Signs emerged at a House hearing that majority Republicans onthe House Financial Services Committee will demand far moreindustry "skin in the game" as their price for reauthorizing theTerrorism Risk Insurance Act.

Members of the majority made their views clear despite concernsunanimously voiced by the industry that the current program isworking and should be reauthorized.

A number of members of the committee voiced support for theprogram, and one, a Republican from Florida, said reauthorizationshould be linked to help for the troubled National Flood InsuranceProgram as well as expansion to help states deal with catastrophicrisk, a key Florida issue.

Insurance industry concern was articulated by SeanMcGovern, director of risk management and general counsel atLloyd's of London. In answers to questions from members of thecommittee, McGovern said take-up rates for terrorism riskinsurance is now 60 percent, and that if the industry isrequired to take on more risk there will be higher prices forterrorism risk insurance and lower take-up rates. "How is thathigher capacity in the market? How is that achieving what you aresetting out to achieve?"

He called for "small incremental changes over a period of timethat would help the industry adapt." 

Robert Hartwig, president of the Insurance InformationInstitute, said in the absence of TRIA in some form, some insurersare in effect "overexposed already for terrorism insurancerisk.

"If there are plans to cover terrorism that are notadequate, insurers will suffer downgrades, then higher cost ofcapital–then problems; then competition is reduced."

Hartwig also said members of Congress should remember that smallto medium insurance companies provide a quarter of TRIA capacity inthe marketplace.

The program does not sunset until Dec. 31, 2014, but industryofficials had been hopeful that something could be done to removeuncertainty associated with waiting until the lastminute at renewal by doing something this year.

However, industry officials said this week that the majoritycommittee leadership is making clear it does not plan to take upthe issue until next Spring at the earliest, and that committeechairman Rep. Jeb Hensarling, R-Texas, insists on "putting his ownstamp on it," demanding a far different template for the programgoing forward than currently exists.

The hearing before the Housing and Insurance Subcommittee of theHouse Financial Services Committee focused on "fostering privatemarket innovation to limit taxpayer exposure."

Rep. Randy Neugebauer, R-Texas, chairman of the subcommittee,said the evolution of TRIA has failed to keep pace withthe advances and innovation of the private market.

"In fact, the program remains largely unchanged in nearly 12years," Neugebauer said. He said that, "Unfortunately, the slowevolution of the program has hindered the growth of the privatemarket for terrorism risk insurance; thus resulting in a bad dealfor U.S. taxpayers."

But, he added, that now is the time Congress can"finally begin to take off the training wheels and transition to aterrorism risk insurance market that is less dependent on ataxpayer-funded backstop."

In his comments, Neugebauer implied the committeeleadership believes TRIA coverage going forward shouldfocus on handling the "less predictable, catastrophic events suchas nuclear, biological, chemical, and radiological attacks."

In testimony that also likely represents the views of committeeRepublicans, former NAIC president Ernest Csiszar testified thatthe program's $100 million loss trigger should be raisedsignificantly, perhaps to as much as $20 billion or $25 billion.Csiszar testified on behalf of the R Street Institute, aconservative think tank.

Csiszar acknowledged the need for further development of privatecapacity and modeling solutions for terrorism risks, and said TRIAshould be extended for five to 10 years beyond its scheduledexpiration at the end of 2014.

Kean Driscoll, CEO of Validus Reinsurance,Ltd., said there is "an unnatural element to TRIAbecause it is free." He said that creates unintendedconsequences–"more often than not that areproblematic." 

Hartwig also said the mechanism for certifying aterrorism event is unclear, and that in any TRIA renewal bill,language clarifying such a mechanism or allowing the TreasuryDepartment to do so should be included. "It is generally agreedthat we need a tightening of that certification process," Hartwigsaid. 

Rep. Dennis Ross, R-Fla., said he believes reauthorizationlegislation should contain more incentives for larger capacity inthe private sector for insurance risk. He also suggested that ifterrorism risk were bundled with natural catastrophe risk, theefficiency of coverage for terrorism risk could potentiallyimprove.

House FSC Republicans are demanding greater industry liabilityeven though industry officials contend the program works well fortaxpayers. "TRIA protects taxpayers by making the private sectorresponsible for all but the most catastrophic attacks," six tradegroups that represent the property and casualty industry said in astatement released at the hearing.

"Failure to keep a TRIA plan in place would result in enormouspublic pressure for costly, direct federal assistance in theaftermath of a major terrorist event," the statement said.

Those signing the letter were officials of the NationalAssociation of Mutual Insurance Companies; the Financial ServicesRoundtable; the Property Casualty Insurance Association of America;the American Insurance Association; the Independent InsuranceAgents and Brokers of America; and the Council of Insurance Agents& Brokers.

In his testimony, Lloyd's McGovern said the basic marketconditions that necessitated TRIA still exist. He said, "Coverageof terrorism risk is different from other risks," and that TRIA hasbeen successful in giving the insurance industry the confidence tomake terrorism coverage available.

"The availability and high take-up rates of terrorism riskinsurance across all sectors of the economy are alreadywell-documented in the record before the committee," and added thatthe availability of terrorism risk insurance "has had a positiveimpact on pricing which has encouraged take-up and the result isthat the Federal Government and ultimately the tax-payer areinsulated from potential losses.

"Since TRIA, through the recoupment provisions, operatesessentially as a post event cost-sharing mechanism, the highthreshold for federal involvement ensures that private capacitywill absorb all but the most extreme losses," McGovern said.