Terrorism Insurance - Comparison of H.R. 3210, S. 2600, and Conference Report

Order Code RS21211 Updated December 9, 2002 CRS Report for Congress Received through the CRS Web Terrorism Insurance – Comparison of H.R. 3210, S. 2600, and Conference Report S. Roy Woodall, Jr. Insurance Consultant Government and Finance Division Summary The terrorist attacks of September 11 resulted in the largest insured catastrophic loss in history, estimated to total $40 billion. Even though the insurance industry committed to pay losses resulting from the attacks, industry spokesmen asserted that insurers might not be able to cover major future terrorism losses without a federal backstop. The 107th Congress considered how to provide such a backstop. On November 29, 2001, the House of Representatives passed H.R. 3210, the Terrorism Risk Protection Act, providing for a temporary federal backstop. In the Senate, four similar measures were introduced in 2001, but no action was taken during the first session of the 107th Congress. On June 7, 2002, Senators Dodd, Sarbanes, Schumer, and Reid introduced a compromise proposal, S. 2600, which was passed by the Senate on June 18, 2002. On October 17, 2002, leaders of the House-Senate conference committee and the White House tentatively agreed in principle upon a proposed compromise version of the legislation, which was circulated to all conferees for signatures. The conferees approved the conference report, which was filed November 13. The House agreed to the report by voice vote on November 14, and the Senate by vote of 86-11, on November 19. The President signed the bill, which became P.L. 107-297, the Terrorism Risk Insurance Act, on November 26, 2002. This report records the legislative development of H.R. 3210, S. 2600, and the conference report language enacted as P.L. 107-297. It will not be updated further. For further information, please call Rawle King (707-5975), or Barbara Miles (707-7804). Background The terrorist attacks of September 11, 2001 resulted in the largest insured catastrophic loss in history, estimated to total $40 billion. At the time, the insurance industry committed to pay losses resulting from the attacks and not invoke “act of war” clauses, even though there had been considerable discussion that such an invocation might be appropriate. Despite the magnitude of the projected losses, the solvency of the insurance industry and most insurance firms was not seriously threatened, in part because Congressional Research Service ˜ The Library of Congress CRS-2 of the spreading of losses among many secondary insurers through the industry practice of “reinsurance.” In light of the huge “9/11” losses and because of the lack of any actuarial basis for determining loss exposures, however, many reinsurers indicated an unwillingness to accept the risk of loss from terrorism in the future. In turn, industry spokesmen asserted that in view of the impending difficulty in obtaining reinsurance for the risk of future terrorist attacks, primary insurers would not be able to cover future terrorism losses without some form of federal backstop. There were anecdotal accounts of dramatically increased premiums or outright inability of some businesses and major real estate landmarks to get insurance that included coverage for acts of terrorism. Several proposals for a federal backstop were introduced in Congress in 2001, and one – H.R. 3210 – passed the House on November 29, 2001. On April 24, 2002, a unanimous consent agreement was proposed to bring H.R. 3210 to the Senate floor and amend it by substituting the language of the compromise agreed to by Banking Committee members, Senators Dodd, Sarbanes, and Gramm. Efforts to reach agreement were not successful, and on June 7, 2002, Senators Dodd, Sarbanes, Schumer, and Reid introduced the compromise proposal as a separate bill (S. 2600), which was passed by the Senate on June 18, 2002. On October 17, 2002, leaders of the House-Senate conference committee and White House officials agreed in principle upon a proposed version of the legislation, which was circulated to all conferees for signatures. The conferees approved and filed the conference report on November 13, and its language was subsequently passed by the House on November 14, and the Senate (86-11) November 19. On November 26, the bill was signed by the President and enacted as P.L.107-297. Comparison of H.R. 3210, S. 2600, and Conference Report (P.L. 107-297) The House, Senate, and conference report language were similar in several aspects, such as by establishing a temporary backstop program, providing for oversight by the U.S. Treasury, setting triggers (losses sufficient to bring the federal backstop into play), setting definitions of what constitutes a terrorism event, and preempting state laws. They differed with respect to whether or not assistance must be repaid, the nature of legal modifications and limitations, and other specific details. Key provisions, similarities, and differences are set out in the following chart. Provision H.R. 3210 S. 2600 Conference Report Name Terrorism Risk Protection Act Terrorism Risk Insurance Act Terrorism Risk Insurance Act Purpose Provides a temporary government loan program Provides a temporary government/industry program for sharing losses Combines payback program with loss sharing program CRS-3 Provision H.R. 3210 S. 2600 Conference Report Governance Oversight by Secretary of the Treasury – may issue regulations Secretary of the Treasury has authority to establish regulations and procedures to implement Program Follows both bills Length of Program One year, but may be extended two additional years One year, but may be extended for one additional year Three years, plus “transition year” for balance of 2002 Trigger (Industrywide) Losses exceed $1 billion Losses exceed $5 million, then two levels of shared losses: up to $10 billion, and over $10 billion (increases to $15 billion if extended to second year) Losses exceed $10 billion in first year, $12.5 billion in second year, or $15 billion if extended to third year Trigger (Individual Insurer) Industry-wide losses exceed $100 million and individual insurer’s losses exceed 10% of capital surplus and 10% of net premiums Trigger is a retention amount referred to as “deductible” at first level, based on insurer’s market share times $10 billion ($15 billion in second year) Trigger or deductible is the greater of $5 million or losses in excess of 1% of direct earned premiums in 2002, 7% in 2003, 10% in 2004, and 15% in 2005 Post Trigger Federal Assistance 90% loan with payback, but if trigger is industrywide, then subject to a $5 million deductible per insurer 80% cost sharing for amounts over individual insurers’ market share “deductible” (net of reinsurance) up to $10 billion, then 90% over $10 billion 90% cost sharing over individual insurer trigger/deductibles, and over industrywide trigger Cap on Assistance $100 billion $100 billion per year (also effectively caps industry share) Follows Senate bill, with transition year combined with 2003 CRS-4 Provision H.R. 3210 S. 2600 Conference Report Covered Lines Commercial Commercial – mandatory Personal – optional Follows House bill, plus war coverage for workers’ compensation; excludes reinsurance; Secretary of Treasury has discretion to add group life insurance Mandatory Terrorism Coverage No, but appears as though insurer not writing terrorism policies still subject to assessments Yes. Participating insurers must offer terrorism insurance in all commercial policies (assumes opt-out by policyholder) Follows Senate bill for first two years; Secretary of Treasury has discretion to extend requirement to third year Payback Yes, through assessments on insurers for first $20 billion, and surcharges on policyholders for amounts from $20$100 billion, with civil monetary penalties for failure to pay No Yes, through surcharges of up to 3% of annual premiums on all policyholders with mandatory recoupment for amounts under the annual industry-wide trigger ($10 billion for 2002-2003, $12.5 billion for 2004, and $15 billion for 2005); no mandatory recoupment if uncompensated losses exceed insurance marketplace retention; Secretary of Treasury has discretion to recoup additional amounts Application to Selfinsureds and Offshore Insurers Yes, if Secretary of Treasury, in consultation with NAIC, so determines Yes. Secretary of Treasury, in consultation with NAIC may establish procedures for municipalities and other entities in existence on 9/11 Follows House bill as to self-insureds, captives, plus state residual market pools, surplus lines carriers and state workers’ compensation funds CRS-5 Provision H.R. 3210 S. 2600 Conference Report Definition of Terrorism Yes, to be developed by Secretary of Treasury and NAIC consistent with the requirements of the Act Yes, as certified by Secretary of Treasury, in concurrence with Secretary of State and Attorney General – based on requirements in the Act (losses exceed $5 million) Follows Senate bill Cost Disclosure of Terrorism Coverage Yes. Sense of Congress that states require separate disclosure of cost of terrorism coverage Yes, as a condition for federal payment Yes. Must disclose terrorism insurance premiums and the existence of the federal backstop Consultation with State Insurance Regulators (NAIC) Yes, as to assessments, surcharges, claims investigation, and covered perils Yes, as to life insurance study and non-insurer entities to be covered Yes, as the Secretary determines appropriate, concerning the program State Regulation Uniformity Yes, as to “terrorism” definitions and underwriting standards No Follows Senate bill Civil Actions and Litigation Federal cause of action in district court(s) designated by Judicial Panel on Multidistrict Litigation General federal cause of action (no designation by Judicial Panel on Multidistrict Litigation) Follows House bill Legal Modifications and Limitations Punitive damages prohibited. Noneconomic damages proportional as to fault. U.S. right of subrogation. 20% cap on attorneys’ fees Punitive damages do not constitute “insured losses” and thus no federal participation. U.S. right of subrogation Follows Senate bill CRS-6 Provision H.R. 3210 S. 2600 Conference Report Studies Life insurance, Life insurance and railroad and trucking other lines of insurance, and insurance reinsurance pool system for future acts of terrorism Life/group life insurance, and other facets of affected insurance markets, including personal lines, railroads and public transit Reports from Insurers None required, except for data not available to NAIC Only as to claims (premium rates reported to NAIC) Follows House bill, but burden of compiling premium data placed on the Secretary of Treasury State Preemption Yes, of impediments to increasing premiums to recover assessments, but not as to filings or subsequent review of rates Yes, as to “terrorism” definition and state prior approval rating statutes. Access to books/records by Secretary of Treasury guaranteed Follows Senate bill, plus nullifies existing terrorism exclusions, with provisions for reinstatement under certain conditions Civil Monetary Penalties Yes, $1 million against insurers for failing to pay assessments or surcharges, erroneous data, or violation of regulations Yes, to be assessed by Secretary of Treasury for violations of Act or of any rule, regulation or order Follows House bill Report to Congress Yes. If Secretary extends the term of the program, must state reasons Yes, not later than nine months after the date of enactment, covering required items, plus joint report 12 months later with Comptroller General as to NAIC, FTC, and GAO reports Yes, not later than June 30, 2005, covering required items, in consultation with NAIC, insurance industry and other experts Satisfaction of Judgments from Assets of Terrorists Yes Yes Yes