By Dan Cook
Workers' compensation premiums could soar unless Congress acts this year to extend the Terrorism Risk Insurance Act of 2002
It was soon after the 9/11 attacks that federal lawmakers adopted the law, setting up a system in which insurers could again offer terrorism insurance coverage to companies because the feds established a government-backed reinsurance program to protect insurers from the worst possible situations.
That program ends at the close of 2014, unless Congress once again extends it, as it did in 2005 and 2007.
Should Congress fail to take action, says the RAND Corp., a workers’ compensation marketplace disruption would likely result.
“TRIA expiration would affect (workers’ compensation) insurance markets differently from other insurance markets because WC statutes rigidly define the terms of coverage, such that in a post-TRIA world insurance companies would limit their terrorism risk exposure by declining coverage to employers facing high terrorism risk,” RAND says in an introduction to its report
“Because WC coverage is mandatory for nearly all U.S. employers, employers that cannot purchase coverage would be forced to obtain coverage in markets of last resort.
“Migration of terrorism risk to these markets of last resort would increase the likelihood that WC losses from a catastrophic terror attack would largely be financed by businesses and taxpayers throughout the state in which the attack occurs, adding to the challenge of rebuilding in that state. TRIA, in contrast, spreads such risk across the country.”
Here are the report’s key points and projections with respect to workers’ comp:
- If reinsurers are unwilling to provide much more coverage for both conventional and nuke/chemical type attacks, insurers might respond to TRIA’s expiration by declining to provide workers’ comp coverage to employers that present a high geographic concentration of potential losses.
- Without TRIA in place, employers perceived to be at high risk for terrorism might have to obtain coverage in markets of last resort known as residual markets, which could charge higher premiums.
- The higher cost of coverage would tend to reduce labor incomes and economic growth even if there is never another attack, though these effects are likely to be small.
- Expiration of TRIA and growth in the residual market might also mean that workers’ comp losses from a catastrophic terror attack would largely be financed by businesses and taxpayers throughout the state in which the attack occurs, adding to the challenge of rebuilding in that state. TRIA, in contrast, spreads such risk across the country.
There’s another potential negative outcome of failure to extend the TRIA:
Federal spending to offset catastrophic losses of future terrorist attacks would be much higher than under the present TRIA system. The RAND report said:
- For terrorist attacks with losses less than about $50 billion, having TRIA in place will lead to less federal spending than if TRIA were eliminated.
- Eliminating TRIA could increase federal spending by $1.5 billion to $7 billion for terrorist attacks with losses ranging from $14 billion to $26 billion.
- The greater federal spending without TRIA would result from less insurance coverage, leading to greater uninsured loss and hence greater demand for federal disaster assistance.
Originally published on BenefitsPro.com