Jersey City, N.J. - The Terrorism Risk Insurance Extension Act of 2005, signed into law by President Bush, does not contain revisions that would affect insurers' use of a portfolio of terrorism insurance tools, endorsements and related rules from ISO, a New Jersey-based risk management services provider.
Congress enacted the Terrorism Risk Insurance Act of 2002 (TRIA) as a federal backstop for the property/casualty insurance industry. TRIA was set to expire on December 31, 2005, but the new law extends TRIA for two years through December 31, 2007.
"Revisions to ISO's portfolio of terrorism endorsements and related rules are not necessary in response to TRIA's extension," said Kevin B. Thompson, ISO senior vice president - Insurance Services. "Since the definition of a certified act of terrorism has not changed, the ISO program already complies with the new law, and there is no immediate need to revise coverage forms or endorsements. ISO will file a revised line item disclosure endorsement in early 2006 to reflect the federal government's reduced share of losses in 2007- from 90% to 85% - and revised conditional endorsements to eliminate references to the original TRIA expiration of December 31, 2005."
With respect to the conditional endorsements that ISO introduced in 2004 to allow insurers to address the uncertainties over TRIA's scheduled December 31 sunset, Thompson said, "ISO drafted the original conditional endorsements to meet contingency situations, and they address the situation exactly as intended. For those lines of business that will continue to be covered by TRIA, the conditional endorsements will not become operative and underlying policy provisions with respect to terrorism will remain unchanged and continue in effect. For those lines of insurance that have been newly excluded from TRIA, such as commercial auto, the conditional endorsements become operative as originally intended.
"The bottom line is insurers can continue to use the full complement of ISO tools to manage their terrorism exposure for both TRIA and non-TRIA lines of business," he added.
Provisions of the new law worth noting are:
* The per-event threshold for federal government participation in insured losses with respect to an act of terrorism occurring after March 31, 2006, will be $50 million, increasing to $100 million for an act of terrorism occurring on or after January 1, 2007.
* The bill excludes commercial auto, burglary and theft, surety, professional liability (other than directors and officers liability) and farmowners multiple peril from TRIA.
* Insurers' deductibles in Program Year 4 will be 17.5% and 20% in Year 5.
* The industry's retention is increased to $25 billion in Year 4 and $27.5 billion in Year 5.
"ISO does not anticipate filing overall changes to its advisory prospective loss costs - anticipated losses from underwriting a class of risk - and factors at this time. But ISO will continue to review other influences on terrorism loss costs and rating factors, like the latest terrorism model from ISO's AIR Worldwide subsidiary, and evaluate the need for new filings later next year," Thompson explained.
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