U.S. insurance markets, like the rest of the nation, were caught off guard by the Sept.11, 2001 terrorist attacks. Loss of life and property led to an estimated $32.5 billion dollars in insured losses – $43 billion in 2013 dollars – the largest amount ever to that point. Following that, terrorism risk insurance became either extremely expensive or unavailable.
Congress responded by passing the Terrorism Risk Insurance Act in 2002. The act provides government support for the commercial terrorism insurance market through mechanisms for spreading losses across the nation’s policyholders and using government funds to cover the most extreme losses. This has helped keep terrorism risk insurance affordable for businesses.
Congress extended the act in 2005 and again in 2007. However, with the program set to expire this year, Congress had to revisit a crucial question: What is the appropriate government role in terrorism insurance markets? The Rand Corp., a nonpartisan, nonprofit research organization, recently identified three emerging themes.
1) The act’s expiration could increase federal spending following terror attacks. Many experts predict that the act’s expiration would increase the price and reduce the availability of terrorism coverage, resulting in a reduction in the number of businesses with terrorism coverage. If this occurred, more attack losses would go uninsured. This would increase demand for disaster assistance in the event of an attack, thus causing federal spending to rise.
Simulated attacks ranging from $14 billion to $26 billion in losses could necessitate an estimated $1.5 billion to $7.2 billion more in federal spending should the act expire.
In the absence of an attack, the act costs taxpayers little. In the event of an attack comparable to 9/11, it is expected to save taxpayers money.
2) Expiration could be costly for workers’ compensation markets, businesses and states. Compared with other insurance lines covered by the act, workers’ comp provides insurers less flexibility to control terrorism exposure. Thus, insurers faced with an expired act could choose to limit their risk exposure by refusing workers’ comp coverage to employers that face high terrorism risk. Because workers’ comp coverage is mandatory for nearly all U.S. employers, high-risk employers might be forced to obtain coverage in markets of last resort, which often cost more.
This higher cost of coverage would tend to reduce labor income and economic growth even if there never were another attack, though these effects are likely to be small.
Because of the mechanism for financing claims paid through markets of last resort, the expiration of the act and growth in these markets could also mean that workers’ comp losses from a catastrophic attack could be financed largely by businesses and taxpayers of the state in which the attack occurred. This would make rebuilding in that state more challenging than if the act remains in place, because the act spreads losses across the country.
3) A robust terrorism insurance market makes communities more resilient to terrorism. With high take-up rates for terrorism insurance, recovery efforts following an attack may be swifter and more effective with the act than without. With the act in place, property damage payments could be made quickly without the need to decide how government compensation should be awarded and how it should be distributed. Moreover, when losses are covered by insurance, people and companies can focus on recovery instead of disputing fiscal responsibility in the courts.
What is more, terrorism insurance would likely be difficult to find and expensive following a future attack without TRIA. This could thwart economic activity and recovery from an attack.
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