TRIA Compliance Risks
First published May 8, 2020
Every two years U.S. Treasury reports to Congress on the effectiveness of the Terrorism Risk Insurance Program. On April 27, Treasury published a request for comment on areas to cover in the 2020 report.
As described in the attached, Treasury’s 2018 report revealed significant compliance risks in the program such as:
- Up to 29% of policies are issued without an identifiable terrorism premium, although insurers cannot recover from the federal backstop unless they have provided policyholders with a “separate line item” disclosure; and
- The terrorism premium insurers reported to Treasury for 2017 may be as much as $1.1 billion short of the actual amount of premium attributable to the risk.
Despite these and other compliance risks, Treasury currently has no tools to investigate or enforce compliance with the program until after an insurance company claims a payout from the backstop. By then it will be far too late for the insurer to fix any compliance issues. Treasury’s only recourse at that point is to deny the requested reimbursement and, if appropriate, pursue civil or criminal penalties against the insurer and the company executive signing the certificate of compliance.
This is not a hypothetical risk. It is playing out right now with certifications signed by executives under another of Treasury’s catastrophe relief programs. The Secretary of Treasury has become personally involved in the ex post scrutiny of applications and payouts under the Paycheck Protection Program including ordering mandatory audits of large payouts and threating criminal liability for false certifications. In response, a significant number of recipients have returned funds to the program.
There is one big difference between the Paycheck Protection Program and the Terrorism Risk Insurance Program. The Paycheck Protection Program was enacted, implemented and executed with minimal time for those involved to think through and address all the compliance risks. The Terrorism Risk Insurance Program is a two-decade old program currently generating more than $3 billion of premium a year for the industry at a 0% loss ratio. We should expect little tolerance for anyone unprepared when it comes time to perform.
Treasury can mitigate compliance risks to the program by implementing a rule requiring insurers to establish a formal TRIA compliance program and appoint a responsible officer as it has done with foreign insurance companies under the Foreign Account Tax Compliance Act.
