Time For TRIA To Sunset

Let me pose a hypothetical.

America is struck with another major terrorist attack originating from outside our borders. The community targeted is a medium-sized city somewhere in the Midwest. In addition to significant loss of life, property damage is extensive. Losses from the attack total tens of billions of dollars. The entire economic and social foundation of the community is threatened. The community desperately needs financial support if it is to remain viable.

Let me add a couple of other facts to this scenario we all pray will never happen. The community is represented in the House by a senior member of the majority partyperhaps a powerful committee chairman. The community is in a state that has senators from both parties. Let's also say that a presidential election is on the horizon and this state's electoral votes are up for grabs.

Now let me add one final fact: None of the businesses wiped out by the attack carried terrorism coverage.

So, how many of you believe that the nation's political leadership would respond to this crisis with the following message: “Well, you know we have a terrorism insurance program in place. You really should have purchased coverage. Too bad you didn't. Best of luck in bankruptcy court. Hope you manage to get your lives back together. Goodbye and good luck.”

Conversely, how many of you believe that Congress and the Administration would send billions of dollars in disaster assistance to this community, notwithstanding the lack of terrorism insurance?

If you agree with me that the latter response is not just probable, but inevitable, then I have to raise a couple more questions: What exactly is the point of the Terrorism Risk Insurance Act and why should it be extended?

All the evidence I've seen so far suggests that TRIA is fundamentally flawed. It is promoted as “insurance,” but it really isn't. The term “insurance” implies predictability and proper spread of risk, and TRIA provides for neither.

Terrorism is inherently unpredictable. Who really knows what is in the mind of a terrorist? Who can accurately describe the logic by which a terrorist operates?

Because the Sept. 11, 2001 attacks were focused on New York City and Washington, there seems to be a presumption among some that we can identify with certainty so-called “high profile” targets and develop an actuarially sound rating structure for these risks.

But this is demonstrably silly. What about Oklahoma City? Although Oklahoma City was an act of domestic terrorism and thus would not have been covered by TRIA, that attack demonstrates that any community anywhere in the country is vulnerable.

Terrorism is not like a natural disaster. Terrorists are capable of adjusting to the things we do to try to stop them. If they perceive that so-called “high profile” targets have higher levels of security, they can adjust by seeking targets with less security.

Terrorism is wholly unpredictable and therefore uninsurable. The nation and our elected representatives need to come to grips with this fact when determining the best way deal with the losses from a major attack.

Even if we were to assume that terrorism is predictable, TRIA still represents bad legislation. It is structurally unsound from an insurance perspective. It mandates that insurance companies offer terrorism coverage to all comers, but does not mandate that anyone buy it.

That probably makes good politics, but I'm not sure it makes good insurance practice. As the recent General Accounting Office report noted, about the only businesses purchasing terrorism insurance are those in what are presumed to be “high profile” locations. As a result, there is insufficient spread of risk and adverse selection.

I'm not surprised by that. If I were a business owner, I'd never purchase terrorism insurance. I wouldn't see the point. As I noted in my hypothetical, I would presume that the political pressure on Congress and the White House to provide significant financial assistance to a devastated community would be overwhelming.

So why should I pay premiums for something I can get for free?

TRIA was enacted in the aftermath of Sept. 11, when insurance companies agreed to pay claims that may well have been excludable under the “act of war” clause in insurance policies.

But the message went out to Congress that this was a one-time-only agreement. The industry said it could not continue to pay claims for which insurance companies had not charged premiums and had not established reserves. The federal government had to act.

Unfortunately, Congress acted with TRIAan illusion based on a fiction. The illusion is that this is a reinsurance program. The fiction is that terrorism is a predictable risk.

A terrorist attack is an attack on all of us. The costs of an attack should be spread among the entire taxpayer base, not just a limited policyholder base. Terrorism should be an excludable risk.

The most rational way to resolve losses from a terrorist attack is for the government to step in after the fact with disaster assistance.

Besides, TRIA or no TRIA, that's what the government will do anyway.

It's time for TRIA to sunset.

Steven Brostoff is NU's longtime Washington editor. He may be reached at sbrostoff@nuco.com.

Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Time For TRIA To Sunset

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