Because of the significant financial impact of the September 11 terrorist attacks, Congress created the Terrorism Risk Insurance Act (TRIA) to provide a financial backstop to the insurance industry that would cap losses in the event of another large-scale terrorist event. The Act was initially set to expire at the end of 2005, but because of the ongoing risk of terrorism, it's been extended several times and is now set to expire December 31, 2014.
Congress is currently debating the program's fate.
When most people, and even lawmakers, think of TRIA, they think of the property insurance marketplace. Without this backstop in place, many high-profile properties would not be insurable on the commercial marketplace. However, workers' compensation is an equally important part of TRIA as there are thousands of people working in those high-profile buildings.
In most jurisdictions, workers' comp coverage is mandatory and benefits must be provided as outlined by the applicable statutes. This means things like acts of terrorism cannot be excluded from coverage. The only way workers' comp carriers can control their exposure to acts of terrorism is by limiting who they cover.
The September 11 attacks resulted in a new area of focus for the insurance industry; employee concentration. Carriers and reinsurers have developed very sophisticated catastrophic profiling models that allow them to gauge their potential exposure in a geographic area under a variety of scenarios. The carriers have used this information to adjust their books of business and control exposure.
If Congress were to allow TRIA to expire after 2014, employers can expect to see an impact in two main areas; capacity and pricing. Some carriers will undoubtedly reduce their exposures in certain high-threat geographic areas. In fact, this is already happening for certain industries. Coverage will still be available, as all states have something in place to ensure that mandatory coverage can be purchased. However, more employers may have to turn to state funds or assigned risk pools to obtain this coverage.
The other impact the expiration or modification of TRIA would have on employers is that they are likely to pay more for their workers' comp coverage. The simple rules of supply and demand mean that if there is less competition, the pricing will be higher. In addition, if carriers are taking on additional exposure, they will also increase pricing. These price increases would come on top of the increases employers have already been facing because of adverse loss development in the workers' comp industry.
What can employers do to address this? For starters, they could reach out to their federal legislators to let them know they favor the extension of TRIA. If TRIA remains in place and unmodified, then this will all be moot. In my opinion, businesses in the United States should not bear the full financial burden of acts of terrorism directed against our country.
Beyond lobbying, there are other things employers can do to reduce the impact of an expiration of TRIA. The key is providing accurate information to the carriers underwriting your account. If your company has multiple shifts, make sure you report both the total number of employees and the number working during peak shifts. The number of employees working during peak shifts is the actual exposure to a terrorist event, not the total number of employees.
In addition, specific information about the construction of your building and its location are also important. Higher floors are less likely impacted by things like car bombs. If your employees are spread out in multiple buildings on a campus, then terrorism exposure is also lessened. Not having a parking garage below your building also reduces the risks.
Employers need to be carefully monitoring the discussion around TRIA currently taking place in Washington D.C. They need to be prepared for the potential financial impact to their businesses should TRIA expire or be significantly modified as this impact will go well beyond property insurance.
March 21, 2013
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