Insurance Industry Hopes to Extend TRIA in Time for 2005 Policies

But Not Everyone Thinks Renewing the Federal Backstop is a Good Idea

Regardless of whether George W. Bush is re-elected or John Kerry moves into the White House, the property/casualty insurance industry appears to have a good chance of getting its wishes when it comes to extending the Terrorism Risk Insurance Act (TRIA).

In July, the bipartisan National Conference of Insurance Legislators’ (NCOIL) task force unanimously approved a resolution to extend the law “for a sufficient period of time to permit discussion and development of a long-term solution” at the group’s summer meeting. The group as a whole went on to vote overwhelmingly in favor of the resolution.

TRIA, the federal law which provides a national government backstop in case of terrorist attacks by foreigners in the United States, is not set to expire until the end of 2005 and a Treasury Department study examining the merits of renewal is due next June. Insurers, however, are pushing hard to have Congress renew it before then to avoid disrupting the commercial property insurance market.

Is Risk Going Away on Dec. 31?
They argue that because the law is set to expire with a so-called hard-end date of Dec. 31, 2005, any year-long policy put into effect in 2005 would not include terrorism coverage after TRIA’s expiration.

“Our biggest concern is the hard-end date,” Don Griffin, a lobbyist with the Property Casualty Insurers Association of America (PCI), told the NCOIL task force.

“What’s magical about Dec. 31, 2005? Is the terrorism risk going away? Has it subsided in some way? I don’t think so.”

Stef Zielezienski, associate general counsel for the Washington, D.C.-based American Insurance Association (AIA), said that the hard-end date means “insurers have to guess when it ends and which policies will be covered, and they will have to seek conditional endorsements in the states.” Birny Birnbaum, a lobbyist with the Austin, Texas-based Center for Economic Justice, told the task force that further extending TRIA would delay the development of a private-market or state-based alternative solution.

“Why are insurers going to work on developing an alternative when they’re getting a free reinsurance program from the federal government?” Birnbaum asked members of the task force.

“Terrorism is a new reality of our generation now. So the question is: Are we going to develop a private-market or state-based solution for this peril or are we going to turn to the federal government for a permanent solution? I’m not only concerned about that as taxpayer, but as proponent of state-based solutions.”

‘Small Price to Pay’
The chairwoman of the task force, New York Assemblywoman Nancy Calhoun, repeatedly interrupted Birnbaum’s testimony and declared, “Many insurers wouldn’t have been able to continue without a federal backstop. I think it’s a small price to pay for the security of having insurance.”

TRIA calls for insurers to pay out 15 percent of the direct earned premium (DEP) on the prior year’s commercial book of business in 2004 and 2005 for an aggregate loss of more than $10 billion. David Brummond, legal counsel for the Terrorism Insurance Program, told the task force that in the event of a $200 million loss, the insurer would pay out $47 million in claims (about 24 percent) with the federal government picking up the rest. For a $40 billion aggregate loss (slightly larger than the estimated insured losses related to Sept. 11), Brummond said the government would pay $30.6 billion (about 75 percent) with insurers paying the rest.

One bill has already been introduced in the House of Representatives to renew TRIA through 2007 and another one is on the way, according to AIA’s Zielezienski. HR 4634 would eventually raise insurers’ deductibles to 20 percent of prior-year DEP in 2007 and trigger federal compensation after a $20 billion aggregate loss. It would also call for a study about whether to include group life insurance as part of TRIA.

Massachusetts Democrat Michael Capuano, a member of the House Capital Markets, Insurance and Government Sponsored Enterprises Subcommittee who has received $44,700 in political contributions from the insurance industry since 2002, has introduced a companion bill that is even more in line with lobbyists’ wishes. It would automatically include group life insurance within TRIA and also have a “soft rollout” sunset rather than a hard-end date, in order to accommodate the policies that would be written in 2007 but not expire until 2008.

Industry lobbyists originally asked Congress to make TRIA a five-year program, arguing that at least that much time was needed to determine whether the private market could adequately handle the job of insuring terrorism risk. Calhoun said that by pushing the insurance industry’s burden of terrorism risk up each year under TRIA, “this could be a way to push it to the private sector.”

Zielezienski, however, told Insurance Journal that TRIA, which he termed a “private-public risk sharing agreement,”may wind up being the “long-term solution.”

TRIA Skeptics
Others are skeptical. Wall Street Journal columnist Holman Jenkins argued in an Aug. 11 article that terrorism is in fact insurable, and that future terrorist incidents are likely to result in insured damage equivalent to the average plane crash, as opposed to the “megaterrorism” of Sept. 11.

Holman’s story was met with a swift response by PCI federal affairs lobbyist Carl Parks, who said that while insurers may be able to quantify the damage of a terrorist attack ahead of time, “determining when and where that will happen is impossible.”

At an August panel convened by the International Association of Industrial Accident Boards and Commissions, William Bernens of catastrophe modeler AIR Worldwide Corp. said insurers are already using the company’s terrorism loss model to understand the financial impact of potential acts of terror and to manage their risk. He demonstrated how the impact of specific scenarios—such as a struck bomb at a specific location—can be conducted to determine potential injuries and losses.

In spite of this seeming progress, insurance executives admit privately that the industry as a whole may lack the incentive to figure out how to insure terrorism if it continues to have a generous backstop provided by the federal government—even with higher deductibles.

Peter Van Doren, the editor of Regulation magazine, which is published by the free-market Cato Institute in Washington, D.C., told IJ he’s not surprised that the insurance industry is trying to renew what was supposed to be a short-term legislative solution.

“That’s how it works in Congress,” he said. “Once a program gets put in place, it seemingly stays there forever.”

Suppresses Market Signals
Van Doren, who opposed TRIA initially, argued the law should not be renewed because it suppresses important market signals and may encourage the construction of even greater terrorist targets.

“You never want to dampen the signaling purpose of market price,” Van Doren said. “The reason is that you don’t want to subsidize coverage. It sends the wrong signal—that there’s no difference between one risk and another. Insurance prices—signals—are suppressed in the New York or Washington markets relative to other cities. That’s just hiding the bad news.

“There are greater risks in certain cities, and you want investors in buildings to think about that before building in those areas, everything else being considered. … You can end up with the worst possible world: attacks do occur, buildings are destroyed, and taxpayers end up subsidizing both the coverage and the rebuilding.”

Detailed Economic Analysis
As IJ was going to press, the industry was preparing to unveil results of a new analysis of the economic impact of federal participation in terrorism risk and the consequences of not extending federal terrorism insurance.

According to the industry-backed study by Columbia University School of Business professor Dr. R. Glenn Hubbard and Bruce Deal of Analysis Group research firm, the catastrophic terrorist attack of 9/11/01 fundamentally changed the way the world looks at risk – and changed the insurance industry – forever.

Today, U.S. vulnerability to international terrorism has taken on new and troubling dimensions. According to the report, the new economic reality is that terrorism losses are too unpredictable and potentially catastrophic to be handled solely by the private sector.

Among the report’s key findings:

• If another catastrophic terrorism attack occurred in the absence of TRIA, tens of thousands of jobs would be lost due to lack of insurance coverage; compared to the fallout from 9/11, thousands of additional commercial bankruptcies could occur.

• Absent another major attack, the economic drag produced by the lack of a federal terrorism insurance backstop would cost Americans in several ways: U.S. gross domestic product may be $53 billion lower, household net worth may be $512 billion lower, and roughly 326,000 fewer jobs may be created.

• TRIA has not prevented development of additional private sector terrorism (re)insurance coverage by “crowding out” capacity. In fact, most system participants feel that without TRIA, there would be substantial and growing commercial insurance coverage gaps.

Hubbard, is a former chairman of the U.S. Council of Economic Advisors and as well as dean of the Columbia University Graduate School of Business

Deal is managing principal of Analysis Group, Inc. which has several offices around the U.S. and in Montreal.

The study was commissioned by the American Insurance Association, Financial Services Roundtable, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, Property Casualty Insurers Association of America, and Reinsurance Association of America.