Nov. 6 marked an important point in time for America’s property and casualty insurers. It was the halfway point between the Sept. 11, 2001, terrorist attacks and Dec. 31, 2005, the date that the Terrorism Risk Insurance Act (TRIA) is set to expire.
It took 476 days for TRIA to be enacted and become law. On Nov. 6, it had been in effect for 310 days—a total of 786 days, and was scheduled to sunset in another 786 days.
At the Alliance of American Insurers, we haven’t forgotten what happened during the first 786 days, and we are concerned with what will happens during the next 786 days. We don’t think it’s too early to start thinking and talking about it.
What happens when TRIA expires on Dec. 31, 2005?
The property/casualty insurance industry suffered its largest losses in history on Sept. 11, 2001. We simply cannot afford another catastrophic event such as occurred that day, and that’s why TRIA is so important. It created a backstop for the industry—a stabilizing mechanism aimed at providing essential reinsurance for America’s primary insurers and their commercial lines policyholders.
With TRIA in place, insurers have been able to take a breath and assess their risk with some degree of financial stability.
With TRIA in place, the reinsurance industry, largely foreign-based, was supposed to be able to get its feet back on the ground, come up with new approaches and new capital, and once again provide the necessary backstop to cover future catastrophic losses on the scale of a 9/11 event.
Well, we are 310 days into the stabilizing period, and so far, reinsurers are still showing little interest or enthusiasm for providing foreign terrorism coverage. Why? Because they view terrorism in the same way we view it.
It is ultimately an uninsurable act that the private market cannot accurately predict or price. Reinsurers told us, and anyone who will listen, that they can’t get a handle on terrorism coverage. As is the case in most countries that have experienced terrorism, the government must be the insurer of last resort.
One can argue that the market should recover for the remaining days that TRIA is scheduled to be in effect, however, our view is that little will change. We need to act now to explain why this vital backstop is needed.
If TRIA is allowed to sunset as planned at the end of 2005, what will take its place? If reinsurers do not step up, where will the coverage come from? Will state regulators be willing to allow insurers to exclude terrorism coverage, as most did before TRIA was passed? Or, will some once again require coverage, regardless of the potential financial consequences to the industry? We fear the latter.
TRIA was meant to be a temporary solution. But the war on terrorism has proved to be ongoing, with no end in sight. And that has created the dilemma that we must begin talking about now. America’s insurers faced up to Sept. 11 and did the right thing by making substantial payments even though they may not have been obligated to do so. The President and Congress faced up to the realities of post-9/11 and did the right thing in passing TRIA.
Implementing and maintaining TRIA has cost the government virtually nothing. With TRIA in place, if there’s another terrorism event insurers will face manageable losses. Under the terms of TRIA, which covers events up to $100 billion, the government will be paid back for any money it puts in through a surcharge on insurers’ policyholders. In reality, with or without TRIA, the federal government will ultimately have to step up with massive federal funds in the event of another attack. Those who choose not to buy terrorism coverage will still expect and demand government assistance. But with TRIA, those expectations can be better managed and the impact on the economy will be minimized.
Bear in mind that policies with effective dates of Jan. 1, 2005 or after will be problematic for insurers. Some of these policies may be issued with terrorism coverage for certified foreign terrorism acts, but TRIA ends mid-term (Dec. 31, 2005) for these policies.
Commercial lines renewal timelines, including meeting both state regulatory and internal processing requirements, mandate that insurers need to have their post-TRIA plan ready to implement in the summer of 2004.
We believe a continuation of TRIA would be good for the government, good for insurers, and good for America. It is certainly worthy of serious and realistic consideration. And we should be looking at this now, rather that waiting until the waning days of 2005.
Rodger S. Lawson, Ph.D., is president and CEO of the Alliance of American Insurers, a national trade association based in Downers Grove, Illinois. For more information, call (630) 724-2100.
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