H.R. 4871, TRIA Reform Act of 2014

Cost Estimate
July 15, 2014

As reported by the House Committee on Financial Services on June 20, 2014

H.R. 4871 would extend the Terrorism Risk Insurance Act (TRIA) for five years—through calendar year 2019—and, in certain instances, increase the share of insured losses paid by private insurers under the program. The bill also would establish the National Association of Registered Agents and Brokers (NARAB) and authorize it to license producers of insurance (mostly agents and brokers) to operate in multiple states. Finally, the bill would require several new studies of various aspects of the terrorism insurance program.

Considering both the direct spending and revenue effects of the bill, CBO estimates that enacting H.R. 4871 would increase budget deficits by about $500 million over the 2015-2024 period. Changes in federal revenues and spending, however, would continue beyond 2024; CBO estimates that after taking into account all revenues and direct spending, enacting H.R. 4871 would lead to a small reduction in deficits over time.

Title I would reauthorize the TRIA program, which requires insurance firms that sell commercial property and casualty insurance to offer clients insurance coverage for damages caused by terrorist attacks by foreign or domestic interests.

Under TRIA, the federal government would help insurers cover losses in the event of a terrorist attack under certain conditions, and would impose assessments on the insurance industry to recover all or a portion of any federal payments. The program is currently set to expire at the end of calendar year 2014; no federal payments have been made under the program since its inception in 2002.

There is no reliable way to predict how much insured damage terrorists might cause, if any, in any year. Rather, CBO’s estimate of the cost of financial assistance provided under the bill represents an expected value of payments from the program—a weighted average that reflects industry experts’ opinions of the probability of various outcomes ranging from zero damages up to very large damages resulting from possible future terrorist attacks. The expected value can be thought of as the amount of an insurance premium that would be necessary to just offset the government’s expected losses from providing this insurance, although firms do not pay any upfront premium for the federal assistance available under TRIA.

Title II of H.R. 4871 would establish the NARAB; it would allow insurance producers who join the organization to obtain a license to act as a producer in any state other than their home state by meeting the NARAB’s eligibility requirements and paying certain fees.

CBO estimates that enacting the bill would increase direct spending for federal assistance under TRIA and spending by the NARAB by $3.0 billion over the 2015-2024 period.

CBO estimates that enacting H.R. 4871 also would increase revenues. The bill would direct the Department of the Treasury to recoup some or all of the costs of providing financial assistance under TRIA through taxes imposed on certain insurance policyholders. CBO expects that spending for financial assistance to insurers would be offset (on a cash basis) by an increase in revenues. In addition, the bill would authorize the NARAB to charge fees to cover the cost of operating the organization. Taken together, CBO estimates that enacting H.R. 4871 would increase revenues by $2.5 billion over the 2015-2024 period, net of income and payroll tax offsets.

Enacting the legislation would lead to additional spending of $250 million and additional revenues of $1 billion after 2024, CBO estimates. Thus the estimated net budgetary savings after 2024 would be slightly larger than the estimated net budgetary cost between 2015 and 2024.

The bill would impose intergovernmental and private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) by extending and expanding some requirements on insurers and policyholders, including the payment of surcharges. State, local, or tribal governments could be required to pay a surcharge as purchasers of property and casualty insurance, but CBO estimates that the aggregate cost to public entities of complying with those mandates would probably fall below the annual threshold established in UMRA ($76 million for intergovernmental mandates in 2014, adjusted annually for inflation). CBO estimates that the aggregate cost to private insurers and policyholders to comply with those mandates would exceed UMRA’s annual threshold for private-sector mandates ($152 million in 2014, adjusted annually for inflation) in each year policyholders pay a surcharge.