TRIA Alternatives Sought For Long Term

Private pool might help, but federal backstop still seen as essential element

As the industry lobbies for an extension of the Terrorism Risk Insurance Act, carriers have been reminded by opponents that at best, TRIAs terrorism reinsurance program was only designed to be a temporary solution.

Even if the program is extended, the industry will still eventually be called upon to find another way to cover terrorism risks. Although insurers are seemingly open to other options, the exposure is still widely seen as too unpredictable to adequately assess. As a result, industry groups believe that whatever long-term solution is adopted, it will have to involve some form of government participation.

“With respect to other options, I take the view that there is no other way than a public/private partnership,” noted Ernie Csiszar, president of the Property Casualty Insurers Association of America and formerly the president of the National Association of Insurance Commissioners. “The belief that the industry can handle terrorism risk is misplaced,” he said, calling a government role in any terrorism risk program “essential.”

Julie Rochman, a top official with the American insurance Association in Washington, agreed there is “clearly a need for a long-term government role in dealing with terrorism risk.”

There are, Mr. Csiszar conceded, other coverage options. “All routes should be explored,” he said, including those initially discussed during the original TRIA debatesuch as a pool reinsurance system similar to the one used in the United Kingdom (which, he noted, is mainly private but has some government participation) as well as a French-style system that is completely public.

Without a backstop program involving the federal government, insurers are likely to simply pull back from terrorism risks entirely if they can, according to Peter Besbecos, director of legal and regulatory affairs for the National Association of Mutual Insurance Companies in Indianapolis.

“I think you’re already seeing what the market will do [after TRIA],” he said, noting the vast majority of states have approved terrorism exclusions. “The industry largely believes that terrorism coverage is unwriteable,” he noted, adding that without TRIA, terrorism coverage will be either extremely costly or written mainly for those in what are considered low-risk areas.

The industry’s argument for the need for government involvement was bolstered by a 2004 Tillinghast study on the feasibility of establishing a terrorism reinsurance pool for workers compensation insurers, which are especially vulnerable without TRIA because states do not permit exclusions for terrorism losses in workers comp. The study found that while a pool might help somewhat by allowing the workers’ comp industry to pool its resources, it would not be enough to account for a maximum probable loss.

“The pool could create some capacity, but not enough to matter in the case of a mega-terrorism event,” the study said. “In fact, the entire industry’s capacity is not enough to respond to a mega-event. Herein lies the fundamental, intractable problem with respect to insuring terrorism risk.”

Even smaller events could overwhelm any pool, warned the Tillinghast study, because of the way in which such pools are financed.

“Even if the pool were to be funded at an aggressive rate, it would take many years before the pool had enough capacity to protect against even ‘moderate’ terrorism events,” the study found. “In the case of catastrophic events (the type that threaten the viability of the industry), the pool could not provide the industry any meaningful protection for the foreseeable future. This is true even under the most optimistic of assumptionsincluding, notably, that the pool could receive tax favorable treatment that would enable it to accumulate capacity more quickly.”

Many other problems for the industry remain the same from the original TRIA debate, including the fact that even if models can predict losses from a terrorist attack, they cannot predict how many attacks to expect, or when they might hit. “How do you model frequency?” Mr. Cssizar asked, a question echoed by Ms. Rochman and Mr. Besbecos.

“Frequency is still a big problem,” Ms. Rochman agreedone that continues to be unsolvable despite major efforts by the industry and modeling firms using advanced mathematic concepts. “It isn’t like insurers have been sitting on their hands watching TRIA tick by,” she said. “We’ve been trying.”

Further complicating the problem, Mr. Besbecos noted, is that terrorists will go beyond rational obstacles to carry out an attack. “If you build a truly state-of-the-art building, it might take a terrorist 10 years to pull off an attack,” he said. “But if it takes him 10 years, he’ll still try to attack it.”

As certain as the industry is that there is still a need for government involvement in reinsuring terrorism risks, there is also the awareness that the industry must find a long-term solution to the problem. “We understand there is no appetite to do repeated discussions on short-term [TRIA] extensions,” Ms. Rochman conceded.

Should the industry get an extension for TRIA, Mr. Csiszar said that work should begin on crafting a long-term solution as soon as possible. The initial TRIA debates were held in the aftermath of the Sept. 11 attacks, he noted, adding that engaging in discussions now would allow the industry to craft a new system through rational dialogue rather than what could become an emotional response to a potential future attack.

“Rather than waiting, let’s come to grips with this now,” he said.

Reproduced from National Underwriter Edition, January 20, 2005. Copyright 2005 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.