As the 113th session of Congress came to a close, one of the noteworthy items left in limbo was the Terrorism Risk Insurance Act (TRIA), which will expire on December 31. While TRIA directly affects the insurance markets, its impact could extend well beyond insurers. The biggest rumor out there is that, without TRIA, the Super Bowl could be in jeopardy. What exactly is TRIA, and how does a federal insurance program affect football games?
Prior to the terrorist attacks of September 11, 2001, terrorism coverage was generally included in insurance policies for little to no charge, as the risk was considered below the threshold for concern. After the attacks, the inability to accurately price these events and the absence of appropriate models caused a ripple effect through the insurance market. Unwilling to absorb the tail risk, reinsurers withdrew from the terrorism coverage market. Unable to find reinsurance, primary insurers started including terrorism exclusions to protect themselves. State regulators approved these exclusions, as the exclusions helped to protect the solvency of the insurers. This left the insureds without sufficient coverage in the eyes of lenders, and greatly impacted the construction and real estate markets, among others. The lack of funding caused delays in projects, such as infrastructure improvements, and lost jobs, impacting the economy outside of the insurance industry.
Congress stepped in with the Terrorism Risk Insurance Act of 2002, which created a temporary program to allow the federal government to act as a backstop reinsurer. In the event of a major terrorist attack, the federal government would provide the capital to pay claims immediately, subject to deductibles, coinsurance, and indemnity triggers, and recoup the money in the following years through assessments. In exchange, insurers would be required to offer terrorism coverage for certain lines of business in commercial policies. TRIA protected the market from tail risk while the market developed methods to properly price the coverage and develop the needed capacity. The act has been extended twice already, each time pushing a greater share of the potential liability of a future terrorist act to the private insurance market without material changes to the availability or rates of the coverage.
Both the House and Senate approved different versions of a TRIA extension during 2014, but the session ended with the bill blocked in the Senate, which was due to the attachment of an unrelated provision. Proponents point to the potentially crippling nature of a major event or series of events to the insurance industry, and the likely impact on the whole economy, while critics think the industry will move on without the federal support. With TRIA expiring, insurers will need to have capital to cover the tail risk the federal government would have covered. Insurers would likely respond to the missing coverage by either increasing rates to supply the additional capital, or reducing (or excluding) coverage, leading to decreased supply of coverage and, again, increased premiums. By passing the costs on to the insureds, the economy could again be affected by the lack of affordable terrorism coverage.
So how does this affect the Super Bowl? The NFL, or any other sports organization, needs to have insurance covering the game sites. Without insurance at an acceptable price, games would likely be canceled. The NFL has joined other sports leagues and other businesses in the construction, entertainment, and hospitality areas as part of the Coalition to Insure Against Terrorism, a lobbying group in favor of the extension of TRIA. However, with TRIA on the shelf until the next session of Congress, does this put the Super Bowl in jeopardy? Well, no. The NFL has said, “The Super Bowl will be played.” Even without TRIA, there is a chance that terrorism coverage will remain in place and even if coverage is canceled, alternative risk transfer devices could be utilized, as was done for that other football’s final match in 2006. So while the lapse in TRIA coverage could significantly impact the economy, don’t worry, we can still look forward to the Super Bowl.