Signing of TRIA Extension Bill Only a Solution to Extreme Losses

The Bill includes captives, self-insurance and risk retention groups putting them on the same basis as commercial insurance carriers. Directors and Officers Liability Insurance was added but not group life business. Going forward companies deductibles will be set at 17.50% of direct earned premium for 2006 and 20% of prior year direct earned premium for 2007 with co-payments remaining at 10% for 2006 and increasing to 15% for 2007. The industry retention trigger for mandatory recoupment of federal payments has increased to $25 billion for 2006 ($27.5 billion for 2007) and a program trigger has been included so that no federal compensation will be paid unless the aggregate industry insured losses exceed $50 million in 2006 or $100 million in 2007, effective after March 31, 2006. California-based Risk Management Solutions (RMS) has warned that as TRIA is only designed to provide solvency protection in extreme events, it is not an insurance industry subsidy. Based on the new TRIA terms, more than 90 percent of the RMS modeled average annual loss would be retained by the industry. If an attack occurred, there is also less than a 10 percent chance that it would cause the industry deductible to be reached, because only the most extreme, low-probability attacks will cause losses in excess of $30 billion, the analysis indicates. For example, the 2001 World Trade Center attacks resulted in approximately $32.5 billion of insured losses; were an event of this magnitude to occur today, it would produce only a minimal TRIA recovery for the insurance industry. At the end of 2007, individual insurance could face the challenge of bearing the risk of terrorism losses with no government backstop. Managing that risk, therefore, will require that companies ensure that they have sound underwriting practices and accumulation controls, good analytical tools, and discipline throughout the organization. RMS has participated throughout the TRIA debate, including through its co-founding of the RAND Center for Terrorism Risk Management Policy and its August 2005 publication of A Risk-Based Rationale for the Extension of the Terrorism Risk Insurance Act," available from www.rms.com.