There were three defining characteristics of the federal Terrorism Risk Insurance Program (TRIP) as it was enacted in 2002 and extended in 2005.
All three are being fundamentally reconsidered as Congress deliberates on legislation to extend the program again, this time until 2017.
First, in 2002, Congress and the Bush Administration wanted to limit federal participation to helping insurers manage losses from warlike acts of foreign terrorism, such as the Sept. 11th attacks. There was little desire or perceived need to help manage exposure to domestic terrorism that private insurers had, in effect, covered for years without need of federal assistance.
Hence was born the requirement that, to be “certified” as an act of terrorism that would trigger coverage under the program, an attack had to be directed or carried out by foreigners or foreign interests.
Secondly, the federal program would only reinsure for terrorism losses that would otherwise be covered under eligible commercial policies. If a peril, like the nuclear hazard, was excluded under the policy, there would be no TRIP coverage for losses caused by that peril.
(It is important to remember that TRIP primarily provides reinsurance liquidity, not reinsurance as such. Losses are to be recouped by surcharges on policies eligible for coverage under the program; the federal treasury is exposed to loss only if the surcharges exceed certain limits per policy.)
Finally, the federal program was structured to leverage existing underwriting and claims operations.
Through program deductibles and retentions, private insurers would continue to have a financial stake in underwriting selection, loss control, and claims management. The federal government would benefit from the efficiency of these private sector operations, and would avoid the cost of establishing its own parallel operations.
A bill introduced in the U.S. House would eliminate the distinction between domestic and foreign terrorism as a criterion for determining if an attack qualified as a “certified” act that could trigger coverage under the program.
Insurers and their trade associations generally welcome the prospect of eliminating that distinction, as many of them doubt that the distinction could be made following an attack by domestic adherents of a foreign cause.
Beyond that, many consider domestic terrorism to be as great a threat to life and property--and as uninsurable without federal help--as foreign terrorism.
Although there is general consensus within the industry on the value of eliminating the domestic-foreign distinction, there will still be costly work for companies and advisory organizations to file new endorsements and rating information reflecting the change.
Virtually none of that effort conveys competitive advantage on any of the participants, but it takes time away from product development that could create competitive advantages.
More worrisome for insurers, however, is the bill’s proposal to expand coverage under the program to losses arising from attacks using nuclear, biological, chemical, and radiological (NBCR) methods.
As part of that expansion, private insurers would be required to “make available” to insureds coverage for losses arising from NBCR attacks, although the level of insurer exposures would be less than that for conventional attacks.
Even though insurers have lower TRIP deductibles and retentions for NBCR losses than for those arising from conventional attacks, insurers are nonetheless fearful that they will be exposed to catastrophic hazards they are not prepared to underwrite.
In particular, insurers are fearful they may be liable for covering losses for indeterminate periods of contamination and business income resulting from such attacks.
Even if one considers NBCR exposure manageable from an underwriting and pricing standpoint, the prospect of a mandatory offer of coverage for it is a significant departure.
To date, the real purpose of the federal terrorism reinsurance program has been to provide carriers and insureds with an alternative to the terrorism exclusions introduced after the Sept. 11th attacks.
As stated above, the effect of TRIP is to allow insurers in the U.S. to continue to cover losses insured under standard commercial policies, even if those losses result from an act of terrorism.
Primary carriers and reinsurers can draw upon industry and proprietary knowledge to underwrite fire, explosion, and other common perils arising from conventional terrorist attacks. They simply feel unable to assume exposure for losses arising from calculated series of attacks.
The situation is entirely different when it comes to addressing property losses from nuclear and radiological attacks. (More on biological and chemical attacks below.)
Nuclear hazards have long been excluded from standard first-party property coverage, so implementing a make-available requirement for “N” and “R” coverage would require developing a coverage grant where one had not previously existed.
“TRIP was never intended to establish coverage beyond the level that was provided before the introduction of terrorism exclusions after the Sept. 11 attacks,” says Deborah Summerlin, AAIS vice president of insurance lines. “If coverage for loss arising out of the nuclear hazard is mandated, the contamination and loss of use issues will require that new coverage terms be developed.”
The situation is different for liability coverage. General liability policies typically do not exclude liability for injury caused by a nuclear hazard unless the insured is also covered under a nuclear energy liability policy. Even today, there is coverage under TRIP for liability for injury arising from a nuclear hazard, except to the extent that coverage is not available under a separate nuclear energy liability policy.
Other questions arise from the possibility that insurers might be required to offer coverage under TRIP for losses arising from biological and chemical attacks, the “B” and “C” of NBCR.
For years, losses arising from biological and chemical agents have not been explicitly covered by or excluded from standard property policies.
Starting in 2006, property/casualty advisory organizations began winning approval in the states for “virus or bacteria” exclusions in commercial lines. These endorsement options excluded all first-party property coverage for losses arising from disease-causing agents.
The exclusions were developed with the fear of a pandemic in mind. Some insurers feared that commercial policyholders would claim property damage and seek coverage in the event that a workplace or its equipment was contaminated with Avian flu or another virus and forced to shut down. (The AAIS version explicitly excludes coverage for loss of use.)
The virus or bacteria exclusions were presented as clarifying what was intended under existing under current property forms, and not as a restriction or limitation on an existing coverage. They were generally accepted as such by regulators, with no demands that premium credits be instituted.
Still, says Summerlin, “prior to the implementation of the virus or bacteria exclusions, it could be argued that a loss covered under TRIP could encompass loss caused by the intentional dispersion, application, or release of pathogenic or poisonous biological material.”
The same could be argued regarding the release of pathogenic or poisonous chemicals, Summerlin adds, unless such an occurrence was found to be subject to the pollution exclusion.
In short, the creation of a federal program to cover NBCR may force insurers to define certain perils in a way they have not had to previously.
The only alternative for providing NBCR coverage would be create a separate, parallel federal insurance program with its own underwriting and claims processes.
Insurers have experience with the National Flood Insurance Program, but there is one, huge difference: When the NFIP was created, the country had experienced floods.
The challenge now for insurers and policymakers is to devise a way to insure against something that has never
happened, and hopefully never will.
Threat assessment 
