Debate Over Terrorism Insurance to Be Renewed

Bipartisan legislation filed yesterday in the House of Representatives promises to renew the federal terrorism reinsurance program and the debate about whether the backup program is necessary.

Introduced by Reps. Michael Grimm, R-N.Y., Carolyn Maloney, D-N.Y., and eight co-sponsors, the bill (H.R. 508) extends the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) for five years beyond its current expiration date of Dec. 31, 2014.

Many in the insurance and business communities welcome renewal of the backstop reinsurance program as a way to maintain availability of business insurance covering terrorist acts.

But the program or parts of it have faced opposition in the past. Some, including consumer groups and certain Republicans, have wanted to completely end or severely limit the federal government’s involvement in insurance. Others have criticized the program’s shifting of the potential costs of terrorist losses from businesses to taxpayers.

The Terrorism Risk Insurance Act (TRIA) was first passed in 2002 in response to the 9/11 terror attacks to provide a public-private risk sharing mechanism. The program been extended twice, in 2005 and again in 2007 as the TRIPRA.

The 9/11 attacks cost private insurers nearly $36 billion and tested their willingness to cover future acts of terrorism. They pulled back on offering the coverage or priced it so high that few businesses would buy it.

“In the aftermath of that fateful day, insurers were forced to re-examine the nature of terrorism related risks due to the potentially devastating economic consequences and insurers’ lack of any basis for assessing the probability of a major terrorist attack,” said Leigh Ann Pusey, president and CEO of the American Insurance Association (AIA), which supports another extension.

The program requires that private insurers offer terrorism coverage to commercial customers while giving private insurers a backstop of government funds for a large certified terrorism event, one above a $100 million loss.

Supporters say that without TRIPRA’s promise of a government subsidy, private terrorism risk insurance coverage would not be commercially available – as was the case following 9/11.

The Coalition to Insure Against Terrorism (CIAT), a group of real estate, manufacturing, construction, entertainment and retail intersts, endorsed the latest bipartisan legislation as did major property/casualty insurance trade associations.

Supporters say TRIPRA has stabilized the terrorism insurance marketplace and restored insurance capacity for a big portion of the U.S. economy. They fear that if private insurance covering terrorist acts were to dry up, the still-recovering real estate and construction industries would be hurt.

CIAT members include the American Bankers Association, Financial Services Roundtable, National Association of Home Builders, American Hotel & Lodging Association, Walt Disney Co. and National Basketball Association.

In previous debates, the Treasury Department expressed caution about renewing the program, noting it was meant to be a temporary program, and urging more reliance in the private sector.

Critics argue that continued federal involvement in terrorism insurance is keeping the private insurance market from developing its own solutions and commercial property owners from taking steps to mitigate potential losses from a terrorist attack such as relocating away from high-risk areas.

For example, a Congressional Budget Office (CBO) report said that “the development of global financial instruments for spreading risk, including catastrophe bonds, would probably be more rapid without TRIA.”

But insurance industry experts say that terrorist events defy the ability to predict insured losses.

“Unlike hurricanes or fire, terrorism risk is almost entirely unpredictable, and will adapt to counter efforts to mitigate against it,” said Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), another supporter of the program. “Additionally, much of the information an insurer would need to measure a particular risk – such as the number of times a property has been targeted or the potential means of attack – are rightfully kept classified by federal law enforcement.”

In terms of costs, the CBO estimated during the last debate that extending TRIA for two additional years (through 2007) would increase direct spending by about $1.7 billion and increase net revenues by $1.2 billion.

The Consumer Federation of America (CFA) has urged Congress to sharply reduce the subsidies in the program for private insurers and businesses and has encouraged states to get more involved in coming up with insurance solutions.

AIA’s Pusey said that the program’s high loss triggers and its mechanism for assessing commercial customers protect taxpayers in the event their is a major loss. “TRIA and its successor programs have worked at little to no taxpayer expense and continue to make terrorism coverage widely available,” she said.

NAMIC’s Grande said that if Congress fails to renew the program, new commercial lending “will halt and commercial insurance policies could be nullified.”

Some commercial real estate experts estimate that a lapse in TRIA would cause the technical default of commercial loans with terrorism insurance and the devaluing of more than $1 trillion in commercial mortgage backed securities.

However the CBO said such fears may be overstated. In its 2006 report, it found that after the 9/11 attacks, policymakers feared that a shortage of terrorism insurance could reduce economic activity and, in particular, slow down commercial construction, costing jobs and weakening the economy.

CBO found that after TRIA’s enactment, some recovery in commercial construction occurred but that the law had “little measurable effect nationally on office construction, employment in the construction industry, or the volume of commercial construction loans made by large commercial banks.”

The disruption to the insurance markets had little effect on commercial lending, in part because firms have alternatives other than insurance for spreading risk, the report found.

“In retrospect, the immediate macroeconomic concerns may have been exaggerated,” the CBO said.