The terrorist attacks of 2001 fundamentally changed the way that the world looks at risk and demonstrated that terrorism losses are too unpredictable and potentially catastrophic to be handled solely by the private sector, believe many representatives of the insurance industry.

In The Economic Effects of Federal Participation in Terrorism Risk, a recent report commissioned by industry trade groups, R. Glenn Hubbard, former chairman of the U.S. Council of Economic Advisors and dean of the Columbia University Graduate School of Business, and Bruce Deal, managing principal of Analysis Group, examined the impact that a failure to extend the Terrorism Risk Insurance Act of 2002 could have on the United States' economy.

Currently, TRIA is scheduled to expire Dec. 31, 2005. In mid-September, House Financial Services Committee Chairman Michael Oxley (R-Ohio) announced that he would sponsor legislation to extend the terms of the act. “Just three months ago, hopes for movement on this legislation were dim,” said Carl Parks, senior vice president, federal government relations, for the Property Casualty Insurers Association of America. “But, through a concerted effort on behalf of the insurers and commercial insurance consumers, an extension of TRIA is now one step closer to completion.”

The act provides that, in the event of a terrorist act, the federal government will assist the insurance industry in paying 90 percent of the resulting insured losses, provided that the Treasury Secretary certifies that an act of terrorism has occurred; insurers have complied with TRIA's conditions, including the make-available and policyholder disclosure requirements; and insurers have incurred losses in excess of an annual individual deductible, calculated as a percentage of the prior year's direct earned premium for covered commercial insurance lines.

If another catastrophic terrorism attack were to occur, in the absence of TRIA, tens of thousands of jobs would be lost due to lack of insurance coverage and thousands of additional commercial bankruptcies could occur, according to the study. Even without another major attack, the economic drag produced by the lack of a federal terrorism insurance backstop would cost Americans in several ways, Hubbard and Deal warn. The nation's gross domestic product may be $53 billion lower, household net worth may be $512 billion lower, and roughly 326,000 fewer jobs may be created. The authors credit this to the uncertainty of policies that extend into 2006, and will be negotiated as early as this fall.

Estimated insured losses from another catastrophic terrorist attack on U.S. soil could exceed $250 billion, according to a 2004 study by Tillinghast Towers Perrin. John J. Degnan, vice chairman and chief administrative officer of the Chubb Corp., cited the Tillinghast report in his written statement to the Senate Committee on Banking, Housing and Urban Affairs. “For example,” he said, “if the World Trade Center attack had occurred later in the day at lower floors, the losses could have been two to three times as severe.”

Issues specific to terrorism make the related risks difficult for private insurers to absorb, the study noted, especially as insurers' financial resources to cover catastrophic terrorism events are limited, and estimating the likelihood and location of such events is impossible. “In light of these realities, the authors do not believe that TRIA has prevented the development of additional private sector insurance or reinsurance coverage by 'crowding out' such capacity,” wrote Hubbard and Deal. “In fact, most participants in the system feel that without TRIA, insurers would be forced to reduce, rather than increase, their exposure to terrorism risk, thus leaving substantial and growing gaps in coverage.

“The U.S. economy will be stronger with TRIA than without it,” they concluded. “Over time, it may be possible to develop alternative approaches to TRIA. However, while several alternatives have been suggested, they are not in place today and we do not believe that any of them is viable in the near term.”

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