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TRIA Goes to Market

Enactment of the Terrorism Risk Insurance Act (TRIA) of 2002 came at the end of a 14-month campaign by PIA and a host of...
March 10, 2003

Initial Participation Low; PIA Says Coverage Cost is Premium, Not Surcharge

By Pat Borowski
Senior Vice President, Government Affairs
PIA National

Enactment of the Terrorism Risk Insurance Act (TRIA) of 2002 came at the end of a 14-month campaign by PIA and a host of other groups in the insurance industry and a broad coalition of business interests directly affected by the lack of available, affordable terrorism coverage.

Signed into law on November 26, 2002 by President Bush, who made it one of his primary legislative goals, carriers had until February 24, 2003 to notify their commercial property clients how much they will charge for terrorism coverage under provisions of the Act.

So far, the number of clients opting for the coverage as backed by TRIA is small. Producers report that confusion and the perception by individual clients that they are not at heightened risk are the principal reasons. Rates of acceptance of this coverage are being reported in the 10-15 percent range. Reports of rates being quoted show a wide range, from waived to two percent of the property premium, to as much as 150 percent for some coverages or exposures.

Conning and Company has issued new studies concluding the Act has done very little to address the fundamental issues that make terrorism risk so difficult and unattractive to insure. Conning says from the insured's perspective, the coverage mandated by TRIA does not address all losses that may arise from terrorism since it does not cover domestic terrorism or losses from nuclear, biological and chemical hazards. And for insurers, it concludes while TRIA will provide some capital relief in the event of another large-scale terrorist attack, it will not prevent insurers from becoming insolvent if their exposures are too concentrated.

While some may be tempted to view Conning's observations as indicating TRIA is inadequate or otherwise flawed, one must remember that the purpose of this legislation is to provide a level of backstop for carriers to ensure their financial viability as they offer coverage that -- by its very nature -- cannot be reliably underwritten because the nature of the risk cannot be calculated.

Premium, Not a 'Surcharge'

Another issue that has taken shape as a result of TRIA is one of particular interest to agents and brokers: how carriers classify the coverage. This is a key consideration because a few carriers have classified the portion of premium collected for such terrorism insurance coverage as a "surcharge," while PIA along with other producer trade associations maintains this is not the case.

What's the difference? Commissions.

PIA National believes that any and all charges for the purchase of terrorism insurance coverage under the Terrorism Risk Insurance Act (TRIA) are a part of premium, subject to the payment of commissions, not a so-called "surcharge." We have filed comments with the U.S. Treasury Department, which oversees the implementation of TRIA, requesting a clarification affirming our position.

A premium by any other name is still a premium, and a commission is still owed. Any cost charged by a carrier to provide TRIA terrorism coverage is, by definition under this law, premium, and therefore per PIA is subject to the commission schedule and payment per carrier, per line and per agency.

Agents are expected by carriers to perform their regular service, processing and informing roles in this area, as they do for all other forms of coverage underwriting and processing for carriers and clients. Specific to TRIA, agents are expected and are directed by their carriers to assist these insurers with their obligations to assure and document that notice has been given, that the consumer was fully informed, and that the consumer made a timely and informed choice. Such producer-provided services for and on behalf of their carriers are paid for through commission.

In contrast, TRIA also provides that the Treasury may decide to impose an after-the-event surcharge instructing carriers to include such a surcharge on all policies, so Treasury might recover a portion of their payout for a terrorism event. The imposition of such a surcharge would not be considered by PIA as a traditional premium, but rather a federal tax collection "recoupment" method and thus not subject to commission.

PIA does not believe that such a post-event recoupment surcharge applies to terrorism insurance coverage.

Patricia A. Borowski is Senior Vice President of PIA National. She can be reached at

This article originally appeared in the March 2003 PIA Connection.

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