Research & Commentary: Alternatives to Federal Terrorism Insurance

Published November 8, 2011

The Terrorism Risk Insurance Act can claim broad support, but it has deep flaws and imposes billions of dollars in liabilities on taxpayers. Signed into law in 2002 by President George W. Bush, TRIA offers up to $100 billion in government-backed terrorism coverage to the private sector. Congress would almost certainly 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), imposed after an event occured, on just about every eligible insurance policy in the country. If that tax proved insufficient, Congress would have to use other revenues to cover liabilities that could become enormous. TRIA is currently authorized through 2014.

Although many in the insurance industry argue TRIA is necessary to maintain a viable market for terrorism insurance, little effort has been made to find alternatives to the nearly limitless liability TRIA potentially imposes on taxpayers. Before another extension is passed in 2014, Congress should consider other options in the private market.

The following articles examine several alternatives to the Terrorism Risk Insurance Act.

Insurance against Terrorism: An Alternative to Unlimited Liability for Taxpayers
Heartland Institute Vice President Eli Lehrer examines one possible alternative to TRIA—”true reciprocals”—in the private market.

Terrorism Insurance: Alternative Programs for 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
Mark A. Hofmann of Business Insurance speaks with several lawmakers about alternatives to the Terrorism Risk Insurance Act.

Challenges for Terrorism Risk Insurance in the 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?
Professors Dwight M. Jaffee and Thomas Russell explore why the private terrorism insurance market fails. If terrorism insurance 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?
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?
Alan O. Sykes and Anne Gron question 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 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
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.