Terrorism Insurance Is a Necessary Government Role | Commentary

Posted October 30, 2013 at 2:30pm

The Terrorism Risk Insurance Act, or TRIA, was originally enacted in 2002 in the wake of the attacks of Sept. 11, 2001. Congress has extended it twice, concluding (correctly) that only a public-private partnership can provide the certainty and stability that’s needed to allow insurance companies to offer coverage against acts of terror.

Congress is currently debating another reauthorization of TRIA, which is scheduled to sunset at the end of 2014; the Senate Banking Committee held a hearing on the subject last month. Some have asked whether TRIA should be continued. The answer is a resounding yes for several good reasons.

Terrorism, sadly, remains a persistent concern. Real estate developers and others who employ millions of people rely on terrorism insurance. But terrorism is fundamentally different from other types of risks. It is intentional, not accidental.

Terrorists look for the path of least resistance and largely control the means, timing and location of attack. National security intelligence about the possibility of such attacks is — rightly — not available to the public. So as a practical matter, terrorism can’t be predicted or modeled for insurance purposes.

To make matters worse, policyholders and the financial markets tend to suffer losses even if they aren’t a direct target of an attack. Consequently, terrorism is both a national concern and a risk that private markets don’t want to handle alone.

TRIA provides a high-level federal government backstop that reduces this uncertainty. It also ensures that insurance companies will absorb all non-catastrophic terrorism losses. This public-private “shared loss” program has provided U.S. businesses with predictability and the assurance of an orderly economic recovery following an attack.

This may sound like a bailout, but it’s not. First, the government hasn’t paid out anything in the 11 years of TRIA’s existence. Not one penny.

Today, the United States would have to suffer an attack larger than the Sept. 11 tragedy — roughly $30 billion in losses — before taxpayers would have to pay anything under TRIA.

Indeed, TRIA requires the government to recoup any federal dollars it spends on the first $27.5 billion of terrorism losses. It also allows the government to recoup any additional federal share of losses up to the program’s cap. Thus, while TRIA protects American taxpayers, it also serves as an effective government backstop for the uncertain risks of unconventional and large-scale terrorist attacks in the United States. This is a valuable — even necessary — role for government.

And it’s particularly important now. If TRIA isn’t extended when it expires next year, the promising economic recovery that we are just beginning to see in this country could be hindered. New construction and development could be halted because those projects can’t move forward without terrorism insurance, which insurers are mandated to offer under TRIA.

The economic consequences of living without TRIA could be severe. A study conducted in 2005 by Moody’s Analytics concluded that if Chicago were subjected to a large biological attack, the mere existence of TRIA could reduce the first-year loss in gross domestic product by about $200 billion and 1.4 million jobs, compared with a scenario in which TRIA didn’t exist. A RAND report in 2007 noted that TRIA encourages more private-sector risk-bearing and would lead to lower expected federal costs compared to having no public-private partnership available.

Lawmakers, of course, should examine TRIA closely. But such an examination should be done with full knowledge that private-market alternatives face the identical obstacles that terrorism risk poses for insurers. The truth is that the government plays a key national economic security role in managing the risk of terrorism.

Only a public-private partnership like TRIA can provide the stability needed for the private market to manage exposure to terrorism, keep the economy humming now and help the economy recover down the road if we are ever again subjected to a catastrophic terrorist attack.

Leigh Ann Pusey is president and CEO of the American Insurance Association.