That sigh of relief you might have heard over the holidayscoming from Washington was the sound of insurance industrylobbyists grateful that President George W. Bush had finally signeda bill extending the Terrorism Risk Insurance Act for two moreyears, just about a week before the controversial program was dueto expire on Dec. 31. The question now is what to do aboutterrorism reinsurance beyond 2007.

Extension was no slam dunk for the industry, confronted withcritics accusing insurers of seeking a “bailout,” a White Housedetermined to downsize the government's exposure, as well as aCongress widely split on whether to simply renew the structuralstatus quo or completely reinvent the federal reinsurancebackstop.

In the end, the minimalists on the Senate side won out overthose in the House seeking a more ambitious rethinking of the TRIAsystem, leaving the long-term future of federal involvement in theterrorism insurance market very much in doubt.

The House had pushed for an expanded TRIA program that wouldcover group life for the first time while also establishing “silos”that would set different industry retention levels depending on theline of coverage. The Senate, however, wanted to keep the currentstructure while raising the trigger and retention levels andeliminating certain coverages from the program. (For details, seethe accompanying sidebar.)

The House bill, passed overwhelmingly, was dead on arrival asfar as the Senate was concerned. Indeed, no formal conferencecommittee was ever convened, as is normally done to iron outdifferences between bills–one telling indication that the Senatewas in no mood to compromise on its bare-bones extensionapproach.

With expiration looming, and with Congress eager to break forthe holidays after partisan battles over higher-profile bills–suchas extension of the Patriot Act and oil drilling in Alaska–Housemembers bowed to political reality and signed onto the Senate'sversion rather than risk seeing commercial policyholders outside ofworkers' compensation insureds left bare for terrorism risks.

“There is a time to fold your cards, and the time is now,” saidRep. Mike Oxley, R-Ohio, chair of the House Financial ServicesCommittee, who had championed the House's silo approach.

“In this short-sighted legislation, we have missed a goldenopportunity to frame the TRIA program more effectively and to moveto a more market-based solution,” he added. “Government and theindustry have made little progress since TRIA was enacted in 2002.When members, inevitably, are asked again to renew this 'temporary'program, they will correctly conclude that in 2005 the can wassimply kicked down the road without any real reform.”

Rep. Barney Frank, D-Mass., ranking minority member of the HouseFinancial Services Committee, voiced frustration about how lack oftime as well as opposition from conservative Senators and the WhiteHouse had forced the House to accept the Senate's version to getsomething on the books before TRIA expired on Dec. 31.

“There is more democracy in Iraq the last few days, underAmerican leadership,” Rep. Frank observed, “than there is in theU.S. Congress under a government where the Republicans control theHouse, the Senate and the executive branch.”

Donald Light, senior insurance analyst at Boston-based researchand consulting company Celent, lamented that the final bill did notinclude a bipartisan commission to explore a permanent terrorismcoverage plan, substituting a White House panel that in allprobability will be less than open-minded about establishing anylong-term federal backstop.

“Only a cynic would say that Congress prefers having theinsurance industry coming back to it every few years to renew amutually beneficial relationship,” he said.

Chris Kende, a lawyer with insurance and reinsurance industryclients at Cozen, a New York law firm, said the two-year extension“is a band-aid…designed to prolong the program in the short-termand deep-six the program in two years.”

Problems in developing a purely private market for terrorismexposures won't go away in two years, Mr. Kende added. “Theinability of the private sector to absorb a catastrophic terroristevent remains,” he warned. “Unless there is a continued effort bythe private sector, industry and legislators, the [TRIA] programwill disappear in two years and catastrophic terrorism risk will beuninsurable.”

In the Senate, there was relief when the final bill was passedby unanimous consent. “At long last builders and insurers of majorprojects in large cities, particularly New York, can breathe a sighof relief,” said Sen. Charles Schumer, D-N.Y. “Terrorism insurancewill be renewed.”

The Treasury Department, speaking on behalf of the Bushadministration–which fought to keep any federal terrorism insuranceprogram short-term and pushed hard for the Senate's limited TRIAextension–was clearly pleased.

“Congress has agreed on legislative language that meets thecritical goals set out by Secretary [John] Snow when he deliveredthe Treasury's TRIA report in June,” said Treasury UndersecretaryRandal Quarles in a statement, citing “a significantly reduced TRIAprogram, more room for private-sector innovation, greaterprotections for the taxpayer, and recognition of the temporarynature of the program.”

“Many thought these goals were not achievable when this debatebegan, but the House and Senate worked constructively to achievethis outcome, and we think the American taxpayer can be satisfiedwith the result,” he added.

Critics of TRIA were pleased that if the program wasn't left toexpire, at least it wasn't expanded and kept on a short timetable.“The Senate bill sponsors and Treasury Department fought off fierceefforts by insurance lobbyists to actually increase taxpayerpayments and industry subsidies and weaken consumer protections,”according to J. Robert Hunter, director of insurance for theConsumer Federation of America.

Industry officials were relieved that TRIA was extended, whilemaking it clear much work remains to be done to craft a longer-termsolution.

“This bill won't make terrorism risk disappear or make it anyeasier to insure without the participation of the federalgovernment,” said Joseph Annotti, senior vice president at theProperty Casualty Insurers Association of America. However, he wasquick to add, “this extension gives us some breathing room thatallows us to keep making this coverage available while we continueto work on a long-term, market-driven solution.” He predicted thateven though Congress just enacted a two-year extension, TRIA'sfuture will be back on the congressional agenda in the second halfof 2006.

Part of the final TRIA extension bill was the creation of aPresident's Working Group to address coverage challenges. However,some are concerned that given President Bush's disdain for anylong-term federal involvement, the deck might be stacked againstany permanent federal role in terrorism insurance.

Dennis Kelly, director of federal media relations at theAmerican Insurance Association, said the working group will be oneof the industry's top legislative agenda items this year. The groupwill analyze market conditions for terrorism insurance inconsultation with the National Association of InsuranceCommissioners, representatives of the insurance and securitiesindustries, and corporate buyers.

“We're looking forward to engaging the President's Working Groupas soon as possible,” he said. “The problem has not been solved forthe long term. As far as we are concerned, there should be acontinuing federal role in dealing with catastrophic terrorism,especially when it comes to nuclear, chemical, biological andradiation events. Catastrophic terrorism remains uninsurable by theprivate market.”

However, the Council of Insurance Agents and Brokers, in abulletin to its members, cited “fear that this forum may simplyrestate the disappointing June report of the Treasury Department,which argued that TRIA has been 'crowding out' marketplaceinnovation.”