July 14, 2014

S. 2244 – Terrorism Risk Insurance Program Reauthorization Act of 2014

Noteworthy

Background: On June 3, 2014, the Senate Committee on Banking, Housing and Urban Affairs reported S. 2244, the Terrorism Risk Insurance Program, out of committee by a vote of 22-0. 

Floor Situation: At a time to be determined, the Senate will begin consideration of S. 2244. The committee-reported amendments will be agreed to and considered as original text for the purpose of further amendment. The only amendments in order are: Coburn #3549 to extend the time for recoupment, which is subject to a budget point of order; Vitter #3550 to ensure a community bank Federal Reserve Board governor; Flake #3551 to create an advisory committee on risk-sharing mechanisms; and Tester #3552 to establish the National Association of Registered Agents and Brokers. Each amendment is subject to one hour of debate, equally divided, and up to one hour of general debate, equally divided. Following the use or yielding back of debate time, the Senate will vote on the amendments in the order listed above, followed by a vote on final passage. It is anticipated the Coburn and Flake amendments and passage of the bill will be recorded votes, with the others likely to be voice voted.  

Executive Summary: The Terrorism Risk Insurance Act expires on December 31, 2014. S. 2244 would extend TRIA for seven years. The bill would increase the share of insured losses paid by private insurers under the program and require a report from the Government Accountability Office on the effects of collecting premiums of insurers that participate in the program. 


Overview of the Issue

Before September 11, 2001, coverage for losses from terrorist attacks was normally included in general insurance policies without specific cost to the policyholders. Following the 9/11 attacks, such coverage became very expensive if offered at all. Because insurance is required for a variety of transactions, there was concern that the absence of insurance against terrorism loss would have a wider economic impact.

In 2002, Congress passed the Terrorism Risk Insurance Act of 2002 (TRIA; P.L. 107-297). It created a temporary, three-year terrorism insurance program in which the government would share some of the losses with private insurers should a foreign terrorist attack occur. This program was extended in 2005 (P.L. 109-144) and again in 2007 (P.L. 110-160). The amount of government loss-sharing varies by the size of the loss. The government assists insurers initially but then recoups its payments through a broad levy on insurance policies afterwards. For a large loss, the federal government would cover most of the losses, although recoupment is possible. TRIA requires insurers to offer terrorism coverage to commercial policyholders, but does not require policyholders to purchase the coverage. The TRIA program expires at the end of 2014.

Under the current program: (1) a terrorist act must cause $5 million in insured losses to be certified for TRIA coverage; (2) the aggregate insured losses from a certified act of terrorism must be $100 million in a year for government coverage to begin; and (3) an individual insurer must meet a deductible of 20 percent of its annual premiums for the government coverage to begin. Once these thresholds are met, the government covers 85 percent of insured losses due to terrorism. If the insured losses are under $27.5 billion, the secretary of the treasury is required to recoup 133 percent of government outlays. As insured losses rise above $27.5 billion, the secretary is required to recoup a progressively reduced amount of the outlays. At some high-insured loss level, the secretary would no longer be required to recoup outlays, but would retain the discretionary authority to do so.

Considerations on the Bill

The Senate Banking Committee has held two hearings on the reauthorization of TRIA – on September 25, 2013, and February 25, 2014. On June 3, the committee favorably reported S. 2244 by a vote of 22-0. 

TRIA’s recoupment provisions timed within the five-year and 10-year budget windows permitted this provision to be scored at no cost by the Congressional Budget Office, creating recoupment periods as short as 21 months. Senator Coburn offered an amendment at committee mark-up that would permit the secretary to extend the recoupment period beyond the 10-year scoring window, easing recoupment for losses that occurred in later years of the bill’s authorization. The amendment failed by a vote of 7-15, with members noting concern the amendment would have on the bill’s score. Senator Coburn has offered this same provision in amendment #3549.

Notable Bill Provisions

Section 2 – Extension of terrorism insurance program

Extends the program to December 31, 2021. 

Section 3 – Federal share

Phases down the federal government’s share of the insurer loses following a certified act of terrorism. The federal share would decrease by one percentage point each year beginning on January 1, 2016 until the federal share has been lowered from 85 percent to 80 percent.

Section 4 – Recoupment of federal share of compensation under the program

Gradually increases the amount of federal assistance that the secretary of the treasury must recoup from private industry following a certified act of terrorism. The current mandatory recoupment amount of $27.5 billion will be increased by $2 billion each calendar year until the mandatory recoupment amount reaches $37.5 billion.

Clarifies that the secretary of the treasury must recoup any federal assistance provided under TRIA up to the mandatory recoupment amount required under the act, no matter the size of the certified act of terrorism, assuming the amount was a positive amount. 

Section 6 – Improving the certification process

Requires the secretary of the treasury to conduct a study on a process by which the secretary could decide whether to certify an act of terrorism. Thereafter, the secretary would be required to issue regulations governing the certification process to address the findings of the study.

Section 7 – GAO study on upfront premiums

Requires the comptroller general of the United States to conduct a study on the viability and effects of the federal government assessing and collecting upfront premiums on insurers that participate in TRIA. 

Administration Position

The Administration has not stated its position on this bill. 

Cost

The Congressional Budget Office notes that while there is no reliable way to predict how much insured damage terrorists might cause, if any, in a specific year, its estimate represents an expected value of payments from the program – a weighted average based on industry experts’ opinions of the probability of various outcomes.

CBO estimates that S. 2244 would increase direct spending by $1.7 billion over 2015-2019 and by $3.5 billion over 2015-2024. An additional $460 million would be spent after 2024. CBO estimates that the recoupment provision in the bill would increase revenues by about $1.8 billion over the 2015-2019 period and by about $4.0 billion over the 2015-2024 period, net of income and payroll tax offsets. 

Cumulatively, CBO estimates that the bill would reduce budget deficits by $460 million over the 2015-2024 period. Federal spending, however, would continue beyond 2024; CBO estimates that over the full term of federal financial assistance, revenues would fully offset direct spending, resulting in no net effect on the deficit.

Amendments

The unanimous consent agreement calls for consideration of the following:

  • Coburn amendment (extended timeframe for recoupment): The Coburn amendment would permit the secretary of the treasury to extend the deadline to recoup government payments from insurers if the mandatory recoupment is more than $1 billion, for a period not to extend beyond 10 years after the date of an act of terrorism. Any extension is to be based on economic conditions and affordability of commercial insurance. NOTE: The amendment is subject to a budget point of order with a 60-vote threshold to waive.
  • Vitter amendment (community bank Federal Reserve governor): The Vitter amendment would amend the Federal Reserve Act to require the president to appoint at least one member to the Federal Reserve Board of Governors with demonstrated experience in or supervising community banks with less than $10 billion in assets. 
  • Flake amendment (advisory committee on risk-sharing mechanism): The Flake amendment would require the secretary of the treasury to establish the Advisory Committee on Risk-Sharing Mechanisms. The committee of nine members would provide advice, recommendations, and encouragement for the creation and development of non-governmental, private market risk-sharing mechanisms for protection against losses arising from acts of terrorism.
  • Tester amendment (NARAB II with two-year sunset provision): The Tester amendment would amend the Gramm-Leach Bliley Act to establish the National Association of Registered Agents and Brokers (NARAB) and authorize it to license producers of insurance to operate in multiple states. Currently, each state establishes requirements for licensing insurance producers within that state, with which insurance producers must comply to operate in that state. Under the amendment, insurance producers that join NARAB would be able to obtain a license to act as a producer in any state other than their home state by meeting NARAB eligibility requirements and paying certain fees. States would retain full authority to regulate the business of insurance and to investigate and discipline insurance producers doing business in their state. The legislation would authorize NARAB to charge fees of members to cover the operating costs of the organization. The Senate voted on this legislation as part of S. 1926, the Homeowner Flood Insurance Affordability Act of 2014. Changed from that bill is Section 335 of the Tester amendment, which would sunset the program after two years.