Senate Republicans Hash Out Unpleasant Choice OnTRIA Would extension undermine private marketdevelopment?

Washington

The Terrorism Risk Insurance Act might be an example of a “badlaw,” forcing Congress to make an “unpleasant choice” on whether toextend it or let it expire, according to a new report from a majorSenate Republican committee.

The report from the Senate Republican Policy Committee, chairedby Sen. Jon L. Kyl, R-Ariz., reaches no conclusion on whether TRIAshould be extended. However, the report said Congress will likelyhave to make a hard choice:

Either allow TRIA to expire and subject the market touncertainty, higher prices and the potential for insurersolvency;

Or extend a program that likely will prevent development of aprivate sector solution.

The reporttitled “Federal Terrorism Reinsurance: A Solution Of AProblem”sums up the arguments for and against TRIA. But it appearsto give special emphasis to comments made two years ago by formerSen. Phil Gramm, R-Texas, that TRIA was designed in a way thatwould “destroy the incentive of the industry to do the things thatneed to be done to get the government out of this business.”

“Two years from now,” Sen. Gramm said at the time, “if we don'tchange this bill, we are going to be back here, and the same peoplewho are saying today we have to have this bill are going to say youhave to extend this bill for another two years, another 10 years,forever.”

The report noted that Sen. Gramm's complaint was that TRIA'scompany-specific deductibles eliminated any incentive for insurancecompanies to pool risk and share premiums. Indeed, the reportnotes, Sen. Gramm's point was that since company-specificdeductibles are, in effect, government reinsurance contracts witheach and every insurer in the industry, insurers are actuallydiscouraged from pooling risk.

“Opponents of TRIA extension argue that by discouraging the kindof insurance industry cooperation that would allow the industry tobuild capacity and provide coverage on its own, the government willnever be able to extract itself from the insurance business,” thereport said.

But the report also identifies the arguments in favor of TRIAextension. First, the report said, TRIA extension would avoidmarket uncertainties. In addition, TRIA supporters argue that it isfar more efficient to have a reinsurance plan in place before anyfuture attacks rather than rely on ad hoc federal appropriations tocover uninsured losses.

There is a widespread presumption, according to the report, thatbecause of the $20 billion appropriation approved by Congressfollowing the Sept. 11, 2001 terrorist attack to help redeveloplower Manhattan, “free” insurance via federal aid would beavailable following another attack.

But the report said that implicit insurance guarantees encourageeconomic actors to not only take more risk than if no insuranceexisted, but also to take more risk than if an explicit, butlimited, government insurance scheme conditioned theirexpectations. “By extending TRIA, supporters contend that thefederal government could actually reduce the total amount oftaxpayer assistance triggered by a terrorist attack and reduceprivate-sector risk-taking,” the report says.

Finally, the report adds, TRIA supporters say that without afederal backstop, insurers will be at risk of insolvency if theyare forced by states to continue covering terrorism risks,particularly in workers' compensation.

The report noted that the Treasury Department is scheduled toproduce a report on TRIA's effectiveness by June 30, 2005. However,the report said, because insurance policies covering potentialpost-TRIA risks will be written this fall, Congress will be facedwith the unpleasant choice of whether to extend TRIA very soon.

Gary Karr, a representative of the Washington-based AmericanInsurance Association, praised the report for saying that TRIA mustbe addressed soon, but said it misses the mark in three areas.

First, he said, none of the private market alternatives togovernment reinsurancesuch as commercial mortgage backedsecuritieshas been able to generate enough capacity to respond tomarket needs. There is little investor appetite for terrorism risk,he said.

Second, he said the report suggests that insurance operates in afree market, but that is not always so. Many states, he noted,impose rate controls on insurers and refuse to accept exclusions.This makes it hard, he said, to structure actuarially soundterrorism insurance programs.

Third, he said the report is incorrect to state that TRIA hasdiscouraged the development of private reinsurance. To reinsurers,he said, terrorism risk is not much different from war risk, andthere is little desire among reinsurers to assume this type ofexposure.

Julie Gackenbach, assistant vice president of governmentrelations with the Des Plaines, Ill.-based Property CasualtyInsurers Association of America, agreed that the report overstatesthe possibility of private market solutions. The industry, shesaid, is looking forward to exploring the possibilities long-term,but it is not feasible to look to the private marketsshort-term.

Indeed, she noted, the industry examined the possibility ofestablishing a pooling arrangement for workers' comp, but found itwould take 10 years just to build up enough capacity to meet anindustry deductible.

Marliss Browder, federal affairs representative for the NationalAssociation of Mutual Insurance Companies in Indianapolis, addedthat the report fails to mention or address the inherent nature ofterrorism. “Terrorism risk cannot be predicted or modeled as cantornadoes and hurricanes,” she said. “The most predictive data thatcould help determine the risk of terrorism is intelligenceinformation which is, and should remain, classified.”

Reproduced from National Underwriter Edition, June 18, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.