End to Federal Terrorism Insurance Called For

Published November 14, 2011

While some organizations are calling for an end to government backstopping of terrorism losses, the Risk & Insurance Management Society and the National Association of Mutual Insurance Companies are among several advocating extension of the Terrorism Risk Insurance Act (TRIA) or a replacement backstop for terrorism insurance coverage.

President George W. Bush signed TRIA into law in 2002. TRIA calls for government backstopping of insurance claims if private commercial and workers compensation insurance claims from a terrorist attack exceed $27.5 billion. TRIA would cover remaining losses up to $100 billion, and many people expect Congress would lift the cap if claims exceeded that amount.

Money to pay claims is to come from a tax (up to 3 percent) on nearly every eligible insurance policy in the country. If that tax proves insufficient, Congress would have to use other revenues. TRIA is currently authorized through 2014.

Senator Tries to End Program

Sen. Roger Wicker (R-MS) in September introduced an amendment to the legislation reauthorizing the National Flood Insurance Program that would end TRIA in 2013. Reaction from the insurance industry was swift. In a comment to National Underwriter magazine, Matt Gannon, assistant vice president of federal affairs for the National Association of Mutual Insurance Companies (NAMIC), argued Wicker’s amendment is unnecessary and ill-timed.

“The committee, and the Senate as a whole, will have ample opportunity to debate the merits of the TRIA program over the next few years as its expiration date approaches. Sen. Wicker’s amendment is not relevant to the NFIP, and we hope it does not distract the committee from the urgent need to reform and reauthorize this vital program,” he said.

Real estate industry groups also opposed the proposal. The Real Estate Roundtable sent a letter to Sen. Wicker asking him to withdraw the amendment. The letter focused on the low cost of TRIA and the lack of a private alternative.

“On behalf of America’s real estate industry and the businesses that drive the U.S. economy, we encourage you to withdraw this amendment,” wrote the Roundtable. “Moreover, it serves as an important tool to minimize the severe economic disruption that almost certainly will occur from a future terrorist attack.”

Amendment Withdrawn

Wicker responded by withdrawing his amendment . According to National Underwriter, Wicker did so after asking Sen. Tim Johnson (D-SD) if the two could work on Wicker’s TRIA concerns at a later date.

In a comment to Business Insurance magazine, Joel Wood, senior vice president at the Council of Insurance Agents & Brokers, argued the TRIA backstop is likely to continue.

“There has been significant philosophical tension since the beginning of this debate about the appropriate scope of federal backstop,” said Wood. “Nobody should be cocky about it, but I feel reasonably optimistic that as long as the terror threat remains, the backstop will be there to assure policyholders they willbe made whole.”

Several conservative and free enterprise groups, including the Heritage Foundation and the Cato Institute, argue there are viable options within the private market and the insurers supporting TRIA may be overstating the need for the program. They say Congress should consider other options in the private market before passing another extension. They also argue ongoing subsidies of the terrorism insurance market are not a sound long-term policy.

Seen as Corporate Welfare

David John, a senior research fellow at the Heritage Foundation, argues TRIA is an example of corporate welfare in allowing insurers to pass on losses to taxpayers. He says TRIA should be allowed to expire.

“Passing the risk of property insurance losses caused by terrorist attacks to taxpayers does nothing to increase security,” said John. “Rather, programs like TRIA encourage insurance companies to avoid the proper pricing of coverage, with the expectation that federal reinsurance under TRIA will enable them to pass on significant losses to taxpayers. TRIA is thus a preapproved bailout for insurance companies, the essence of corporate welfare.”

Heartland Institute Vice President Eli Lehrer discussed a possible alternative to TRIA, first proposed by Clive Tobin, CEO of the Bermuda/London reinsurer Torus: true reciprocity. According to Lehrer, “under a ‘true reciprocal’ system, 25 firms that each own a $25 million office building would each take responsibility for paying $1 million if terrorists destroyed any group member’s building. The firms would pay no yearly premiums for the coverage (they might pay administration fees and exchange $1 payments to make the contracts between themselves legal) and would not be regulated as insurers. Instead, they would simply pledge their full faith and credit to pay the claim if another group member experienced an attack.”

Lehrer acknowledges several potential issues with this idea but says they can be surmounted to shift the burden of insurance risk away from taxpayers.

“Tria in its current form poses a huge risk to taxpayers,” Lehrer said. “Much of the private insurance industry, however, remains cautious about writing terror coverage. We need lots of new ideas if we are ever to free this market.”