It is important to take a moment to talk about the importance of the Terrorism Risk Insurance Act and why I believe we must act again to establish a more permanent federal initiative to provide coverage from potential terrorist attacks.
In the aftermath of 9/11, the market for terrorism risk insurance disappeared, and the American economy dealt with a great deal of uncertainty. We repeatedly heard from businesses large and small, from labor unions, from manufacturers, from builders and lenders, from not-for-profits such as universities and hospitals, and from insurers, about the need for the federal government to help stabilize the market and ensure the availability of affordable insurance against the risk of future terrorist attacks.
The critical U.S. industry sectors were in dire need of terrorism insurance to obtain credit, loans and investments necessary for their normal business operations. Without terrorism risk coverage, the economy faced instability and dislocation — which is exactly what the terrorists hoped to accomplish. The policyholder community and insurers together called for a response to the 9/11 attack on our nation and our nation’s economy.
Congress listened, and we acted in 2002 — creating the Terrorism Risk Insurance Act (TRIA).
TRIA created a three-year program, the Treasury Risk Insurance Program located within the Department of Treasury, establishing a federal backstop against catastrophic losses in the property and casualty insurance marketplace. In December 2005 a two-year TRIA extension was signed into law. The provisions of that bill will expire on Dec. 31 of this year.
Under TRIA, the federal government shoulders a share of the financial risk of future attacks. This burden-sharing makes sense — these attacks are against us as Americans, against our democracy, our way of life. The attacks are aimed at the American public, and therefore require a public role in addressing the threat.
But TRIA also requires that the private sector bears a significant financial responsibility and helps to impose market discipline in the claims and underwriting processes.
In the past five years, we have heard an overwhelming response from policyholders across the country — TRIA works. According to a recent study by the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, about 50 percent of commercial enterprises through 2005 have purchased terrorism insurance.
According to Marsh Inc. and cited by the President’s Working Group on Financial Markets, take-up rates have increased from 23 percent in the beginning of 2003 to 64 percent at the end of 2005, while the price of terrorism insurance has declined. The median cost of property terrorism insurance was 25 percent lower in 2005 than the 2004 rate.
Those trends demonstrate that TRIA has achieved its primary goal — continued availability and affordability of insurance against future terrorist attacks. What we have seen is that the re-emergence of limited terrorism risk insurance would not have happened without the enactment of TRIA.
The private sector does not have the capacity to provide affordable terrorism risk insurance on its own without the existence of a federal backstop. In a 2005 Treasury Department survey, nearly 50 percent of insurers said that they do not plan to write terrorism coverage after TRIA expires.
Do we do nothing to financially protect our country against future terrorist attacks? Do we provide another short-term extension to meet current market needs? Or, do we create a long-term solution for the security of our people and of our economy?
I firmly believe that doing nothing is simply not an option. The world has fundamentally changed since 9/11. Nearly all of the data and the experts say that there is no reason to think that private forces alone could and would provide against this very unique risk. We have every reason to believe that a federal role for terrorism risk insurance coverage is needed for the foreseeable future.
Several industrialized countries have already recognized this fact. The United Kingdom, France, Germany and others have created permanent government programs to manage terrorism risk.
We are engaged in a violent conflict in Iraq, and we have seen despicable terrorist attacks abroad in Europe and elsewhere. The threat of terrorism is not simply a short-term threat, it has the potential to be a long-term reality.
We must act once again to ensure that stability, availability and affordability remain in the market for terrorism risk insurance. But I don’t believe we should continue to extend the program for short periods of time — causing uncertainty and confusion in our economy. A more permanent federal commitment is, in my view, not only something that we should do, it is something that we must do.
Excerpted from the statement Sen. Christopher J. Dodd, D-Conn., chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, made at the TRIA hearing on Feb., 28 2007.