
terrorist attacks, as well as to address the inability of the
private insurance and reinsurance markets to provide coverage
relating to terrorism risk in a meaningful way, Congress passed
the Terrorism Risk Insurance Act of 2002 (TRIA).\4\ TRIA
created the Terrorism Risk Insurance Program, which provided a
government reinsurance backstop in the case of foreign
terrorist attacks. Since originally passing TRIA in 2002,
Congress has reauthorized and reformed TRIA twice (in 2005 and
2007),\5\ with the last reauthorization extending the program
for 7 years. Currently, the program is set to expire on
December 31, 2014.
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\4\P.L. 107-297.
\5\P.L. 109-144 and P.L. 110-160.
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The events and aftermath from the September 11th terrorist
attacks underscored that terrorism risk is a relatively unique
and challenging kind of risk to underwrite from an insurance
perspective. Although it has been more than a decade since the
attacks, terrorism risk continues to pose significant
challenges for insurers to be able to model and price the risk.
In a 2014 report, the President's Working Group on Financial
Markets (PWG) found that, ``According to commenters, a
significant challenge to pricing terrorism risk is the lack of
credible empirical historical data on which to base loss
projections and pricing. . . . Among others, the following
impediments to more robust modeling of terrorism have been
identified to the PWG: Lack of sufficient experience and
historical information by which to validate a model
(frequency); Unique nature of terrorism risk; Geographic
concentration of terrorism risk (proximity of insured assets to
perceived ``targets''); Diversity of potential weapons
scenarios; Number of potential targets; and Insufficient
exposure data.''\6\
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\6\President's Working Group on Financial Markets, The Long-Term
Availability and Affordability of Insurance for Terrorism Risk (April
2014), http://www.treasury.gov/initiatives/fio/ reports-and-notices/
Documents/PWG_TerrorismRiskInsuranceReport_2014.pdf, pp. 15-16.
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There is some data available about the terrorism risk
insurance market since Congress passed TRIA. The President's
Working Group on Financial Markets and others have issued
reports showing various trends on pricing, premiums and
capacity across a range of affected industries.\7\ There have
also been recent studies on TRIA's impact on Federal spending,
national security, and workers' compensation insurance
markets.\8\ As far as take-up rates go, Marsh, Inc. has
reported that only 27 percent of their commercial clients
bought terrorism insurance in 2003. The take-up rate, however,
climbed relatively quickly to 49 percent in 2004 and 58 percent
in 2005. Since 2005, the take-up rate has leveled off around 60
percent.\9\
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\7\See, e.g., President's Working Group on Financial Markets,
Terrorism Risk Insurance (2006), http://www.treasury.gov/resource-
center/fin-mkts/Documents/report.pdf, Market Conditions for Terrorism
Risk Insurance (2010), http://www.treasury.gov/resource-center/fin-
mkts/Documents/PWG%20Report%20Final%20January%2013.pdf, and The Long-
Term Availability and Affordability of Insurance for Terrorism Risk
(April 2014), http://www.treasury.gov/initiatives/fio/reports-and-
notices/Documents/PWG_TerrorismRiskInsuranceReport_2014.pdf; Marsh,
Inc., 2010 Terrorism Risk Insurance Report (June 23, 2010), http://
www.insurancemarketreport.com/
LinkClick.aspx?fileticket=6HBpiRJJTgs%3D&tabid=7464, and 2013 Terrorism
Risk Insurance Report (Apr. 30, 2013), http://
www.insureagainstterrorism.org/MMC%20TRIA%20Report%2004-2013.pdf.
\8\See, e.g., Henry H. Willis and Omar Al-Shahery, RAND Corporation
Policy Brief, National Security Perspectives on Terrorism Risk
Insurance in the United States (Mar. 6, 2014), http://www.rand.org/
pubs/research_reports/RR573.html; Tom LaTourrette and Noreen Clancy,
RAND Corporation Policy Brief, The Impact on Federal Spending of
Allowing the Terrorism Risk Insurance Act to Expire (Apr. 10, 2014),
http://www.rand.org/pubs/research_reports/RR611.html, which noted that,
``In the absence of a terrorist attack, TRIA costs taxpayers little,
and in the event of a terrorist attack comparable to any experienced
before, it is expected to save taxpayers money.'' (p. 1); and Henry H.
Willis and Omar Al-Shahery, RAND Corporation Policy Brief, The Impact
on Workers' Compensation Insurance Markets of Allowing the Terrorism
Risk Insurance Act to Expire (May 7, 2014), http://www.rand.org/pubs/
research_reports/RR643.html.
\9\Marsh, Inc., 2013 Terrorism Risk Insurance Report (Apr. 30,
2013), http://www.insureagainstterrorism.org/MMC%20TRIA%20Report%2004-
2013.pdf, p. 9; and President's Working Group on Financial Markets, The
Long-Term Availability and Affordability of Insurance for Terrorism
Risk (April 2014), http://www.treasury.gov/initiatives/fio/reports-and-
notices/Documents/PWG_TerrorismRiskInsuranceReport_2014.pdf, p. 30.
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To date, the private insurance and reinsurance markets
continue to exhibit an inability to offer coverage without a
government backstop. The 2014 PWG report states, ``Challenges
continue to exist regarding the ability of the private market
to provide terrorism risk insurance without a federal backstop,
particularly with respect to the ability of insurers to model
the frequency and severity of losses that could arise from acts
of terrorism. Also, reinsurers and the capital markets appear
reluctant to provide further support to the terrorism risk
insurance market. Private reinsurance does not appear to be a
sufficient substitute for the market certainty provided by
TRIA.''\10\
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\10\President's Working Group on Financial Markets, The Long-Term
Availability and Affordability of Insurance for Terrorism Risk (April
2014), http://www.treasury.gov/initiatives/fio/reports-and-notices/
Documents/PWG_TerrorismRiskInsuranceReport_2014.pdf, p. 37.
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In the Fiscal Year 2015 budget, the Obama Administration
announced its support of a long-term extension of TRIA, saying
``In order to preserve the long-term availability and
affordability of property and casualty insurance for terrorism
risk, the Budget proposes to extend the Terrorism Risk
Insurance Program and to implement programmatic reforms to
limit taxpayer exposure and achieve cost neutrality.''\11\
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\11\U.S. Department of the Treasury, The Budget in Brief--FY 2015
(Mar. 4, 2014), http://www.treasury.gov/about/budget-performance/
budget-in-brief/Documents/Treasury_FY_2015_ BIB.pdf, pp. 4-5.
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PURPOSE OF THE LEGISLATION
On April 10, 2014, Senators Schumer, Kirk, Reed, Heller,
Murphy, Johanns, Warner and Blunt introduced the Terrorism Risk
Insurance Program Reauthorization Act of 2014. The legislation,
as amended by the Committee, will extend TRIA for 7 years until
December 31, 2021. The legislation bolsters the existing
taxpayer protections the program currently has by increasing
the amount of co-payments insurance companies must pay to 20
percent from the existing 15 percent. The legislation would
also raise the mandatory recoupment threshold from the current
$27.5 billion to $37.5 billion. The changes in co-payment and
recoupment would be gradually phased in over 5 years.
As amended by the Committee, the legislation would require
a GAO study on the viability and effects of the Federal
Government assessing and collecting upfront premiums on
insurers that offer TRIA-backed coverage. The legislation, as
amended, would also require a study and rulemaking on the
certification process to improve transparency and market
certainty in the aftermath of any event that could
realistically be certified under the program.
In considering the legislation in Committee\12\, Chairman
Johnson said, ``This bipartisan legislation is the result of a
tough but fair compromise that will extend the TRIA program for
another 7 years. Congress first passed TRIA in response to the
insurance industry no longer offering coverage for the
commercial property market following the tragic September 11th
terrorist attacks. Today the private insurance industry has
returned to the marketplace and is now able to serve this vital
market because of TRIA, not in spite of it. From its inception,
this program was designed to protect taxpayers, and with the
work of the members of this Committee, this bipartisan bill
continues to bolster these protections.''
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\12\Hearing transcript, Senate Committee on Banking, Housing and
Urban Affairs, Executive Session to consider S. 2244, the Terrorism
Risk Insurance Program Reauthorization Act of 2014 (June 3, 2014).
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Ranking Member Crapo said, ``The TRIA program allows the
insurance industry to absorb and cover the losses of all but
the largest acts of terror, ones in which the Federal
Government would likely be forced to step in if the program
were not there. As a part of this reauthorization, I and others
pushed to decrease the size of the backstop. In order to do
that, we have examined each of the policy levers in the
program. This bill would increase the insurance industry's
aggregate retention level and the company coinsurance level.''
In discussing what kinds of acts of terrorism would be
covered by TRIA, Senator Schumer said, ``I have been struck
over the last few months about the discussion of `conventional'
terrorist attacks. It is sort of an oxymoron. Not using a
nuclear weapon does not mean that it is not a terrorist attack.
I can tell you, as somebody who lives in New York City, that
was, I suppose, a conventional terrorist attack. But it still,
if you--in the parlance, but there is nothing conventional
about it, the uncertainty and fear we faced in the immediate
aftermath of the day, the talk that there would be no building
in southern Manhattan, the fact that businesses would flee, and
it began to dawn on people throughout the world that a
terrorist attack could cause such devastation that no free
market mechanism could make up for it. A terrorist attack is
not part of the conventional thinking of a free market, and
that if we did not have some kind of backstop, the amount of
building, the amount of construction, the amount of jobs would
greatly decrease.''
Acknowledging the evolving nature of terrorism since TRIA
was first enacted into law by Congress, including new threats
of cyber-attacks, the Committee maintains the Treasury
Secretary's existing broad discretion and authority to certify
any kind or mode of terrorist attack regardless of how the
attack is carried out provided that the certification criteria
is met. As Senator Reed stated during consideration of the
legislation, ``In short, reauthorizing TRIA is not only a
matter of economic security; it is also a matter of national
security. And, indeed, while TRIA is silent on whether a
nuclear-, chemical-, biological-, or radiologic-related
terrorist attack or any kind of cyber-related attack are
covered, I believe our intent with S. 2244 is that these
attacks would continue to fall within the scope of TRIA's
covered lines, as they do today, provided that the statutory
prerequisites are met.''
It is also the view of the Committee that the legislation,
by striking Section 103(e)(7)(B) of the Terrorism Risk
Insurance Act of 2002 (15 U.S.C. 6701 note), would remove a
superfluous provision regarding the computation of the amount
subject to mandatory recoupment, and should not be construed as
conveying any kind of new authority to the Treasury Secretary
to reimburse or pay claims on a negative calculation derived
from Section 103(e)(7)(A) of the Terrorism Risk Insurance Act
of 2002 (15 U.S.C. 6701 note). Any negative number calculated
under Section 103(e)(7)(A) should be considered otherwise moot.
The legislation is supported by a number of organizations,
including the American Association of Port Authorities,
American Bankers Association, American Bankers Insurance
Association, American Bankers Securities Association, American
Council of Engineering Companies, American Gaming Association,
American Hotel and Lodging Association, American Land Title
Association, American Public Gas Association, American Public
Power Association, American Resort Development Association,
American Society of Association Executives, Associated Builders
and Contractors, Associated General Contractors of America,
Association of American Railroads, Association of Art Museum
Directors, Building Owners and Managers, Association
International, Boston Properties, Campbell Soup Company,
Coalition to Insure Against Terrorism, Cornerstone Real Estate
Advisers, LLC, CRE Finance Council, CSX Corporation, Emerson,
Financial Services Roundtable, Food Marketing Institute,
Helicopter Association International, Hilton Worldwide, Host
Hotels & Resorts, Inc., Institute of Real Estate Management,
InterContinental Hotel Group, International Council of Shopping
Centers, International Franchise Association, International
Safety Equipment Association , International Speedway
Corporation, Long Island Import Export Association, Marriott
International, Mortgage Bankers Association, NAIOP, National
Apartment Association, National Association of Chain Drug
Stores, National Association of Home Builders, National
Association of Manufacturers, National Association of REALTORS,
National Association of Real Estate Investment Trusts, The
National Association for Stock Car Auto Racing (NASCAR),
National Association of Waterfront Employers, National
Basketball Association, National Collegiate Athletic
Association, National Council of Chain Restaurants, National
Football League, National Hockey League, National Multifamily
Housing Council, National Restaurant Association, National
Retail Federation, National Roofing Contractors Association,
National Rural Electric Cooperative Association, New England
Council, Partnership for NYC, Public Sector Alliance, Public
Utilities Risk Management Association, Office of the
Commissioner of Baseball, The Real Estate Board of New York,
The Real Estate Roundtable, Securities Industry and Financial
Markets Association, Self-Insurance Institute of America, Inc.,
Starwood Hotels and Resorts, Tenaska, Taxicab, Limousine &
Paratransit Association, UJA-Federation of New York, United
Airlines, Union Pacific, University Risk Management and
Insurance Association, U.S. Chamber of Commerce, and the U.S.
Travel Association.
HEARINGS
On September 25th, 2013, the Committee held a hearing
entitled, ``Reauthorizing TRIA: The State of the Terrorism Risk
Insurance Market.'' The hearing discussed the need for
reauthorization of the Terrorism Risk Insurance Program.
Witnesses were: Mr. Peter Beshar, Executive Vice President and
General Counsel, Marsh & McLennan Companies; Mr. Erwann O.
Michel-Kerjan, Professor and Managing Director, Center for Risk
Management and Decision Processes, The Wharton School,
University of Pennsylvania; and Mr. Robert Hartwig, Insurance
Information Institute.
At the hearing, Mr. Beshar spoke to the role TRIA has
played in the terrorism risk insurance market after the
September 11th attacks, saying, ``We consider TRIA to be a
model of a public-private partnership. TRIA restored insurance
capacity at a critical time after 9-11 and has been important
in fostering a well-functioning terrorism insurance market
since that time. . . . Thankfully, thus far, the federal
government has not made any payments under TRIA. The only
federal appropriations associated with the program have been
for its administration.''\13\
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\13\Peter J. Beshar, Executive Vice President and General Counsel,
Marsh & McLennan Companies, testimony before the Senate Committee on
Banking, Housing and Urban Affairs, Reauthorizing TRIA: The State of
the Terrorism Risk Insurance Market (Sep. 25, 2013), http://
www.banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=24ef097c-574c-4ebc-a705-
5e35173d1ee7, p. 2.
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Dr. Hartwig made this observation, ``The unambiguous
success of TRIA demonstrates that the Act has become an
invaluable component of the country's national security
infrastructure. The continued operation of the nation's
financial institutions--including its insurers--during and
throughout the aftermath of a major terrorist attack--is
absolutely essential to ensure a smooth and expedited recovery
from the massive economic and operational shocks of the sort
that occurred after the 9/11 attacks and that are certain to
accompany future such events, irrespective of where in the
country they occur. Failure to institutionalize a permanent
plan to protect the nation's financial infrastructure leaves
the country unnecessarily vulnerable to economic instability
and risk of recession.''\14\
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\14\Robert Hartwig, Ph.D., President & Economist, Insurance
Information Institution, testimony before the Senate Committee on
Banking, Housing and Urban Affairs, Reauthorizing TRIA: The State of
the Terrorism Risk Insurance Market (Sep. 25, 2013), http://
www.banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=8213e203-2743-4c66-a58d-
6664c82c6857, pp. 4-5.
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In his testimony, Dr. Hartwig also outlined eight distinct
layers of taxpayer protections that the current structure of
the TRIA program provides: (1) an act of terror meets a
detailed set of certification criteria; (2) an act may not be
certified if aggregate losses do not exceed $5 million; (3) no
Federal funds may be paid if aggregate losses do not exceed
$100 million; (4) individual insurers must pay a deductible
that covers losses that are 20 percent of an insurer's direct
earned premiums for commercial property and casualty insurance;
(5) individual insurers must also make a co-payment of 15
percent of the remaining losses above their 20 percent
deductible; (6) industry in the aggregate covers up to $27.5
billion of losses that must be recouped; (7) government is
required to recoup 133 percent of the difference between
Federal payments and retained losses paid by insurers through
deductibles and co-payments up to $27.5 billion of losses, and
has further discretion to recoup losses above $27.5 billion;
and (8) the program is capped at total losses (Federal payments
plus losses retained by insurers through deductibles and co-
payments) of $100 billion in a year. Dr. Hartwig testified that
taxpayers are further protected by other program features, such
as restrictions on the lines of insurance that are covered and
the program's make available requirement.\15\
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\15\Robert Hartwig, Ph.D., President & Economist, Insurance
Information Institution, testimony before the Senate Committee on
Banking, Housing and Urban Affairs, Reauthorizing TRIA: The State of
the Terrorism Risk Insurance Market (Sep. 25, 2013), http://
www.banking.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore_id=8213e203-2743-4c66-a58d-
6664c82c6857, pp. 6-10.
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On February 25th, 2014, the Committee held a hearing
entitled, ``Reauthorizing TRIA: The State of the Terrorism Risk
Insurance Market, Part II.'' The hearing discussed the need for
reauthorization of the Terrorism Risk Insurance Program.
Witnesses were: Mr. W. Edward Walter, President and CEO, Host
Hotels & Resorts, on behalf of the Coalition to Insure Against
Terrorism; Ms. Carolyn Snow, President, Risk and Insurance
Management Society; Mr. Bill Henry, CEO, McQueary, Henry Bowles
and Troy, on behalf of the Council of Insurance Agents &
Brokers; Mr. Vincent T. Donnelly, President and CEO, PMA
Insurance Group, on behalf of the Property Casualty Insurers
Association of America; Mr. Warren W. Heck, CEO and Chairman of
the Board, Greater New York Insurance Companies, on behalf of
the National Association of Mutual Insurance Companies; and Mr.
Douglas G. Elliot, President of Commercial Markets, The
Hartford, on behalf of the American Insurance Association.
At the hearing, witnesses discussed the need for a long-
term reauthorization of TRIA in response to a question from
Chairman Johnson.\16\ Mr. Walter responded, ``Senator, I would
think that a seven-year extension would probably be the minimum
that we should consider, and it would be better if we were to
consider a longer period of time. For those of us in the real
estate industry, we are typically making investments where we
are looking at 7 to 10 to 15 or longer time frames. When we
invest in Europe and some other markets around the world, one
of the issues we do not have to worry about is how this issue
will be dealt with because they have permanent programs. In the
U.S., we have not necessarily had the benefit, certainly so
far, of a permanent program. But having something that would be
longer-term, that would allow us to know that for the period of
financing or for the period of ownership that we might have in
that particular investment, that this issue would be covered by
the TRIA program would be advantageous. And I think it would
encourage incremental real estate investment.''
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\16\Hearing transcript, Senate Committee on Banking, Housing and
Urban Affairs, Reauthorizing TRIA: The State of the Terrorism Risk
Insurance Market, Part II (Feb. 25, 2014).
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Mr. Henry responded by saying, ``Senator, basically, the
independent agents and the Council agents would love to see
this become permanent. It is an extremely uninsurable program.
It is not going to change over the next 5 or 10 years. We will
still have the same problem at that time. So this is a
permanent problem, and we would like to see a permanent
solution.''
The other witnesses--Ms. Snow, Mr. Donnelly, Mr. Heck, and
Mr. Elliot--also agreed that a long-term extension was
preferable from their organizations' perspectives.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
Section 2. Extension of Terrorism Insurance Program
This section amends section 108(a) of the Terrorism Risk
Insurance Act of 2002 (15 U.S.C. 6701 note). This section would
extend the Terrorism Risk Insurance Program until December 31,
2021.
Section 3. Federal share
This section amends section 103(e)(1)(A) of the Terrorism
Risk Insurance Act of 2002 (15 U.S.C. 6701 note). This section
would gradually phase-down the share of the insurer loses that
the Federal government would be required to provide following a
certified act of terrorism. The Federal share would begin
decreasing by 1 percentage point each year on January 1, 2016
until the Federal share has been lowered to 80 percent.
Section 4. Recoupment of Federal share of compensation under the
program
This section amends section 103(e) of the Terrorism Risk
Insurance Act of 2002 (15 U.S.C. 6701 note). This section would
gradually increase the amount of Federal assistance that the
Secretary of the Treasury must recoup from the private industry
following a certified act of terrorism. The current mandatory
recoupment amount of $27,500,000,000 will be increased by
$2,000,000,000 each calendar year until that mandatory
recoupment amount reaches $37,500,000,000.
This section would also clarify that the Secretary of the
Treasury must recoup any federal assistance provided under the
Terrorism Risk Insurance Program up to the mandatory recoupment
amount required under the Act, no matter the size of the
certified act of terrorism, assuming that the mandatory
recoupment amount calculated under the Act was a positive
amount.
Section 5. Technical amendments
Section 6. Improving the certification process
This section would require the Secretary of the Treasury to
conduct a study on the process which the Secretary would use to
decide whether to certify an act an act of terrorism under the
Act including an examination and analysis of the establishment
of a reason timeline for the Secretary to use in making such
determination. After the conduction of the study, the Secretary
would be required to issue regulations under existing
authorities governing the certification process to address the
finding of the study.
Section 7. GAO study on upfront premiums
This section would require the Comptroller General of the
United States to conduct a study on the viability and effects
of the Federal Government assessing and collecting upfront
premiums on insurers that participate in the Terrorism
Insurance Program.
COST OF LEGISLATION
CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
Summary: S. 2244 would extend the Terrorism Risk Insurance
Act (TRIA)\17\ for seven years--through calendar year 2021. The
bill also would increase the share of insured losses paid by
private insurers under the program and require the Government
Accountability Office (GAO) to prepare a report for the
Congress that assesses the effects of collecting premiums on
insurers that participate in the program.
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\17\The Terrorism Risk Insurance Act, P.L. 107-297, was enacted on
November 2, 2002; the Act was extended on December 22, 2005 upon
enactment of the Terrorism Risk Insurance Extension Act of 2005, P.L.
109-144. On December 26, 2007, the Terrorism Risk Insurance Program
Reauthorization Act of 2007, P.L. 110-160, extended the program again.
In this estimate, CBO refers to the original Act as subsequently
amended, as TRIA.
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The program requires insurance firms that sell commercial
property and casualty insurance to offer clients insurance
coverage for damages caused by terrorist attacks by foreign or
domestic interests. Under TRIA, the federal government would
help insurers cover losses in the event of a terrorist attack
under certain conditions, and would impose assessments on the
insurance industry to recover all or a portion of the federal
payments. The program is set to expire at the end of calendar
year 2014; no federal payments have been made under the program
since its inception in 2002.
There is no reliable way to predict how much insured damage
terrorists might cause, if any, in any specific year. Rather,
CBO's estimate of the cost of financial assistance provided
under the bill represents an expected value of payments from
the program--a weighted average that reflects industry experts'
opinions of the probability of various outcomes ranging from
zero damages up to very large damages resulting from possible
future terrorist attacks. The expected value can be thought of
as the amount of an insurance premium that would be necessary
to just offset the government's expected losses from providing
this insurance, although firms do not pay any upfront premium
for the federal assistance available under TRIA.
On this basis, CBO estimates that enacting the bill would
increase direct spending by $1.7 billion over the 2015-2019
period and by $3.5 billion over the 2015-2024 period. An
additional $460 million would be spent after 2024.
CBO estimates that enacting the legislation also would
increase revenues. S. 2244 would direct the Department of the
Treasury to recoup some or all of the costs of providing
financial assistance through taxes imposed on certain
policyholders (referred to as surcharges in the legislation).
CBO expects that federal spending for financial assistance to
insurers would be largely offset (on a cash basis) by an
increase in revenues. We expect that, following a covered loss,
the Secretary of the Treasury would impose those surcharges in
a way that meets the deadlines for collections specified in the
bill. Thus, CBO estimates that enacting the recoupment
provision in the bill would increase revenues by about $1.8
billion over the 2015-2019 period and by about $4.0 billion
over the 2015-2024 period, net of income and payroll tax
offsets.\18\
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\18\When excise taxes and other types of ``indirect'' taxes are
imposed on goods and services, they tend to reduce income for workers
or business owners in the taxed industry and others throughout the
economy. Consequently, revenue derived from existing ``direct'' tax
sources--such as individual and corporate income taxes and payroll
taxes--will also be reduced. To approximate that effect, CBO and the
staff of the Joint Committee on Taxation apply an offset when
estimating the net revenue that legislation imposing some form of
indirect tax is expected to generate. The amount of the offset ranges
from 25.2 percent in 2015 to 26.2 percent in 2024.
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Considering both the direct spending and revenue impacts of
the bill, CBO estimates that enacting the bill would reduce
budget deficits by $460 million over the 2015-2024 period.
Federal spending, however, would continue beyond 2024; CBO
estimates that over the full term of federal financial
assistance, revenues would fully offset direct spending,
resulting in no net effect on the deficit.
The bill would impose intergovernmental and private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
by extending and expanding some requirements on insurers and
policyholders, including the payment of surcharges. State,
local, or tribal governments could be required to pay a
surcharge as purchasers of property and casualty insurance, but
CBO estimates that the aggregate cost to public entities of
complying with those mandates would probably fall below the
annual threshold established in UMRA ($76 million for
intergovernmental mandates in 2014, adjusted annually for
inflation). CBO estimates that the aggregate cost to private
insurers and policyholders to comply with those mandates would
exceed the annual threshold established in UMRA ($152 million
in 2014, adjusted annually for inflation) in each year
policyholders pay a surcharge.
Estimated cost to the Federal Government: The estimated
budgetary effect of S. 2244 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
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By fiscal year, in billions of dollars--
---------------------------------------------------------------------------------------------------------------
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014-2019 2014-2024
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CHANGES IN DIRECT SPENDING
Estimated Budget Authority.............. 120 280 370 440 480 510 540 410 240 150 1,690 3,540
Estimated Outlays....................... 120 280 370 440 480 510 540 410 240 150 1,690 3,540
CHANGES IN REVENUES
Estimated Revenues...................... 0 200 400 500 670 400 380 440 450 560 1,770 4,000
NET INCREASE OR DECREASE (-) IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES
Impact on Deficit....................... 120 80 -30 -60 -190 110 160 -30 -210 -410 -80 -460
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Note: CBO estimates that implementing S. 2244 would not have a significant effect on discretionary costs over the 2015-2019 period.
Basis of estimate: For this estimate, CBO assumes that S.
2244 will be enacted before the end of calendar year 2014. We
estimate that enacting the bill would increase direct spending
by about $3.5 billion and increase revenues by $4.0 billion
over the 2015-2024 period. While this estimate reflects CBO's
best judgment on the basis of available information, the cost
of this federal program is a function of inherently
unpredictable future terrorist attacks. As such, actual costs
are likely to vary significantly from the estimated amounts.
Such costs could be either higher or lower than the expected-
value estimates provided for each year.
Terrorism Risk Insurance Act Under Current Law
The Terrorism Risk Insurance Act provides financial
assistance to commercial property and casualty insurers for
losses above certain thresholds (illustrated in figure 1)
caused by terrorist attacks by individuals acting on behalf of
foreign or domestic interests. For such assistance to be
provided, the Secretary of the Treasury must certify that a
terrorist attack has occurred in the United States or other
specified locations. TRIA is set to expire on December 31,
2014.
TRIA does not require commercial property and casualty
insurance policies to cover losses from terrorist attacks
involving nuclear, biological, chemical, or radioactive (NBCR)
materials. If, however, an insurer and a policyholder choose to
include losses from terrorist attacks involving NBCR materials
in such a policy, TRIA would cover a portion of the losses
resulting from such attacks.
For the Secretary of the Treasury to certify a terrorist
attack, insured damages resulting from the attack must exceed
$5 million. Financial assistance becomes available to insurers
suffering losses from a certified attack once the insurers
suffering losses have aggregate insured losses from an attack
that exceed $100 million. Once that threshold is met, insurance
companies that suffer losses are responsible for paying claims
up to a deductible amount that equals 20 percent of the
premiums they collected for certain lines of insurance in the
calendar year preceding a certified attack. The total amount of
deductibles paid by insurers would depend on the amount of
losses from an attack and the particular insurers involved.
After meeting their individual deductibles for damage
claims, insurers that suffered losses and the federal
government would each pay a portion of the losses above the
deductible (in 2014, the federal government would pay 85
percent of insured losses and individual insurers would pay 15
percent) up to total losses of as much as $100 billion. The law
does not specify how any claims above the $100 billion cap
would be paid.
The Secretary of the Treasury is authorized to recover
payments made by the federal government through taxes in the
form of surcharges paid by all purchasers of commercial
property and casualty insurance. The Secretary is required to
recoup any federal payments made to cover losses, but only if
those recoveries plus other amounts paid by directly affected
insurers do not exceed $27.5 billion--known as the retention
amount. If insured losses from a terrorist attack are large
enough that insurers pay more than the industry retention
amount, the Secretary would not be required to recoup any
federal payments. The program provides the Secretary of the
Treasury with authority, however, to recover federal payments
in that instance after considering the ultimate cost to
taxpayers, economic conditions, and the affordability of
commercial insurance.
Modifications to TRIA Under S. 2244
S. 2244 would extend TRIA for seven years, through December
31, 2021. The bill also would make incremental changes in
program parameters that would increase the share of insured
losses paid by private insurers in the event of an attack.
As under current law, an insurer suffering losses as a
result of a certified attack would pay claims up to a specified
deductible. The bill would retain the same deductible limits,
20 percent of certain premiums collected in the calendar year
preceding an attack, as in current law.
S. 2244 also would continue the payment-sharing process
that exists under current law. Insurers and the federal
government would each pay a portion of the losses over the
deductibles up to the $100 billion limit for the program.
However, the bill would decrease the federal government's
portion by one percentage point per year over a five-year
period that starts on January 1, 2016. Currently, the federal
portion is equal to 85 percent of covered losses above the
deductible; under the bill, that rate would be reduced to 80
percent of covered losses by 2020, and remain there until the
program expires at the end of 2021.
Finally, the bill would increase the industry retention
amount--the limit used to calculate the amount of federal
spending that would be recovered from policyholders--from $29.5
billion to $37.5 billion over a five-year period starting in
the first year after enactment.
Direct Spending
By extending financial assistance to certain commercial
insurers for losses from future acts of terrorism against
insured private property, enacting S. 2244 would expose the
federal government to potentially large liabilities for seven
more years (2015 through 2021). For any particular year, the
amount of insured damage caused by terrorists could range from
zero to many billions of dollars. CBO's estimate of the cost of
this program reflects how much, on average, the government
could be expected to pay to insurers and recover from the
industry over the 2015-2024 period.
The following sections describe our method for estimating
the expected value of financial assistance under the bill and
explain how we convert that cost to estimates of annual federal
expenditures.
Estimating the Expected Cost of Federal Assistance. For
this estimate, CBO discussed the process of estimating insured
losses with industry actuaries and reviewed models used by
firms to set premiums for the terrorism component of property
and casualty insurance that they offer. State insurance
regulators generally require such premiums to be grounded in a
widely accepted model of expected losses from covered events.
After the terrorist attacks on September 11, 2001, the
insurance industry began efforts to set premiums for insurance
coverage for terrorist events using such models.
Although estimating losses associated with terrorist events
is difficult because of the lack of meaningful historical data,
the insurance industry has experience setting premiums for
other catastrophic events--namely, natural disasters. Setting
premiums for hurricanes and earthquakes, for example, involves
determining areas that could sustain damage, the value of the
losses that could result from various types of events with
different levels of severity, and the frequency of such events.
Similarly, estimating premiums for losses resulting from
terrorist attacks involves judgments regarding potential
targets and the frequency of potential attacks. Because there
is a very limited history of terrorist attacks in the United
States, many of the parameters needed by the insurance industry
to set premiums are based on expert opinion regarding terrorist
activities and capabilities as well as information about
attempted attacks that were not successful.
Estimating Potential Insured Losses. Based on discussions
with insurers and information provided by the insurance
industry, CBO estimates that the expected or average annual
loss subject to TRIA coverage under the bill would be about
$2.1 billion (in 2014 dollars). This estimate incorporates
industry expectations of the probabilities of terrorist
attacks, encompassing the possibility of attacks that result in
enormous loss of life and property damage, as well as a
significant likelihood that no such attacks would occur in any
given year. This estimate also reflects our expectation that
some portion of losses from terrorism would not be covered by
TRIA because some policyholders choose not to purchase
insurance coverage for terrorism risks.
CBO's estimate incorporates an expectation that, in most
years, losses from terrorist attacks covered by TRIA would cost
significantly less than $2.1 billion. We expect that there is a
significant chance that no terrorist attacks covered by TRIA
would occur in a given year. Since enactment of TRIA, no
covered events have occurred, though several attempts were
prevented by law enforcement and other security measures.
Although the risk of a terrorist attack with many lives lost
and substantial property damage still remains, based on
industry models, CBO assumes for this estimate that attacks
causing losses similar in scale to those sustained on September
11, 2011, in New York City are likely to occur very rarely, if
at all.\19\
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\19\Based on information from the Insurance Information Institute,
we estimate that industry losses on September 11, 2001, totaled about
$44 billion (in 2014 dollars), including about $35 billion in losses
that would have qualified for coverage under TRIA had the law been in
effect on that date.
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Our estimate of average annual losses includes about $650
million in losses resulting from terrorist attacks involving
NBCR materials. Under current law, insurers are not required to
offer this coverage, although if an insurer and a policyholder
voluntarily agree to include this coverage in a property and
casualty policy, TRIA would cover some of those losses. While
the bill would not require property and casualty policies to
include coverage for losses resulting from attacks using NBCR
materials, information provided by the industry indicates that
a small amount of coverage is currently in place for such
losses. Thus, under the bill, the government's exposure to
losses resulting from terrorist attacks involving NBCR
materials would likewise be small compared with losses
resulting from attacks using conventional materials. The only
exception is in the workers' compensation insurance line, where
no exclusions for specific causes are allowed.
Determining the Federal Share of Insured Losses. Federal
payments under TRIA would be lower than the total expected
losses from terrorist attacks because TRIA places limits on
eligibility for federal assistance and requires that insurers
that suffer losses as the result of a certified attack pay a
share of covered losses. CBO took account of those requirements
to estimate federal spending for any given amount of insured
losses from future terrorist attacks.
Upper and lower limits for federal assistance.
Because federal payments under TRIA would be capped at $100
billion per event, we excluded costs for potential losses above
that level. Similarly, S. 2244 would maintain the minimum
losses that would trigger federal payments under current law at
$100 million; therefore, we excluded potential losses below
that minimum level as well.
Insurers' deductibles. Before the federal
government would make any payments under TRIA, an insurer
incurring losses would first pay claims up to a deductible
amount. S. 2244 would maintain the current-law deductible of 20
percent of premiums on certain property and casualty lines
collected by affected insurers in the calendar year preceding
an attack.
The total amount of the deductibles could range from a few
million dollars to several billion dollars, depending on how
many insurers provide coverage for losses resulting from a
particular terrorist attack. In addition, the value of each
individual insurer's deductible would vary greatly across the
industry. For this estimate, CBO considered a range of
possibilities regarding the share of federal assistance, using
industry data to estimate insurers' deductibles under the bill.
The range encompasses the possibility that an attack would
affect only a few insurers with relatively small deductibles or
several insurers with relatively large deductibles. CBO expects
that insured losses below a few hundred million dollars would
most likely be covered by insurers' deductibles, and therefore,
would not result in a significant increase in federal spending.
Shared payments if losses exceed insurers'
deductibles. Once affected insurers have paid claims up to
their deductibles, the federal government would share a portion
of the losses above the deductibles. Under S. 2244, the federal
government's share of claims above the deductible would fall
from the current-law level of 85 percent of total losses to 80
percent, up to the $100 billion limit covered by the program,
by 2020.
After taking into account minimum and maximum limits,
deductibles, and the insurers' share of payments above the
deductibles, CBO estimates that enacting the bill would
increase direct spending by $4.0 billion over the full life of
the program. That amount translates into an average of roughly
$570 million for each of the seven years for which the program
would be extended. Actual spending would be spread out over
many years, and those costs would be recovered through
surcharges imposed on policyholders (which are discussed in the
section on revenues below).
Taken another way, if the Secretary of the Treasury were
authorized to collect premiums for the program, CBO estimates
that the Secretary would need to charge, on average, about $570
million per year (for seven years) to offset the government's
projected losses under the bill. The bill, however, would not
authorize any charges prior to a certified attack. The bill
also does not contain an explicit requirement for the Secretary
to recoup interest that would accrue on amounts outstanding.
Timing of Federal Spending. To estimate federal spending
for this program on a cash basis, CBO used information from
insurance experts on historical rates of payment for property
and casualty claims following catastrophic events. Based on
such information, CBO estimates that outlays under the bill
would total about $3.5 billion over the 2015-2024 period; about
$460 million would be spent after 2024. In general, following a
catastrophic loss, it takes many years to complete insurance
payments because of disputes over the value of covered losses
by property and business owners. Under this bill, we expect
that financial assistance to insurers would be paid over
several years, with most of the spending occurring within the
first five years following a certified event.
Revenues
Enacting S. 2244 would affect federal revenues by
authorizing the Secretary of the Treasury to impose taxes in
the form of surcharges on all holders of property and casualty
insurance policies in order to recover the amount of federal
payments made under the program, with certain limitations. CBO
estimates that this provision would increase revenues by $4.0
billion over the 2015-2024 period.
Surcharges. If a terrorist attack were to require the
government to provide financial assistance, the bill would
require the Secretary of the Treasury to recoup some or all of
that cost through taxes paid by purchasers of commercial
property and casualty insurance. Specifically, the Secretary
would be required to recoup federal payments to the extent that
the total amount paid by insurers (for deductibles and the
industry's share of payments over the deductibles) is less than
the lower of total insured losses or the industry retention
amount.
If insured losses from a terrorist attack are large enough
that insurers pay more than the industry retention amount, then
the Secretary would not be required to recoup any federal
payments--although the Secretary could choose to do so. In that
case, the amount the Secretary would collect would be based on
economic conditions, the affordability of commercial insurance,
and the cost to taxpayers of no additional recoupment. CBO
expects that the Secretary would not seek to recover financial
assistance provided above the industry retention amount and
would not collect interest on outstanding amounts.
The recoupment of financial assistance would be
accomplished by assessing a surcharge on premiums for property
and casualty insurance policies and would apply to policies in
force following a terrorist attack that necessitated federal
assistance. The amount to be recovered would be 135.5 percent
of the difference between the industry retention amount, which
grows from $29.5 billion to $37.5 billion over the term of the
program, and the Secretary's estimate of the total amount paid
by insurers for deductibles and their share of payments over
the deductibles. CBO estimates that surcharges resulting from a
seven-year extension of TRIA would total, in an expected-value
sense, $5.4 billion over the 2015-2024 period.
Timing and Tax Offset. The bill would require the Secretary
to recover all or a portion of amounts due for events occurring
before December 31, 2017, by the end of fiscal year 2019. For
losses from events occurring between January 1, 2018, and the
end of the program, the Secretary would be required to recoup
all amounts due by the end of fiscal year 2024.
Those gross revenue collections would be partially offset
by a loss of revenues from income and payroll taxes. Consistent
with standard procedures for estimating the revenue impact of
indirect business taxes, CBO reduced the gross revenue impact
of the insurance surcharges to reflect offsetting effects on
income and payroll tax receipts. On balance, CBO estimates that
enacting the bill would increase revenues by a total of $4.0
billion over the 2015-2024 period, net of income and payroll
tax offsets.
Changes in Spending Subject to Appropriation
S. 2244 would direct the Government Accountability Office
to prepare a report assessing the viability of collecting
upfront premiums from insurers that participate in the TRIA
program. The study would examine, among other things, how the
government would determine the price of such premiums, how the
premiums would be collected and managed, and how the assessment
of premiums would affect take-up rates for terrorism risk
coverage. CBO estimates that implementing the new reporting
requirement would not have a significant effect on
discretionary costs.
Pay-As-You-Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays and revenues that are
subject to those pay-as-you-go procedures are shown in the
following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR S. 2244, AS ORDERED REPORTED BY THE SENATE COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS ON JUNE 3, 2014
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By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------------------------------------
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2014-2019 2014-2024
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE OR DECREASE (-) IN THE DEFICIT
Statutory Pay-As-You-Go Impact. 0 120 80 -30 -60 -190 110 160 -30 -210 -410 -80 -460
Memorandum:
Changes in Outlays......... 0 120 280 370 440 480 510 540 410 240 150 1,690 3,540
Changes in Revenues........ 0 0 200 400 500 670 400 380 440 450 560 1,770 4,000
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Intergovernmental and private-sector impact: The bill would
extend and expand intergovernmental and private-sector mandates
contained in the Terrorism Risk Insurance Act. Those mandates
would:
Require property and casualty insurers to offer
terrorism insurance;
Require, under certain circumstances, property
and casualty insurers to collect surcharges from policyholders
in amounts large enough to pay assessments to the federal
government; and
Preempt state laws regulating insurance.
State, local, or tribal governments could be required to
pay surcharges as purchasers of property and casualty
insurance, but CBO estimates that the aggregate costs to public
entities of complying with those mandates would probably fall
below the annual threshold established in UMRA for
intergovernmental mandates ($76 million in 2014, adjusted
annually for inflation). CBO estimates that the aggregate cost
to private insurers and policyholders to comply with the
mandates would exceed the annual threshold established in UMRA
($152 million in 2014, adjusted annually for inflation).
Requirement to Offer Insurance
Current law requires that, through calendar year 2014,
insurance companies offer terrorism insurance as a part of
their property and casualty policies. Those companies may set
their own premium rates, and policyholders can choose whether
to purchase such insurance. The bill would extend the
requirement to offer terrorism insurance through calendar year
2021. According to industry representatives, the cost for
public and private insurers to continue making terrorism
insurance available under property and casualty insurance
policies would be minimal.
Repayment of Assistance
Insurers that offer terrorism insurance would receive
financial assistance to cover losses under some conditions in
the event of a certified terrorist attack. The bill would
extend and expand the requirement that the federal government
recoup the costs of such financial assistance through
assessments on the insurers and surcharges on purchasers of
property and casualty insurance. The requirement to repay the
federal government would be both an intergovernmental and a
private-sector mandate under UMRA since state and local
governments and private entities are both providers and
purchasers of insurance.
The cost to insurers to comply with the mandate to
administer the surcharges on policyholders and remit the
amounts collected to the federal government would be small.
CBO estimates that total surcharges collected by insurers
would be about $2.4 billion over the 2015-2019 period. That
amount is equal to federal benefits paid over those years plus
35.5 percent of those benefits (see Revenues section for
further discussion). Based on information about the purchase of
various types of insurance by public entities, CBO assumes that
state, local, and tribal governments comprise a small portion
of the total market for property and casualty insurance. To the
extent that state, local, and tribal governments would be
required to pay a surcharge as policy holders, CBO estimates
that the aggregate costs to public entities of complying with
the mandate would total tens of millions of dollars annually,
but probably would not exceed the annual threshold for
intergovernmental mandates in any given year. CBO estimates
that the aggregate amount of surcharges paid by private
entities would amount to hundreds of millions of dollars
annually and would exceed the annual threshold for private-
sector mandates.
Preemption of State Law
The bill also would preempt some state laws that regulate
insurance. Based on information from state insurance
regulators, CBO estimates that the cost to states of extending
those preemptions would be minimal.
Estimate prepared by: Federal Costs: Susan Willie, David
Torregrosa, and Perry Beider; Impact on state, local, and
tribal governments: Melissa Merrell; Impact on the private
sector: Amy Petz and Tristan Hanon.
Estimate approved by: Theresa Gullo, Deputy Assistant
Director for Budget Analysis.
REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
This legislation will not have a substantial regulatory
impact because it makes changes to the administration of the
Terrorism Risk Insurance Program, but does not place regulatory
requirements on businesses or individuals directly. Changes to
the Terrorism Risk Insurance Program may affect the businesses
or individuals who choose to participate in the Terrorism Risk
Insurance Program.
CHANGES IN EXISTING LAW (CORDON RULE)
On June 3, 2014, the Committee unanimously approved a
motion by Senator Johnson to waive the Cordon rule. Thus, in
the opinion of the Committee, it is necessary to dispense with
section 12 of rule XXVI of the Standing Rules of the Senate in
order to expedite the business of the Senate.