Passed by Congress in 2002, TRIA is a low-cost reinsurance program for property and workers' comp insurers. After total insured losses from a "certified" event exceed a dollar threshold, the feds pick up 90 percent of each insurer's losses above its deductible, set in 2005 at 15 percent of its policyholder surplus (i.e. equity). The feds ultimately recoup through a premium add-on paid by the policyholder.
Howard Kunreuther and his colleagues at Wharton released this summer an insightful analysis called "TRIA and Beyond." RMS provided the loss forecasts and A.M. Best the insurer data.
A five-ton truck bomb may cause $10 billion in workers' comp losses and $15 billion in property loss in New York City or the largest cities in California and Texas.
According to the Wharton study, this five-ton truck-bomb attack would drive very few of the top 30 insurers into insolvency. Roughly half of the top 30 would lose at least 10 percent of their surplus; a quarter would lose more than 25 percent. This projection does not net out reinsurance arrangements.
I see three concerns with TRIA. The first involves individual insurer behavior. If an insurer wants to place all of its business smack dab in Manhattan, that's OK with TRIA. The law contains zero disincentive for an insurer to place itself in harm's way, nor any requirement that it reinsure.
Consider the state fund of New York. The Fund could be hit with 40 percent of the $10 billion workers' comp loss in a New York City attack, far more than its annual premium. The Fund will become, overnight, a ward of Congress. Here is a highly exposed and market-dominating insurer, reporting to a governor.
The second concern is coverage. Just as TRIA makes no demands on insurers to distribute their risks, it does not require insurers to offer coverages at the sweet spot of terrorist risk. Losses from chemical-biological attacks are generally not covered. Nor in many jurisdictions is post-traumatic stress syndrome for workers.
The third concern is risk management. TRIA does not require anyone to undertake any prevention or mitigation investments. The insurer community in support of TRIA doesn't want any risk management standards put into TRIA. Insurers even told the Wharton team that prevention and mitigation are not pertinent in a massive attack scenario. They appear to oppose any mandatory measures.
I savored a personal taste of this shunning of risk management when earlier this year I visited a key insurance association in Washington. I ask an executive to consider endorsing a much needed Occupational Health Disaster Expert Network. This new nonprofit venture plans to share reliable advice among insurers and corporations when a disaster strikes. This executive couldn't have been less interested. I suspect she found it was just off message.
Certainly it is important to address the risk of massive insurer failure from a disaster. But as written now TRIA is a vacuum chamber from which insurer conduct, coverage needs and risk management 101 have been banished.
a Vermont-based consultant and writer, is the workers' comp columnist for Risk & Insurance®.
October 1, 2005
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