Businesses Hit Treasury Terrorism Insurance Report

June 30, 2005

The business lobby, Coalition to Insure Against Terrorism, is blasting as “flawed” and illogical the Treasury Department’s report recommending against renewal of the federal Terrorism Risk Insurance Act in its current form.

Meanwhile, the insurance industry seemed grateful that the report at least recognizes the need for a federal role in terrorism insurance even if it does not back renewal of the current TRIA program.

“The Treasury study released today on terrorism insurance is flawed. It does not present an accurate picture of the current terrorism insurance marketplace and fails to acknowledge that the risk of terrorism is unknowable,” said CIAT Martin L. DePoy, vice president for government relations at the National Association of Real Estate Investment Trusts.

“The study’s assertion that the now partial presence by reinsurers will somehow grow stronger in the absence of a federal backstop defies logic. Even Federal Reserve Chairman Alan Greenspan has questioned the ability of the private market alone to insure against terrorism.”

DePoy said that the study also ignores TRIA’s value as a mechanism to help the economy rebound quickly in the event of another catastrophic attack.

“Only in acknowledging that the immediate effect of TRIA’s expiration is likely to be ‘less terrorism insurance written by insurers, higher prices and lower policyholder take-up,’ does the study reflect the realities of the marketplace and thereby confirm the need for a federal role beyond December 31st,” he added.

The group argued that a federal terrorism insurance program of some kind must be in place next year to help protect the U.S. economy and American jobs.

“Treasury’s flawed treatment of the issue reinforces the urgency of Congress reopening the debate so that the American people better understand TRIA’s role and importance. The House and Senate should schedule hearings immediately.”

The CIAT represents businesses and organizations throughout the transportation, real estate, manufacturing, construction, entertainment and retail sectors.

The insurance industry, which also supports renewal of TRIA, took a less combative posture towards the report itself but strongly urged Congress to get involved right away to assure a federal program is in place soon.

“We urge Congress to act as quickly as possible to ensure that the United States has an effective economic safety net in place beyond the end of 2005,” said Leigh Ann Pusey, American Insurance Association senior vice president of government affairs. “Our economy must be protected against the very real, long-term threat of a catastrophic terrorist attack on our shores. We believe that the federal government has a major role to play in providing Americans with critical financial protection against such attacks.”

Pusey maintained that there is no “free market” for the insurance industry because U.S. insurers operate in a “forced market” where they are subject to a myriad of state-level price and product controls. “The closest thing to a free market in the insurance industry is the reinsurance sector, and that market has shown very little interest in terrorism insurance,” AIA stated.

Turning to the potential of private capital markets emphasized in the TRIA report, Pusey said, “Private capital markets have demonstrated for more than two years that they are unwilling to finance terrorism risk. Insurers paid more than $32 billion in claims from the 9/11 attack, two-thirds of which came from reinsurance. That private market backstop is not available today.”

“We are committed to working with Congress and the administration to develop an effective public-private partnership to handle this immense financial risk,” Pusey continued. “The legislative clock cannot be allowed to run out on this vital national security issue.”

The Property Casualty Insurers Association of America put a positive spin on the Treasury report, agreeing with the report that renewal of the current TRIA is not the best answer while stressing its belief that the federal government must have a role in any solution.

“While the Treasury and the Administration oppose the extension of TRIA in its current form, the report clearly recognizes the need for an ongoing federal role in the terrorism insurance arena and acknowledges the successes of TRIA in ensuring market stability, availability of coverage, and economic growth since the 9/11 tragedy,” PCI claimed in a statement.

“Despite TRIA’s success, we agree with the Administration that a short-term extension of the current program is not the most effective solution to the terrorism insurance problem,” said Ernie Csiszar, president and CEO of PCI.

Csiszar called for “a long-term program that stimulates more private sector participation, while maintaining the high level federal participation necessary to foster a functional terrorism insurance market.”

To achieve this long-term answer he suggested allowing insurers to better manage their increased exposure to terrorism risk through favorable tax treatment of assets, “buy-down” options, use of private reinsurance and other capital market vehicles such as catastrophe bonds.

But eliminating federal participation in the terrorism insurance equation “will have significant and long-lasting consequences on the economy,” according to PCI.

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