Two Decades of the Terrorism Risk Insurance Program

Opportunity to Evaluate Effectiveness of Program Administration

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These comments respond to Treasury’s Notice appearing at 87 FR 18473 (March 30, 2022) seeking comments in advance of its 2022 Report on the Effectiveness of the Terrorism Risk Insurance Program with a focus on program administration.

Executive Summary

After nearly two decades of operation, the Federal Insurance Office (FIO) should raise awareness of and assess in the upcoming Effectiveness Report the key roles its staff, state insurance commissioners, and others play in the effectiveness of the Program including:

• Program resourcing;
• Program compliance testing and enforcement; and
• Lessons learned from COVID-19.

A. Program Resourcing

Prior FIO reports on the effectiveness of the program have omitted any substantial discussion of Program staffing, capabilities, and other resources.

The Program Office requires an adequate staff (potentially including suppliers) in terms of quantity and capabilities for the Program to be effective in executing its current and foreseeable tasks and operations. The Effectiveness Report should include a section on staffing, budget, and key suppliers to assist Congress and other stakeholders in their understanding whether the Program Office is appropriately resourced to carry out its mission. The Effectiveness Report should include a discussion of the Program Office’s strategy to satisfy an expected surge in demand in the days and months following an act of terrorism.

B. Program Compliance Testing and Enforcement

TRIP requires commercial property and casualty insurers to participate in the Program. Program participants are required to comply with:

• The “make available” requirement;[1] and
• TRIP data calls.[2]

Treasury may levy civil penalties for failure of a participating insurer to comply with these requirements.[3]

In addition, as a condition of receiving any payments from the TRIP program after the certification of an act of terrorism, executive officers of participating insurers must certify that the insurers have provided clear and conspicuous disclosure to their policyholders of:

• The premium charged for insured losses covered by the Program; and
• The federal share of compensation for insured losses under the Program.[4]

Treasury may deny payment of the federal share of covered loss to an insurer that had failed to comply with these disclosure requirements. Treasury may take other action against any insurers and executive officers that provide inaccurate certifications of compliance.

Treasury has concurrent jurisdiction with state insurance regulators with respect to monitoring and enforcement of compliance with the disclosure and make available requirements prior to an act of terrorism.[5] However, it is not clear from FIO’s Effectiveness Reports or the NAIC how they have coordinated or allocated responsibilities for compliance monitoring, complaint handling, or enforcement actions relating to the make available, disclosure, or data call requirements.

Such a plan should contemplate the limited oversight tools state insurance regulators have with respect to the conduct of surplus lines insurers and captive insurers. According to recent reports, largely unregulated surplus lines insurance has grown to as much as 20% of the commercial property and casualty market.[6] According to FIO’s analysis of Program data calls, captives are expected to receive up to 85 cents of every Program dollar suggesting these opaque structures play a dominant role in the Program. Because neither surplus lines insurers nor captives make state regulatory product filings, the make available and disclosure practices of these key players in the Program are wholly outside of public (and to a large extent state and federal regulatory) visibility.

Without a plan of coordination, it is likely that FIO and state insurance commissioners may inefficiently overlap in their compliance monitoring and enforcement activities or ineffectively leave gaps in coverage of critical areas of compliance monitoring and enforcement. Moreover, it is unclear how FIO and the NAIC or its members share information regarding consumer complaints, examination findings, or other insights into compliance with Program requirements.

Without an efficient and effective pre-event compliance monitoring and enforcement program, all practical compliance testing and enforcement would be deferred until after a catastrophic act of terrorism occurs. At that point, participating insurers would be far beyond any opportunity to remediate non-compliance in make available and disclosure practices. Such non-compliance risks denial of insurer requests for payments from the Program or qui tam or similar recovery actions for Program payments that are made to non-compliant insurers.

For these reasons, the Effectiveness Report should include a discussion of:

• State and federal compliance testing, monitoring and examination activities related to the Program’s data call, disclosure, and make available requirements;
• Findings, trends, fines, orders, or other observations from those activities;
• Limitations or weaknesses in state and federal oversight of Program compliance;
• Coordination of state and federal compliance strategies and activities; and
• Other strategies, plans, or activities intended to reduce the risk of participant non-compliance leading to failure of Program payments or post-payment recovery actions.

C. Lessons from COVID-19

The Effectiveness Report should discuss whether there have been lessons learned or other observations regarding the design, implementation, or operation of the Program derived from the insurance industry’s experience with COVID-19.

These lessons and observations may include a discussion of:

• The suitability and risks of using the Program as a template for other public-private catastrophe risk partnerships including the pandemic risk. For example, the Pandemic Risk Insurance Act of 2021 (HR 5823) largely copies the Program’s structure although there has been little evident analysis whether a terrorism program is an appropriate basis from which to design a pandemic program.
• The potential loss of public trust in a catastrophe risk program that is perceived to allocate public funds unfairly or inequitably. For example, Treasury’s analysis of prior data calls shows that up to 85 cents of every Program dollar would be paid out to special purpose subsidiaries of large corporations (known as captive insurers) rather than to support small and medium-sized businesses that rely on traditional insurers for terrorism coverage.
• The Program’s interaction with hastily assembled and enacted catastrophe relief programs in the weeks and months after an act of terrorism. For example, it is unclear how a terrorism relief program modeled after the Paycheck Protection Program would interact with TRIP’s prohibition on duplicative compensation. It would appear the Paycheck Protection Program model may create a risk that participating insurers would bear the cost of that Program through reduction in TRIP recoveries while policyholders receive windfall duplicative recoveries.[7]

It may also be that the Effectiveness Report could discuss the costs and benefits of conducting preparedness exercises or simulations with participating insurers (beyond data calls based on modeled loss events) based on the real-world dynamics experienced by Treasury, policyholders, and insurers during the response to COVID-19.

[1] Sec. 103(c).

[2] Sec. 104(h).

[3] Sec. 104(e).

[4] Sec. 103(b)(2).

[5] Sec. 106(a). This is especially the case where the respective Insurance Commissioner has undertaken state-level regulatory action such as requiring the filing and approval of forms, rates, rules, and/or disclosure relating to the Program.

[6] Regulation of surplus lines insurance by state insurance regulators is largely limited to financial matters but excluded market conduct matters such as the make available and disclosure requirements.

[7] Sec. 103(e)(1)©.