Signs emerged at a House hearing that majority Republicans on the House Financial Services Committee will demand far more industry “skin in the game” as their price for reauthorizing the Terrorism Risk Insurance Act.
Members of the majority made their views clear despite concerns unanimously voiced by the industry that the current program is working and should be reauthorized.
A number of members of the committee voiced support for the program, and one, a Republican from Florida, said reauthorization should be linked to help for the troubled National Flood Insurance Program as well as expansion to help states deal with catastrophic risk, a key Florida issue.
Insurance industry concern was articulated by Sean McGovern, director of risk management and general counsel at Lloyd’s of London. In answers to questions from members of the committee, McGovern said take-up rates for terrorism risk insurance is now 60 percent, and that if the industry is required to take on more risk there will be higher prices for terrorism risk insurance and lower take-up rates. “How is that higher capacity in the market? How is that achieving what you are setting out to achieve?”
He called for “small incremental changes over a period of time that would help the industry adapt.”
Robert Hartwig, president of the Insurance Information Institute, said in the absence of TRIA in some form, some insurers are in effect “overexposed already for terrorism insurance risk.
“If there are plans to cover terrorism that are not adequate, insurers will suffer downgrades, then higher cost of capital--then problems; then competition is reduced.”
Hartwig also said members of Congress should remember that small to medium insurance companies provide a quarter of TRIA capacity in the marketplace.
The program does not sunset until Dec. 31, 2014, but industry officials had been hopeful that something could be done to remove uncertainty associated with waiting until the last minute at renewal by doing something this year.
However, industry officials said this week that the majority committee leadership is making clear it does not plan to take up the issue until next Spring at the earliest, and that committee chairman Rep. Jeb Hensarling, R-Texas, insists on “putting his own stamp on it,” demanding a far different template for the program going forward than currently exists.
The hearing before the Housing and Insurance Subcommittee of the House Financial Services Committee focused on “fostering private market innovation to limit taxpayer exposure.”
Rep. Randy Neugebauer, R-Texas, chairman of the subcommittee, said the evolution of TRIA has failed to keep pace with the advances and innovation of the private market.
“In fact, the program remains largely unchanged in nearly 12 years,” Neugebauer said. He said that, “Unfortunately, the slow evolution of the program has hindered the growth of the private market for terrorism risk insurance; thus resulting in a bad deal for U.S. taxpayers."
But, he added, that now is the time Congress can “finally begin to take off the training wheels and transition to a terrorism risk insurance market that is less dependent on a taxpayer-funded backstop.”
In his comments, Neugebauer implied the committee leadership believes TRIA coverage going forward should focus on handling the “less predictable, catastrophic events such as nuclear, biological, chemical, and radiological attacks.”
In testimony that also likely represents the views of committee Republicans, former NAIC president Ernest Csiszar testified that the program's $100 million loss trigger should be raised significantly, perhaps to as much as $20 billion or $25 billion. Csiszar testified on behalf of the R Street Institute, a conservative think tank.
Csiszar acknowledged the need for further development of private capacity and modeling solutions for terrorism risks, and said TRIA should be extended for five to 10 years beyond its scheduled expiration at the end of 2014.
Kean Driscoll, CEO of Validus Reinsurance, Ltd., said there is “an unnatural element to TRIA because it is free.” He said that creates unintended consequences--"more often than not that are problematic.”
Hartwig also said the mechanism for certifying a terrorism event is unclear, and that in any TRIA renewal bill, language clarifying such a mechanism or allowing the Treasury Department to do so should be included. “It is generally agreed that we need a tightening of that certification process,” Hartwig said.
Rep. Dennis Ross, R-Fla., said he believes reauthorization legislation should contain more incentives for larger capacity in the private sector for insurance risk. He also suggested that if terrorism risk were bundled with natural catastrophe risk, the efficiency of coverage for terrorism risk could potentially improve.
House FSC Republicans are demanding greater industry liability even though industry officials contend the program works well for taxpayers. “TRIA protects taxpayers by making the private sector responsible for all but the most catastrophic attacks,” six trade groups that represent the property and casualty industry said in a statement released at the hearing.
“Failure to keep a TRIA plan in place would result in enormous public pressure for costly, direct federal assistance in the aftermath of a major terrorist event,” the statement said.
Those signing the letter were officials of the National Association of Mutual Insurance Companies; the Financial Services Roundtable; the Property Casualty Insurance Association of America; the American Insurance Association; the Independent Insurance Agents and Brokers of America; and the Council of Insurance Agents & Brokers.
In his testimony, Lloyd’s McGovern said the basic market conditions that necessitated TRIA still exist. He said, "Coverage of terrorism risk is different from other risks,” and that TRIA has been successful in giving the insurance industry the confidence to make terrorism coverage available.
“The availability and high take-up rates of terrorism risk insurance across all sectors of the economy are already well-documented in the record before the committee,” and added that the availability of terrorism risk insurance “has had a positive impact on pricing which has encouraged take-up and the result is that the Federal Government and ultimately the tax-payer are insulated from potential losses.
“Since TRIA, through the recoupment provisions, operates essentially as a post event cost-sharing mechanism, the high threshold for federal involvement ensures that private capacity will absorb all but the most extreme losses,” McGovern said.