White House Draws Line On TRIA Renewal

New Treasury official emphasizes limits to what President Bushwill accept on extension

Washington

The Bush administration believes the U.S. government should notcontinue providing a backstop for terrorism insurance much longer,and that insurers must have a lot more "skin in the game," a U.S.Treasury official told National Underwriter last week.

"We are committed to the notion that the Terrorism RiskInsurance Act was and is a temporary program, and we believe theprivate market will adjust better if the government can get out ofthe way," said Emil W. Henry Jr., named last month as assistantsecretary for financial institutions.

He said the administration is "trying to maintain our principlesthat this is a program that should be temporary and should notcrowd out private initiatives. To the extent something ispermanent, it serves to dampen innovation in the privatemarkets."

The clock is ticking on TRIA, due to expire on Dec. 31.Congress–especially the Senate–is aiming to finish its work for theyear and go home by Thanksgiving Day.

Mr. Henry confirmed the report in last week's edition ofNational Underwriter that the administration is pushing inclusionof language in the Senate TRIA extension bill that would barpayment of punitive damages in lawsuits stemming from a terrorismact in which the government is involved.

Such a position almost killed the original bill when it came upon the House floor in November 2002, and its resurrectionjeopardizes extension because of stiff opposition by Democrats.

"We believe and the administration has long stated that punitivedamages should be excluded from any TRIA reform program," Mr. Henrysaid. "The administration has long stated its distaste forgovernment dollars being paid for punitive damages."

He added that Treasury Secretary John Snow sent a letter toCongress on June 30, "where he said specifically that currentlitigation rules would allow unscrupulous trial lawyers to profitfrom a terrorist attack and would expose the American taxpayer toexcessive and inappropriate costs."

If there is an extension, he said, "we would like to seedirectionally a smaller program, a tighter program, and anextension where the private market's skin in the game continues togo up while taxpayer exposure continues to go down. Those areessential elements of any program, in our view."

In addition, Mr. Henry confirmed that the administration is notsupportive of proposals that would create different levels ofgovernment retention for different lines of business–so-called"silos"–because it would make the program "too complex." (See NU,Oct. 24.)

However, asked if the administration is leaning toward thegreatest government backing for the workers' compensation andproperty lines, with lesser levels of support for other lines, Mr.Henry said "not necessarily," adding that "we would like to seegreater simplicity and fairness than there is currently inTRIA."

He admitted that commercial auto "would fall into thedefinition" of lines the administration would not like to seesupported in a federal reinsurance program, but added that "theSenate and House are going to have to work out the details."

In general, he said, "we just want fewer lines and a smalleroverall program."

He confirmed the administration would like to see a $500 milliontrigger for government participation in paying claims from aterrorism event, but cautioned that this position is sometimesmisunderstood. (The trigger in the current law is $5 million.)

In explaining the administration's definition of "trigger," hesaid the aggregate cost of an event would have to be $500 millionbefore the government would become involved. Once that level isreached, government payments would be above so-called thresholdlevels–which under the current law would mean anything above 15percent of a claim. An insurance company insuring the loss wouldpay the first 15 percent. "A lot of people misunderstand that," Mr.Henry said.

At the same time, small and medium-sized insurers have beentelling Congress ever since the Treasury Department issued its TRIAreport in June that a high trigger could potentially wipe them outbefore the government became involved.

Warren W. Heck, chairman and CEO of Greater New York MutualInsurance Company, made that point clear in a letter to theleadership of the Senate Banking Committee last week.

"Without TRIA–or by re-enacting TRIA with a $500 million triggerand 20-to-25 percent deductibles, which from the market'sperspective effectively amounts to the demise of TRIA–stand-aloneterrorism reinsurance would either vanish or cost too much for allbut the largest and most profitable companies to buy," hewarned.

Infographic: With pix of Bush signing TRIA in 2002

Flag: The Skinny

Head: Bush Sets His TRIA Terms

A new Treasury Department official, Emil W. Henry Jr., laid outthe conditions under which President Bush could live with anextension of TRIA, due to expire Dec. 31. A renewal bill would haveto:

o Be a temporary extension. "We believe thatthe private market will adjust better if the government can get outof the way," said Mr. Henry.

o Have much higher triggers, so that "theprivate market's skin in the game continues to go up while taxpayerexposure continues to go down."

o Bar payment of punitive damages in lawsuitsstemming from a terrorism act in which the government is involved."The administration has long stated its distaste for governmentdollars being paid for punitive damages."

o Limit the risks covered. "We just want fewerlines and a smaller overall program."