U.S. Treasury Okay with $0 Terrorism Premium Disclosures (For Now)
The Terrorism Risk Insurance Act requires participating insurers to provide “clear and conspicuous disclosure to the policyholder of the premium charged for insured losses covered by the Program.”[1] An insurer that fails to disclose the terrorism premium charged forfeits its right to reimbursement from the program’s backstop.
In its recently released Study of Small Insurer Competitiveness in the Terrorism Risk Insurance Marketplace (June 2021), U.S. Treasury addresses the common practice among insurers (especially smaller insurers) of disclosing $0 terrorism premium.
Overall, Treasury’s analysis of small insurer data found that 35% of small insurer policies (by premium) provide terrorism coverage at “no additional charge.”[2]
Surprisingly, “no charge” terrorism coverage is most common in some of the highest terrorism exposed lines of business, such as:
- Excess Workers Compensation (78%)
- Liability (77%)
- Inland Marine (74%)
- Fire (56%)
- Aircraft (38%)
In the early years of the program, Treasury considered that “[TRIA’s] disclosure requirements are key provisions of the Act, both in terms of being a condition for payment and a mechanism to effectuate the other purposes of the Act.”[3] Back then, Treasury recognized a Congressional intent “to enhance the competitiveness of the marketplace by better enabling consumers to comparison shop for terrorism insurance coverage.”[4]
It would now seem that if state insurance regulators do not require an insurance company to calculate a terrorism charge separate from the charge for other perils, Treasury is fine with the terrorism charge disclosed as $0 even though a terrorism charge may be embedded within a generic catastrophe load. Treasury figures “[s]o long as participating insurers are charging (or not charging) a premium consistent with state law policy pricing requirements, and the amount of that premium is appropriately disclosed in the policy, a participating insurer should be able to certify compliance [with TRIA.”[5]
If an insurance company does go through the effort of separating the terrorism charge from the charge for other catastrophe perils, that amount must be disclosed. According to Treasury, “[a] disclosed premium which is inconsistent with the actual charge that the insurer is making (or recording) would be misleading.”[6]
Treasury seems to abandon any attempt to facilitate comparison shopping through meaningful apples-to-apples disclosures. It is now up to individual state regulators and individual company practices whether a separate premium is developed and disclosed for terrorism coverage or the terrorism premium charge remains embedded in a general catastrophe load with the terrorism premium disclosed as $0.
The unfortunate implications of Treasury’s deferral to individual state regulatory priorities and individual company preferences become evident in the Study itself. For example, Treasury spends considerable time reflecting on the highly exposed line of workers compensation:
- Terrorism “losses under a workers’ compensation policy are potentially unlimited”;[7]
- State pricing controls over workers compensation insurance “will limit what insurers can charge (generally as well as specifically for terrorism risk) and potentially affect whether the purchase of reinsurance is economically viable”;[8]
- Workers compensation “insurers are required by state law to cover terrorism risk (including NBCR-related terrorism risk)”;[9]
- “Although [TRIA] applies irrespective of the size of the insurer participating in the workers’ compensation market, it may be more critical for small insurers”.[10]
Despite “the unique terrorism-related risks posed by the workers’ compensation system”, Treasury found an astounding 78% of small insurer excess workers compensation insurance policies disclose a $0 premium (compared to 5% of non-small excess workers compensation insurance policies). 1 in 7 primary small insurer workers compensation insurance policies issue with a $0 premium despite the fact that every workers compensation rating bureau has developed a specific terrorism coverage charge.
Treasury should be asking: If workers compensation insurance is so highly exposed to extreme terrorism events, why do so many small insurers charge nothing for the coverage?
Indeed, there are clear red flags for terrorism premium disclosure practices across the insurance industry as a whole: 1 in 3 policies subject to the Terrorism Risk Insurance Program issue with a $0 premium disclosure.[11]
While currently “Treasury does not share the view” that the widespread use of $0 premium disclosures is a serious problem, it reminds participating insurers that “compliance with the Program’s disclosure requirements for the charging of terrorism risk insurance premium will be specifically evaluated incidental to claims for payment of the Federal Share of Compensation.”[12]
That will be far too late for insurers caught on the wrong side of Treasury’s final word on premium disclosures.
[1] TRIA Sec. 103(b)(2).
[2] Treasury Study at page 24.
[3] 68 FR 19303.
[4] 68 FR 59719, citing H.R. Conf. Rep. №107–779 (2002); and 68 FR 59722.
[5] Study at page 22, footnote 61.
[6] Study at page 22, footnote 61.
[7] Study at page 46.
[8] Study at pages 46–47.
[9] Study at page 47.
[10] Study at page 49.
[11] Study at page 24.
[12] Study at page 22, footnote 61.
