Insurers Hope to Put Off TRIA’s Sunset

Regardless of whether President 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 federal Terrorism Risk Insurance Act (TRIA).

Over the summer the bipartisan National Conference of Insurance Legislators (NCOIL) passed a resolution to extend the law in order to allow time to develop a long-term solution.

TRIA, which provides a federal backstop in case of terrorist attacks by foreigners in the United States, is set to expire at the end of 2005 and a Treasury Department study examining the merits of renewal is due next June. Insurers are pushing Congress to renew it sooner. They argue that because the law is set to expire on 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? … I don’t think so.”

Stef Zielezienski, associate general counsel for the Washington, D.C.-based American Insurance Association (AIA), said 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 NCOIL task force studying the issue 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. “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 a proponent of state-based solutions.”

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, said in the event of a $200 million loss, insurers 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 been introduced in the U.S. House of Representatives to renew TRIA through 2007 and another is on the way, AIA’s Zielezienski said. 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 also calls for a study about whether to include group life insurance as part of TRIA.

Massachusetts Democrat Michael Capu-ano, 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, introduced a companion bill that is even more in line with lobbyists’ wishes.

It would automatically include group life insurance within TRIA and would have a “soft rollout” sunset rather than a hard-end date. Industry lobbyists originally asked Congress to make TRIA a five-year program, arguing that the private market needed time to determine whether it could adequately handle the job of insuring terrorism risk.

Calhoun said by increasing the industry’s burden of terrorism risk yearly, “this could be a way to push it to the private sector.”

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

Others are skeptical. Wall Street Journal columnist Holman Jenkins argued in an Aug. 11 article that terrorism is 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.

Responding to Holman’s story, PCI lobbyist Carl Parks noted 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. He showed how specific scenarios—such as a truck bomb at a specific location—can be studied to determine potential injuries and losses.

Insurance executives admit privately that the industry may lack the incentive to figure out how to insure terrorism if it continues to have a generous backstop provided by the federal government.

Peter Van Doren, the editor of Regulation magazine—published by the Cato Institute in Washington, D.C.—told IJ he’s not surprised that the insurance industry wants 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.”

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.”

Topics Catastrophe Carriers Legislation Washington Market