The terrorist attacks in London are expected to be covered by the nation’s Pool Reinsurance Company, drawing a stark contrast to the potential for the expiration of the federally-provided “safety net” of the Terrorism Risk Insurance Act.
Although the attacks are a tragedy for the victims, Lehman Bros. analyst Jay Gelb said in a note to investors that insurer’s losses from the attacks “should be limited” because of the Pool Reinsurance Company, which is also known as “Pool Re.”
Established in 1993 to help insurers manage terrorism risk mostly related to the Irish Republican Army, Pool Re is a government program that maintains a reinsurance pool all members of the pool pay into. Should the losses from a terrorist attack go beyond the pool’s reserves, the British Treasury assumes the costs and recoups the funds through later charges on insurers.
Under Pool Re, the U.K. insurance industry faces a total bill of ?75 million, ($132 million U.S.) for a single event, and up to a max of ?150 million ($262 million) if the attack is deemed several events.
“There are permanent mechanisms for these risks,” said Robert P. Hartwig, vice president and chief economist with the Insurance Information Institute Inc., in New York. “And this should serve as a wake-up call for this risk that the terrorists will strike again. It is a matter of when and not if.”
In addition, Mr. Hartwig noted that Spain has a consortium to cover terrorism risk.
These systems contrast with the U.S., where the Terrorism Risk Insurance Act established a federal backstop for terrorism losses in the wake of the Sept. 11, 2001 attacks. Under that program, coverage is for the bulk of financial losses from an attack once damages rise above a certain threshold, with insurers then assessed later to recoup the funds. The TRIA program was designed to serve as a temporary stop-gap, however, to give the private market time to establish it’s own system for covering terrorism risk.
The program is currently set to expire at the end of the year, and Congress is considering an extension Mr. Hartwig said is much-needed.
“The expiration of TRIA will tear a massive hole in the homeland security of this country,” he said. “A major terror attack would bring our economy to a halt and economic chaos. The responsibility rests squarely with those who oppose the extension of TRIA.”
Perhaps viewed as the greatest obstacle for an extension to TRIA is a Treasury report that said the private market, after an initial period, should be able to handle terrorism risk and that any federal program beyond the 2005 expiration date for TRIA should involve far less government involvement. The report has drawn criticism from TRIA supporters for failing to account for the vital, stabilizing effect it has on the economy.
“While the Treasury study acknowledges the very real threat posed by potential congressional inaction, it fails to draw the obvious conclusion that TRIA extension is vital to our national and economic security,” said Rep. Steve Israel, D-N.Y. Rep. Israel added that it is “critical” for Congress to pass legislation extending by two years the program that he introduced with Rep. Mike Capuano, D-Mass.
Industry groups also argued that the need for economic stability would require a federal role in insuring against terrorism.
“Our economy must be protected against the very real, long-term threat of a catastrophic terrorist attack on our shores,” said Leigh Ann Pusey, senior vice president of government affairs for the American Insurance Association. “We believe that the federal government has a major role to play in providing Americans with critical financial protection against such attacks.”
Others criticized the report’s optimistic view of the private market’s ability to establish a means of dealing with terrorism risk. They were also critical of the suggestion made by Treasury Secretary John W. Snow in a letter to House Financial Services Committee Chairman Mike Oxley, R-Ohio, accompanying the report, that the administration would not support an extension unless it raised the threshold for government involvement from $5 million in total damages to $500 million and increased deductibles paid by insurers.
“That would be virtually tantamount to no program at all,” said Robert Detlefsen, director of public policy for the National Association of Mutual Insurance Companies.
“Interestingly, one way to increase private market capacity for terrorism coverage would be for the government to make changes in tax, accounting and regulation to make it less costly for insurers to hold surplus capital and allow prices to adjust freely,” he added. “Yet that approach is not even mentioned in the Treasury report or in Secretary Snow’s letter.”