One of the biggest challenges in risk management is the concept of things "probable" versus things "possible." Traditional risk management has focused more on the probable, using historical losses and other data to actuarially forecast future losses and related costs. Naturally, the probable is much more in the comfort zone of insurance underwriters than the things that could "possibly" happen.
Yet, research shows that the most destructive risks are those that are much harder to forecast as there is typically limited historical data that may inform such forecasts. In fact, these most destructive risks tend to fall into the strategic category type and are reflected in events such as those related to merger and acquisition failure, competitive risk, and new products offering risk, among many others.
While terrorism risk is typically classed as an operational risk exposure or in other schemes, "external," and notwithstanding their perceived commonality in our modern world, it remains more possible than probable. In fact, terrorism events have been falling in recent years in both frequency and severity according to Marsh's 2019 Terrorism Risk Insurance Report. Among many conclusions of this report are that the market for terrorism insurance remains stable and healthy in part due to the US Treasury "backstop" provided by the Terrorism Reinsurance Protection Reauthorization Act of 2015 (TRIPRA) legislation (originally TRIA or Terrorism Reinsurance Act—hereinafter referred to as the "Act").
This legislation is up for renewal once again as the current version expires on December 31, 2020. Interestingly, consumer advocates believe it is an unnecessary subsidization of insurance markets that they believe are fully able to handle multiple 9/11 magnitude events at the current industry capitalization of $742 billion. The "9/11" event produced $27 billion in insured losses in 2019 dollars.
Apart from this debate about the renewal of TRIPRA, the reality is no terrorism claims against TRIPRA or its predecessor acts have ever been paid. This is not so much as a result of claim denial as much as the size of deductibles and coinsurance built into the TRIPRA design. The Consumer Federation of America estimates it would take $85 billion in insured losses before TRIPRA would be required to pay. This may be one reason that the claim-making process of TRIPRA is unfamiliar to many and obscure at best to others.
Yet, many larger organizations (and a few more modest sized) have written terrorism insurance in their captives in part because the Treasury backstop provides real insurance (reinsurance) protection from the truly catastrophic (highly unlikely or improbable). Thus, the day may someday come when buyers may need to perfect a TRIPRA claim and thus will need to understand what the TRIPRA law requires regarding how to make a claim recovery from the US Treasury. Therefore, the following is a simplification of the claim-making process under the Act, the full details of which can be found on the US Treasury website.
Federal Share Claim Process
The US Treasury Department administers the TRIPRA program and, naturally, any claims that are made against this unique federal reinsurance mechanism, first crafted to both reinforce the limited terrorism insurance markets that were in operation prior to the "9/11" event, to encourage insurers to wade safely into expanded terrorism risks and, of course, to undergird economic activity increasingly dependent on protection from terrorism-related events.
So, as you might expect, they have designed a detailed process to perfect claims against the Act. These claims are made from the vantage point of an insurer (thus the "reinsurance" label), which is how and why a captive insurance company can access this mechanism if the requirements set forth in the Act are met. No direct access is available to a self-insured entity.
To obtain payment from the Act, insurers can use a Web-based facility (Facility) to electronically certify and submit the information required. Insurers may also use the Facility to obtain information on how to certify their submission within the rules.
Registration Process for Electronic Submissions
To use the Facility to electronically sign, certify, and submit required TRIPRA claims, an insurer must first register with the Facility. The registration process requires submission of the following information: insurer and insurer group (affiliate), point of contact, and the identity of individuals "authorized" by an organization to enter TRIPRA claims information and/or electronically certify and submit information. Only corporate officers designated and verified through the registration process will be able to electronically certify and submit TRIPRA claims through the Facility.
The Process
There are seven forms that may be required in the event of a certified act of terrorism. If an insurer is a member of an affiliated group, the group must select one insurer to submit forms on behalf of the group. These potentially applicable forms include the following.
- Notice of Deductible Erosion (Form TRIP 01). This form must be submitted to Treasury when the incurred aggregate insured losses (including reserves for "incurred but not reported" losses) for an insurer, or collectively for a group of affiliated insurers, exceed an amount equal to 50 percent of the insurer's deductible within a calendar year. One form should be submitted based on all insured losses applicable to a calendar year once there has been a program trigger-event applicable to that calendar year.
- Certification of Loss (Form TRIP 02). This form is to be used by insurers claiming insured losses arising from program trigger events. The initial, and if necessary, supplemental, certification(s) of loss are to include data relevant to all insured losses paid or that will be paid as specified in 31 CFR 50.73(b)(2)(i) based on all program trigger events within a calendar year. Schedules A, B, and C are required supporting documentation for this certification of loss form. The Treasury must receive, or have received, a notice of deductible erosion for the relevant calendar year to process a certification of loss.
- Proposed Settlement of Third-Party Claims (Form TRIP 03). This form is to submit a proposed settlement for review and processing. Pursuant to 31 CFR Part 50, Subpart K (Sections 50.102 and 50.103), proposed settlements resulting from a certified act of terrorism that exceed $2 million for personal injury or death, or $10 million for property damage liability, require Treasury's advance approval. Insurer claimants are required to submit a separate completed form for each proposed settlement.
- Direct Written Premium and Surcharge Calculations. Section 103(a) of TRIA authorizes Treasury to use policyholder surcharges to recoup federal payments made under the program. This form is to determine and document the amount of surcharge to be submitted by each individual insurer (rather than by an affiliated group as a whole). Treasury will establish an assessment period during which policyholders of commercial property and casualty (P&C) insurance policies must pay, and insurers must collect, the remittance to Treasury.
- Data Call (Form TRIP 05). This form is used to collect data from insurers in a variety of circumstances. TRIA requires the secretary of the Treasury to notify Congress when the secretary estimates that aggregate insured losses under the program will reach $100 billion in a calendar year. The Treasury is also required to publish an estimate of aggregate insured losses to determine whether mandatory recoupment of the federal share of compensation will be required. This form will be used to collect data from insurers regarding their aggregate insured losses.
- Certification Data Call (Form TRIP 06). No act of terrorism may be certified by the secretary if commercial P&C insurance losses arising from the event do not exceed in the aggregate $5 million. This form then is to issue a data call to insurers to collect information regarding projected and actual losses in connection evaluating an act for certification as an act of terrorism.
- Monthly Claims Report (Form TRIP 07). Within 60 days of establishing one or more claims associated with a certified act of terrorism, insurers are required to report to Treasury information regarding these claims. This form must be submitted until all claims arising from the certified act of terrorism have been resolved.
Policyholder Surcharges
If federal payments are made to insurers under TRIPRA, the Act includes a mechanism for the secretary to recoup "terrorism loss risk-spreading premiums" from insurers. When imposed by the secretary, insurers are required to collect such premiums from policyholders as a surcharge on insurance policies for TRIPRA-eligible lines of insurance after the calendar year in which the federal payments are made and to remit them to the secretary.
Record-Keeping Requirements
Under the law, the Treasury is authorized to access all books, documents, papers, and records of an insurer that are pertinent to amounts paid to an insurer or pertinent to any federal terrorism policyholder surcharge. Accordingly, any insurer that seeks payment must retain all records necessary to fully disclose this information, including (but not limited to) records regarding premiums and insured losses for all commercial P&C insurance issued by the insurer and information relating to any adjustment in the amount of a payable claim. There are additional record-keeping rules whose details can be accessed on the US Treasury website.
Prior Approval for Certain Claims
Certain claims require Treasury's preapproval prior to their inclusion on TRIP 02C (bordereau). They include proposed settlements resulting from a certified act of terrorism that exceeds $2 million for personal injury or death, or $10 million for property damage liability.
Payment to Insurers
To receive payment of a claim, insurers will be required to complete a supplier entry request form to register their information with the Bureau of the Fiscal Service. This will be used to facilitate payment through electronic funds transfer to the insurer's bank.
Payments to Treasury
Insurers may be required to make payments to Treasury under certain circumstances. An insurer seeking advance payment of a claim is required to establish an interest-bearing account to receive funds. All interest earned on advance payments must be remitted to Treasury at least on a quarterly basis. Payments to Treasury may be remitted by check or wire transfer.
In the event of a certification of an act of terrorism by the Treasury, the Facility will be activated and will provide contact information for insurers to seek assistance via telephone or email. In the interim, questions regarding the claim process may be directed to [email protected].
The process for making a claim against TRIPRA is bureaucratic but clear. The details contained at the Treasury's website are comprehensive and go well beyond this summary. Of course, we all hope that the parameters that would trigger the need to make a claim of this type may never emerge, but in this increasingly uncertain age, all insurers engaged in providing terrorism risk transfer should understand the rules of the road that enable them to continue to provide primary terrorism risk transfer from insureds to P&C markets at affordable rates and through relatively efficient underwriting processes.
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