Policy Documents

Research & Commentary: Terrorism Risk Insurance Act Extension

August 27, 2013

The Terrorism Risk Insurance Act (TRIA) is currently set to expire at the end of 2014 and both its supporters and detractors have been pushing Congress to act by either extending the program or allowing it to expire and be replaced by private terrorism insurance. TRIA has deep flaws and imposes billions of dollars in liabilities on taxpayers.

Under the program, signed into law in 2002 by President George W. Bush, if industry-wide private commercial and workers compensation insurance claims from a terrorist attack were to exceed $27.5 billion, TRIA would kick in and cover the remaining expenses up to $100 billion. Congress almost certainly would lift the $100 billion cap if claims exceeded that amount. In theory, the money to pay claims would come from a tax (up to 3 percent) on just about every eligible insurance policy in the country. If that tax proved insufficient, Congress would have to use other revenues.

TRIA was first implemented in response to a lack of private insurers offering terrorism policies. This reluctance is understandable; insurers cannot make accurate guesses about the likelihood of terrorist attacks. Actuaries forced to make the calculation might estimate the average yearly chance of a terrorist attack on a $25 million office tower located in a midsized city as one in a million. No insurance company with competent management would ever risk $25 million in capital for a premium of $25 or even $2,500.

Under TRIA, the federal government has assumed nearly unlimited liability for major terrorism losses. While many in the insurance industry contend that TRIA is necessary to maintain a viable market for terrorism insurance, efforts need to be made to ensure that the program does not end up costing taxpayers.

Experts from many groups, including the Heritage Foundation and several companies within the insurance and reinsurance markets argue that viable options within the private market exist and that the need for TRIA may be overstated by some insurers. In his testimony before the U.S. House Subcommittee on Insurance, Housing and Community Opportunity, David John of the Heritage Foundation argued that TRIA does little to improve security and allows insurance companies to avoid charging a price commensurate to the risk posed by terrorist attacks and allowing insurers to pass on losses to taxpayers.

Before another extension is passed in 2014, Congress should consider other options in the private market; continuing to subsidize the terrorism insurance market in perpetuity is not a sound long term policy.

The following articles examine the Terrorism Risk Insurance Act and its future.

Terrorism Insurance: Alternative Programs for Protecting Insurance Consumers
http://heartland.org/policy-documents/terrorism-insurance-alternative-programs-protecting-insurance-consumers
Richard J. Hillman, director of financial markets and community investments at the U.S. Government Accountability Office, outlines features of several existing terrorism and catastrophic insurance programs, both domestic and international; alternative mechanisms for funding insured losses; and some broad principles or guidance Congress may want to bear in mind while considering possible ways to support the insurance industry in case of future catastrophic losses due to terrorist acts. 

Backstop Supporters Seeking Alternatives to Current TRIA
http://www.businessinsurance.com/article/20050731/ISSUE01/100017296#   
Mark A. Hofmann of Business Insurance speaks with several lawmakers about alternatives to the Terrorism Risk Insurance Act. 

TRIA: Time to End the Program
http://www.heritage.org/research/testimony/2012/09/terrorism-risk-insurance-act-time-to-end-the-program
In this testimony before the U.S. House Subcommittee on Insurance, Housing and Community Opportunity, David John of the Heritage Foundation contends that TRIA is a pre-approved bailout for insurance companies and the essence of corporate welfare. “There was a good reason to establish TRIA, but those days are over. TRIA has served its purpose and should now be allowed to expire.” 

Federal Terrorism Risk Insurance
http://heartland.org/policy-documents/federal-terrorism-risk-insurance
This paper by Jeffrey R. Brown, Randall S. Kroszner, and Brian H. Jenn discusses the economic rationales for and against federal intervention in the terrorism insurance market, and concludes that the benefits from establishing a temporary transition program, during which the private sector can build capacity and adapt to a dramatically changed environment for terrorism risk, may provide benefits to the economy that exceed the direct and indirect costs. 

Challenges for Terrorism Risk Insurance in the United States
http://heartland.org/policy-documents/challenges-terrorism-risk-insurance-united-states
Writing in the Journal of Economic Perspectives, Howard Kunreuther and Erwann Michel-Kerjan examine the role insurance played in dealing with terrorism before and after September 11, 2001. The authors evaluate alternative terrorism insurance programs for the future as Congress decides whether to extend the Terrorism Risk Insurance Act. 

Should Governments Support the Private Terrorism Insurance Market?
http://heartland.org/policy-documents/should-governments-support-private-terrorism-insurance-market
Professors Dwight M. Jaffee and Thomas Russell explore why the private terrorism insurance market fails. If terrorism is really an “uninsurable risk,” they state, an optimal government alternative must be identified. However, if the private market, after a period of temporary stress, could be independently viable, a long-term program of government support is not only unnecessary but may actually crowd out the private market recovery, they write.

Federal Terrorism Reinsurance: A Solution or a Problem?
http://heartland.org/policy-documents/federal-terrorism-reinsurance-solution-or-problem
The Republican Study Committee provides background on the Terrorism Risk Protection Act of 2002 and examines arguments for and against its extension. 

Terrorism and Insurance Markets: A Role for the Government as Insurer?
http://heartland.org/policy-documents/terrorism-and-insurance-markets-role-government-insurer
Alan O. Sykes and Anne Gron question in this article the wisdom of any further measures similar to TRIA. They argue such efforts are likely to come too late to address short-term market disruption, and in the long run they may well supplant or distort desirable market responses to new information about terrorism risk.

Testimony of J. Robert Hunter, Director of Insurance, Consumer Federation of America on Oversight of the Terrorism Risk Insurance Program
http://heartland.org/policy-documents/testimony-j-robert-hunter-director-insurance-consumer-federation-america-oversight-
J. Robert Hunter, director of insurance at the Consumer Federation of America, testifies before the Senate Committee on Banking, Housing, and Urban Affairs about TRIA. He argues the law should not be extended without a thorough examination of whether this temporary tool is still necessary and, if so, how it should be structured in the future. Hunter makes recommendations on alternatives to TRIA. 

Government Terrorism Insurance: Déjà Vu(Doo)?
http://www.cato.org/pub_display.php?pub_id=6673
Peter Van Doren, editor of Regulation magazine, discusses the government’s involvement in terrorism insurance and recommends against increasing government subsidies. 

As 9/11 Anniversary Nears, Senator Plans to Introduce TRIA Sunset
http://www.propertycasualty360.com/2011/09/07/as-9-11-anniversary-nears-senator-plans-to-introdu
This National Underwriter story discusses the proposed 2012 amendment that would have created a sunset date for the Terrorism Risk Insurance Act (TRIA) in 2013. Although the amendment was withdrawn, it has brought the issue of TRIA back under discussion.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the FIRE Policy News Web site at http://news.heartland.org/insurance-and-finance, The Heartland Institute’s Web site at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

If you have any questions about this issue or The Heartland Institute, contact Heartland Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.