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New Terrorism Risk Insurance Legislation Seeks To Reduce Federal Role

American Money
January 16, 2015

The long-term intent of Congress in the future funding of terrorism losses is spelled out in sections 108 and 110 of the Terrorism Risk Insurance Program Reauthorization Act of 2015, and it appears aimed at reducing the federal role.

The "Finding" quoted in section 110 is as follows: “Congress finds that it is desirable to encourage the growth of nongovernmental, private market reinsurance capacity for protection against losses arising from acts of terrorism.”

To assist in achieving that objective, the Act calls for the creation of the Advisory Committee on Risk-Sharing Mechanisms. The duties of the nine-member committee, to be appointed by the secretary of Treasury, are to provide advice and recommendations with respect to the creation and development of the risk-sharing mechanisms. The members are to be directors, officers, or other employees of insurers, reinsurers, and the capital markets of the affected sector of the insurance industry.

Section 108 of the Act also requires the U.S. Government Accountability Office (GAO) to complete a study by January 2017 on the viability and effects of the federal government (1) assessing and collecting up-front premiums on insurers that participate in the Terrorism Insurance Program and (2) creating a capital reserve fund and requiring insurers participating in the program to dedicate capital to prefund terrorism losses.

These two sections of the Terrorism Risk Insurance Program Reauthorization Act of 2015 strongly suggest that Congress currently plans to reduce the federal role in funding costs associated with risk of terrorism losses. Captive insurance companies and their reinsurers should start planning now for what could happen on December 31, 2020, when the Reauthorization expires.   

See the full text of Sections 108 and 110 of H.R. 26--the Terrorism Risk Insurance Program Reauthorization Act of 2015 (source: Library of Congress).

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