Administration opposes extension in current form; calls for threshold hike to $500M

The Treasury Department issued a report giving limited support for extension of a modified version of the Terrorism Risk Insurance Act that provides a federal backstop for insurers.

The current bill expires Dec. 31 unless extended, and Congress, which mandated the Treasury examination of TRIA effectiveness, has been looking forward to the report for guidance on how it should proceed.

Treasury's less than enthusiastic evaluation of the program during its 31-month life implied that it would only support an extension for even a limited period if there is less government involvement going forward.

“It is our view that continuation of the program in its current form is likely to hinder the further development of the insurance market by crowding out innovation and capacity building,” Secretary of the Treasury John W. Snow wrote in a letter to Congress accompanying the report.

“Consistent with its original purpose as a temporary program scheduled to end on Dec. 31, 2005, and the need to encourage further development of the private market, the administration opposes extension of TRIA in its current form.”

Importantly, the letter also outlined several cutbacks in the scope of the current program the Bush administration will demand in any extension.

One of these is the need “to significantly reduce taxpayer exposure.”

The administration's position outlined by Secretary Snow is that it will accept an extension only if it includes a significant increase to $500 million of the event size that triggers coverage.

It calls for increases in the dollar deductibles and percentage co-payments, and eliminates from the program certain lines of insurance, such as commercial auto, general liability and other smaller lines, “that are far less subject to aggregation risks and should be left to the private market.”

The current threshold for event size is $5 million. The current retention level for individual insurers is 15 percent, after rising from 10 percent in the first year of the program and 12.5 percent in the second year of the program.

The administration also made clear it would take a tough line on litigation in any new bill, a view that insurance industry representatives said would make extension of the program more difficult.

The letter said, “It is also important to keep in mind that the program would cover damages awarded in litigation against policyholders following a terrorist attack.”

It argued that current litigation rules “would allow unscrupulous trial lawyers to profit from a terrorist attack and would expose the American taxpayer to excessive and inappropriate costs.”

“The administration supports reasonable reforms to ensure that injured plaintiffs can recover against negligent defendants but that no person is able to exploit the litigation system,” the letter explained.

The Council of Insurance Agents and Brokers, in a confidential report to members issued immediately after the report was released last Thursday, said that Treasury's conclusion that the program “crowds out innovation” in the insurance marketplace and “is very disappointing to us.”

The CIAB noted in its comments that “the global reinsurance marketplace has not restored itself even for the 15 percent individual company retention that insurers must pay before the 90 percent backstop kicks in,” and it is therefore “highly unlikely that the marketplace will repair itself in the absence of any backstop.”

However, the CIAB said, “Treasury Secretary John Snow has indicated that the administration desires to work with Congress to achieve a solution that decreases the federal role and includes further legal reforms.”

The CIAB added, “We expect that this willingness of the administration to work with Congress will now set off a flurry of events in Congress, which we hope will lead to a successful conclusion [i.e., extension] by the end of this year.”

The CIAB report also voiced concern about the Treasury report's comments that if the program is extended, the Bush administration will demand tighter control over lawsuits stemming from a terrorism attack. Demands for tort reform by conservative Republicans in the House “complicated TRIA's enactment in 2001 and 2002,” the CIAB statement said.

The Independent Insurance Agents and Brokers of America made similar comments. Charles Symington, Big “I” senior vice president for government affairs and federal relations, said, “Some of the Treasury conclusions may be more wishful thinking than business reality. We must ensure that we have markets for our business customers.”

“With the risk of catastrophic attacks on U.S. soil still very real, and the capability of both insurers and reinsurers to offer comprehensive terrorism coverage for an uninsurable risk still very limited, the Big 'I' continues to push for the extension of a federal backstop by Congress,” Mr. Symington said.

The insurance industry is pushing for a two-year extension for the current bill as contained in legislation introduced several months ago by Sens. Robert Bennett, R-Utah, and Chris Dodd, D-Conn. The current bill expires Dec. 31, and the industry and Congress were intensely awaiting the mandated Treasury report for guidance on how it should proceed to possibly extend it.

The CIAB and other lobbyists also voiced concern about comments made in a conference call to the industry made by Mark Warshawsky, assistant Treasury secretary for economic policy, elaborating on the report. One lobbyist described Mr. Warshawsky's tone as “very negative. I am not sure how to spin any of this positively.”

Mr. Warshawsky elaborated on comments in the report that not even the real estate industry would be hard hit if the program is not extended. “There probably would not be much of a macroeconomic impact if TRIA were not extended,” he said. “Removal will have a short-term impact, but we believe that will be very short-lived, and we believe that modeling will continue to grow.”

As to an acceptable alternative, Mr. Warshawsky said “it would need to be temporary,” noting there has been “considerable private market development.”

Industry sources said that President Bush had seen the report before it was released, but there was disagreement as to whether he had ordered major changes in it.

The Property Casualty Insurers Association voiced agreement with the Bush administration. Ernie Csiszar, president and CEO of Property Casualty Insurers Association of America, said, “Despite TRIA's success, we agree with the administration that a short-term extension of the current program is not the most effective solution to the terrorism insurance problem.”

Instead, Mr. Csiszar said: “It makes more sense to establish a long-term program that stimulates more private sector participation, while maintaining the high-level federal participation necessary to foster a functional terrorism insurance market.”

“By allowing insurers to better manage their increased exposure to terrorism risk through favorable tax treatment of assets, “buy-down” options, use of private reinsurance and other capital market vehicles such as catastrophe bonds, it should be possible to further reduce federal government involvement and spur markets to develop innovative solutions to finance terrorism risks,” he said.

This is consistent with conclusions presented in the 142-page Treasury report.

“Overall we find that TRIA was effective in terms of the purposes it was designed to achieve,” the executive summary of the report said.

It continued: “Our assessment is that the immediate effect of the removal of the TRIA subsidy is likely to be less terrorism insurance written by insurers, higher prices and lower policyholder take-up….Over time, we expect that the private market will develop additional terrorism insurance capacity. We anticipate that the initial response of premiums in the market will spur the buildup of surplus as insurers tap into capital markets and the development of additional private reinsurance and other risk shifting mechanisms.”

This is consistent with conclusions presented in the 142-page Treasury report.

“Overall we find that TRIA was effective in terms of the purposes it was designed to achieve,” the executive summary of the report said.

Caption:

Industry sources said that President Bush had seen the report before it was released, but there was disagreement as to whether he had ordered major changes in it.

Flag: Report Highlights

Head: What Treasury Said

o The administration opposes extension of TRIA in its current form.

o Any extension of the program should recognize several key principles, including the temporary nature of the program, the rapid expansion of private market development, and the need to significantly reduce taxpayer exposure.

o The administration would accept an extension only if it includes a significant increase to $500 million of the event size that triggers coverage. (The current threshold for event size is $5 million.)

o The administration will demand increases in the dollar deductibles and percentage co-payments. (The current retention level for individual insurers is 15 percent, after rising from 10 percent in the first year of the program and 12.5 percent in the second year of the program.)

o The administration wants certain lines of insurance eliminated from the program, such as commercial auto, general liability and other smaller lines “that are far less subject to aggregation risks and should be left to the private market.”

Special Reports /

Treasury Calls For Modified TRIA Extension

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