Group Life Insurers Still Seeking TRIA Coverage

Though a recent U.S. Treasury Department report recommended against reauthorizing the federal terrorism insurance backstop unless it was scaled down significantly from its current form, the nation's largest life insurance association is lobbying to both extend and expand the program to cover group life insurance.

According to Frank Keating, president and chief executive officer of the American Council of Life Insurers, because group life policies are not covered by the three-year-old federal Terrorism Risk Insurance Act, writers of group life have seen the private market for catastrophe reinsurance evaporate since the Sept. 11, 2001 terrorist attacks. This has left life insurers in the "precarious position of choosing to remain in the marketplace without a reinsurance backstop or exiting from the market all together," Keating said in a statement.

"Unlike the property and casualty industry, in the absence of TRIA, group life insurers are required by state law to offer terrorism coverage if they offer the product," Keating said. "As a result, group life insurers have been making changes to mitigate factors within their control. They are adjusting underwriting factors and working to control risk concentrations. However, despite these efforts, terrorism is and will remain an event that cannot be predicted with any degree of certainty, frequency or severity."

Under the TRIA program, which is set to expire at year end, the federal government will provide certain coverage for "certified" acts of terrorism -- those that cause at least $5 million in damage and are committed by foreign interests -- that result in claims on commercial property, business interruption, workers' compensation and general liability lines of business.

Reinsurance is provided for 90% of losses, to a cap of $100 billion, on events that cause total damage in excess of 15% of the entire industry's prior-year commercial property and casualty direct earned premium, which is estimated to be between $15 billion and $20 billion for 2004. If a terrorist attack fails to exceed the industrywide retention, then the government will provide "temporary liquidity" to those companies whose losses exceed 15% of their prior year's direct earned premiums, but the program requires those companies to repay those funds over time.

TRIA specifically excludes life insurance, as well as health insurance and personal lines property and casualty insurance. When initially passed, the Treasury Department was asked to evaluate the market conditions affecting group life and determine whether it should be included in TRIA. In August 2003, the department reported that, although there was a general lack of catastrophic reinsurance for group life coverage, it found "no appreciable reduction in the availability of group life insurance coverage for consumers" and recommended against including it in the program.

"This decision is the result of a careful consideration of market conditions, with significant input from users and providers of group life insurance," said then-Assistant Treasury Secretary for Financial Institutions Wayne A. Abernathy, at the time. "We were pleased to find that group life insurance companies have stayed with their customers and continued to make group life insurance available on much the same terms as before the terrorist tragedies of Sept. 11. However, Treasury will continue to monitor conditions and developments in the market for group life insurance."

Treasury's June 30 study, which recommended against renewing TRIA as it currently stands, mentions the earlier inquiry into group life coverage, but makes no specific recommendations about whether the line of insurance should be included in any successor program. However, in a letter to the chairmen and ranking members of the Senate Banking Committee and House Financial Services Committee, Treasury Secretary John Snow said the Bush Administration only could support some form of program going forward provided it excludes commercial auto, general liability and other lines considered "less subject to aggregation risks."

The administration also seeks a program that increases the insurance industry's dollar deductibles and percentage co-payments, and is guaranteed to only be triggered by events larger than $500 million in insured losses.

But according to Keating, ACLI believes "that lives, not just brick and mortar, should be included in TRIA."

"More than 160 million Americans have group life insurance coverage," Keating said. "For many of them, their employer-sponsored term life insurance is their only source of life insurance. That is why the ACLI believes it is critical that the U.S. government assist the group life insurance industry to assure that this critical life insurance coverage continues to be available to the millions of Americans who rely on the promised survivor benefit of their group life policy."

According to the RAND Institute for Civil Justice, the life insurance industry suffered losses of $1 billion in the Sept. 11 attacks. In June 2003, Swiss Re estimated group life insurance accounted for less than half of the total.

Nonetheless, at last month's National Association of Insurance Commissioners Summer National Meeting in Boston, the Terrorism Insurance Implementation Working Group of the NAIC's Property and Casualty Committee passed a resolution urging Congress to include group life insurance coverage in any eventual terrorism risk measure, including a long-term solution or, more immediately, a two-year renewal, which the industry has desired.

Group life is also included under reauthorization bills introduced in both the House and Senate, each of which would extend the current TRIA program for an additional two years.

Senate Banking Committee Chairman Richard Shelby, R-Ala., said last week he will schedule a fresh round of hearings on whether to modify, replace or cancel the federal Terrorism Risk Insurance Program in light of a Treasury Department study that recommends against renewing the program in its current form, the committee's chairman said. House Financial Services Committee Chairman Michael Oxley pledged he would pursue a similar inquiry.