Bush Signals Veto of Terrorism Reinsurance Program

September 18, 2007

The Bush Administration believes that the federal backup for terrorism reinsurance should be phased out in favor of a private market for terrorism insurance and “strongly opposes efforts to expand the federal government’s role in terrorism reinsurance,” the White House said.

The Office of Management and Budget said that if the Terrorism Risk Insurance Act (TRIA), H.R. 2761, is sent to President Bush as currently written, his senior advisors would recommend that he veto the bill.

The current program is scheduled to expire on Dec. 31, 2007. The current renewal legislation for the program, H.R. 2761, known as the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA), was introduced in the House on June 18, 2007 and is sponsored by Rep. Michael Capuano, D-Mass., and House Financial Services Chairman Barney Frank, D-Mass. It has won support in the U.S. House of Representatives, but still needs to win approval from the U.S. Senate before it goes to the president.

The administration has set forth three conditions for the White House to accept an extension of TRIA: the program should be temporary and short-term; there should be no expansion of the program; and private sector retentions should be increased.

H.R. 2716 would extend the program for 15 years and add coverage for group life insurance and domestic terrorism — provisions Bush’s advisors oppose.

“Adding these insurance coverages to the federal reinsurance backstop sends the wrong signal to the marketplace, which instead should be encouraged to find new ways to diversify the risks of doing business,” the OMB said in a statement.

The administration also opposes provisions that would increase the government’s share of private insurance losses from nuclear, biological, chemical, and radiological (NBCR) events by reducing insurance industry deductibles and reducing co-payments for NBCR losses.

In addition, the legislation also creates a new “make available” mandate for NBCR coverage, which OMB says “could have a negative impact on the provision of terrorism risk insurance coverage for non-NBCR acts of terrorism.”

Furthermore, the administration believes that private sector retentions should be increased. The administration opposes provisions that lower the program trigger level from $100 million; maintain or decrease insurance industry retention levels; and restructure the program’s cap in a way that increases the federal government’s share without a matching increase in the private sector’s share.

“These provisions would have the effect of reducing or limiting private participation in the program while at the same time increasing taxpayers’ exposure,” OMB maintains.

The administration also opposes the bill because of the potential cost of the legislation. In 2006, the Congressional Budget Office scored the previous two-year extension of the program at a 10-year cost of $1.4 billion and has recently scored H.R. 2761 at a 10-year cost of $10.4 billion.

OMB said the administration is “willing to work with the Congress as the bill moves through the legislative process so that H.R. 2761 meets the critical elements of an acceptable extension.”

The administration has balked at terrorism reinsurance bills in past years but never resorted to a veto.

The OMB position again puts the White House at odds with the insurance industry, which largely supports extension of the program.

The Property Casualty Insurers Association of America said it “strongly supports an extension of the Terrorism Risk Insurance Act (TRIA), which is necessary to allow businesses to insure against terrorism risks and encourage continued economic growth in geographic areas that face these potential perils.”

“TRIA is absolutely vital to our economy, and it needs to be renewed before its expiration date,” said Ben McKay, PCI’s senior vice president, federal government relations. “After 9/11, there was a slowdown in commercial building because terrorism is an uninsurable risk. TRIA helped make terrorism insurance available and affordable. The program has worked, and it continues to work. It would hurt our economy if we allow this much-needed program to lapse.”

Just last week, on the anniversary of the Sept. 11, 2001 terrorist attacks, the industry repeated its call for TRIA renewal.

“Besides killing almost 3,000 individuals, the terrorists also sent economic shock waves throughout the U.S. economy,” said Dr. Robert Hartwig, president of the industry’s Insurance Information Institute.

Hartwig said the industry has paid September 11-related claims totaling $31.6 billion. Adjusted for inflation, insurers paid the equivalent of $35.9 billion in September 11 claims in 2006 dollars, the I.I.I. estimates.

“With many realistic attack scenarios producing losses several times that of September 11, it is essential that a long term terrorism risk insurance program be enacted,” Hartwig said. “Implementation of such a measure is a key component of the nation’s effort to protect the financial homeland. Congress is considering an extension which will protect millions of businesses and their workers. It also addresses the potential ambiguity of domestic versus international terrorism acts.”

According to Hartwig, a long term terrorism risk insurance program’s benefits will be felt immediately and will affect virtually every segment of the economy.

“Businesses in cities and towns, large and small, from coast to coast would under this proposal be able to purchase terrorism risk insurance more readily, secure in the knowledge that the protection will remain available for many years to come,” he said. “It should be particularly beneficial to the construction, commercial real estate, manufacturing, and utility and transportation industries. Governments that own and operate critical infrastructure such as airports, ports and bridges will also benefit.”

But he expressed concern over the inclusion of a provision that would compel insurers to cover nuclear, biological, chemical and radiological (NBCR) risks. “NBCR risks pose unique threats which have in the past not been covered by standard property/casualty insurance policies. Insurers have little to no experience insuring against these risks, the magnitude of which can easily exceed the claims-paying resources of private insurers, even with TRIREA in place,” he warned.

Supporters of the federal program maintain TRIA has ensured the availability of affordable terrorism risk insurance in the marketplace and helped foster urban and real estate development.

While the TRIA program has kept terrorism insurance affordable, the President’s Working Group on Financial Markets’ most recent report concluded that a private market for terrorism reinsurance is virtually nonexistent, especially with regard to nuclear biological chemical and radiological (NBCR) acts of terrorism.

The current legisaltion would require studies of the development of a private market for terrorism risk insurance.

Topics USA Catastrophe Natural Disasters Legislation Reinsurance Market

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