The Terrorism Risk Insurance Act requires the Federal Insurance Office (FIO) to conduct a study of the program’s impact on small insurers. We have suggested FIO focus its upcoming report on two heighten program risks facing small insurers:
- Compliance with the separate line-item disclosure of terrorism premium; and
- A disproportionate burden of post-event policyholder surcharges.
Separate Line-Item Disclosure
TRIA requires participating insurers to include a “clear and conspicuous disclosure to the policyholder of the premium charged for insured losses covered by the Program … on a separate line item in the policy, at the time of offer and renewal of the policy.” According to data contained in FIO’s report from 2019, small insurers disclose no terrorism premium in 34% of policies (based on overall premium) which jumps to:
- 94% for ocean marine;
- 77% for inland marine;
- 69% for products liability;
- 68% for allied lines;
- 62% for other liability; and
- 61% for fire.
Even commercial multiperil insurance policies issued by small insurers disclose no terrorism premium 42% of the time.
There are only two explanations for disclosing no terrorism premium. The insurer may have determined there is no significant exposure to the risk of loss from terrorism such that a terrorism premium charge would be “excessive” under state law. The other explanation is that the insurer believes there is a significant exposure but has embedded the terrorism premium charge within the overall policy premium charge – in violation of the separate line-item requirement.
If state regulators are not picking up disclosure violations during regular examination, insurers may pay the price later. An insurer cannot recover from the federal backstop unless one of its senior executive submits a signed Certification of Compliance that the separate line-item disclosure has been made.
In most circumstances, U.S. Treasury recovers 140% of any amounts paid out by the federal backstop by levying policyholder surcharges on future commercial property and casualty insurance premium charged by participating insurers. It appears customers of small insurers are likely to bear a disproportionate amount of that burden.
FIO has grouped participating insurance companies into four categories:
- Non-small insurers representing 80% of assessable premium;
- Small insurers representing 11% of assessable premium;
- Alien insurers representing 5% of assessable premium; and
- Captive insurers representing 4% of assessable premium.
For example, using the data developed by FIO for a hypothetical conventional terrorist attack in Chicago, policyholder surcharges would total $2.9 billion. Accordingly, 80% of those surcharges (or $2.3 billion) would land on customers of non-small insurers. Although captives make up only 4% of the assessable premium base and account for 25% of industry losses in the Chicago scenario, the generous backstop recoveries available to captives drive 95% of policyholder surcharges. A similar skewing of large backstop payouts favoring captives coupled with their tiny exposure to policyholder surcharges can be seen in the other four scenarios developed by FIO.
It is clear from the data published by FIO that in nearly every scenario the program aggressively shifts the benefits of the federal backstop into the pockets of large corporations that set up captives and drops the cost of those benefits onto the backs of the customers of small insurance companies.