Any alternative funding structure to the Terrorism Risk Insurance Act (TRIA) would create a significant challenge for insurance, reinsurance and government leaders in finding an acceptable alternative, according to a report released last week by the U.S. Government Accountability Office (GAO).
Specifically, the GAO said that the two leading proposals — a pre-event federal surcharge or a insurance industry capital “set aside” — would include a mix of regulatory and market challenges that would make them difficult to pull off.
“Designing and implementing alternatives to TRIA’s current funding structure, such as a federal terrorism risk insurance charge or set-aside of insurer funds, would require trade-offs among various policy goals and involve complexities,” the GAO said in its report.
The GAO report was required following the passage of the Terrorism Risk Insurance Program Reauthorization Act of 2015 with the goal of finding financial “alternatives” to the current funding structure that expires in 2020.
The current TRIA funding method is a loss-sharing structure that requires insurers pay claims on covered terrorism losses with U.S. Department of Treasury reimbursing carriers for losses that exceed a specified amount.
However, loss-sharing has come under criticism from insurers and reinsurers since it relies on the federal government certifying an event that creates uncertainty in the claims process. Government officials also argue that the current funding regime places too much risk with taxpayers.
One alternative funding mechanism explored by the GAO is a federal “charge” on insurers or policyholders. The proposed alternative could either be “risk-based” charge that recoups the government’s share of potential losses or fee paid to the U.S. Treasury “for the promise of payment of the federal share of losses with recoupment in place to cover the actual losses.”
However, the report points out that any charge to cover the federal share of losses may be too small to cover losses in the “near term” and have significant “limitations.”
“Policymakers may face tradeoffs among the pricing objectives as no single design will satisfy all parties on all dimensions, and the level of importance different policymakers may place on different objectives will vary, depending on how they value the characteristics of each” the GAO said.
The government watchdog also explored the use of “terrorism set-asides” that could take the form of loss reserves for future terrorism losses, additional capital requirements for terrorism risk, or separate assets “that only could be used for terrorism losses.”
But set asides were found to be too “complex” given the federal, state accounting and tax issues that would be raised by creating a new capital structure.
“[One] set-aside approach could restrict the flexibility with which insurers can use assets (generally, for a variety of risks) and thus hamper risk management,” the report states. “Under each option, federal fiscal exposure exists.”
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