Pfundstein Report:

In response to the economic disruption caused by the September 11th terrorist attacks, Congress created a “temporary” federal program of backstop insurance for certain terrorism risks. The Terrorism Risk Insurance Act of 2002 (TRIA) was signed by President Bush on Nov. 26, 2002.

TRIA was designed to reduce insurance market disruptions (when insureds can’t find coverage), make terrorism coverage available to commercial insureds through the “make available” aspect of the law and allow the insurance industry sufficient time to build adequate capital and surplus to insure terrorism risks.

TRIA’s program is scheduled to sunset at the end of 2005. It must be extended now – we can’t wait until Jan. 1, 2006, to solve this problem.

How does TRIA work? TRIA established a risk-sharing program between the federal government and the property and casualty insurance industry. It covers calendar years 2003 through 2005.

There also was a short transition period from the date of the president’s signature through year-end 2002.

Not all claims are covered under the program. TRIA eligibility requires that there be an “insured loss” of at least $5 million from a “certified” act of terrorism – foreign, not domestic terrorism.

Shared losses

The loss is shared between the program and insurers according to a schedule of “self-retained exposure” (what the insurer must pay) and a co-payment above the retained exposure. The co-payment is split by having the government program pay 90 percent and the insurer 10 percent of the eligible loss above the insurer’s retained amount. An insurer can reinsure its exposures under TRIA.

For example, assume there is an eligible loss of $100 million. Let’s assume further that our insurer had $100 million of “direct earned premium” (DEP) for the prior calendar year and has a policyholder surplus of $85 million. The insurer’s self-retained exposure is calculated as follows: 10 percent (15 percent effective 1/1/05) x DEP. So the insurer’s retained exposure is $10 million. Its co-payment share is another $9 million (10 percent of the $90 million loss above the retained amount), for a total exposure of $19 million. The program will pay the other $81 million.

If TRIA is not extended and our insurer incurs such a loss, this is what happens: The insurer has only $85 million in capital and surplus, which is what pays claims. The hypothetical loss more than wipes out the entire capital and surplus. Thus, the company is insolvent and will be shuttered as a result of regulator-managed insolvency or liquidation procedures. It will likely be years before claims are finally adjudicated and policyholders receive the benefit of their insurance coverage.

Why should you care? You may believe that living and working in New Hampshire insulates you from terrorist attacks. Take a look along the Piscataqua River corridor some day. How many large employers are located nearby?

Without TRIA being extended, the National Association of Insurance Commissioners (NAIC) notes that commercial insureds may not have insurance coverage available. Without the program, insurers will race to exclude the coverage from their policies. In fact, conditional filings have in many cases already been made with the regulators. The NAIC further notes that metropolitan areas with attractive targets will likely face both availability and affordability issues.

Do we really want the economic dislocation we faced before TRIA was enacted?

Workers’ comp

Workers’ compensation insurers cannot exclude coverage due to terrorism risks. Employers with large numbers of employees in a single location represent a significant risk to a workers’ compensation insurer.

Although workers’ compensation is currently covered by TRIA, unless the program is extended, workers’ compensation insurer insolvencies are the likely result of another 9/11 attack.

I work with MEMIC Indemnity Company, a New Hampshire domestic workers’ compensation insurer. The CEO, John T. Leonard, is working hard to get Congress to extend TRIA.

If TRIA is not extended, the company may be forced to stop providing employers with coverage. Mr. Leonard recently estimated that without the TRIA program a $67 million terrorism loss would consume the company’s entire surplus, even after application of its reinsurance coverage.

In the absence of TRIA being extended, you should assume you will not be able to secure workers’ compensation insurance in the voluntary market.

The NAIC has suggested extending TRIA for a two- year period through 2007. New Hampshire Insurance Commissioner Roger Sevigny supports these efforts. A two-year extension would avoid the economic consequences of general coverage disruptions and allow the private workers’ compensation market to continue to provide our employees with coverage. During the extension, Congress could review the Treasury Department’s report and recommendations due June 2005 and then take any necessary action prior to year-end 2007.

Donald J. Pfundstein is managing director of the Concord law firm of Gallagher, Callahan & Gartrell. He can be reached at

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