JavaScriptThe Congressional Budget Office has released its cost estimate for the legislation that has extended the federal Terrorism Risk Insurance Act, predicting it will cost $1.5 billion over the next 10 years.

The CBO, in its analysis of the measure, acknowledged that the actual costs could be far different than what it predicts, due to the unpredictable nature of terrorism. TRIA, which was extended for only two years, provides federal support for insurers after terrorism losses rise above certain levels.

"There is no reliable way to predict how much insured damage terrorists might cause in any specific year," said the agency, which offers objective analysis to Congress on legislation.

However, it explained that the estimate serves as the expected value of payments from the government under the program, or a weighted average of the probabilities of outcomes from zero damages up to a major terrorist attack.

"The expected value can be thought of as the amount of an insurance premium that would be necessary to just offset the government's losses from providing this insurance, although firms do not pay any premium for the federal assistance offered by TRIA," the CBO said.

Based on this, the CBO estimated that the TRIA extension will cost the federal government $1.4 billion between 2006 and 2010, and $1.5 billion between 2006 and 2015. The office also estimated the legislation would increase government receipts by $150 million by 2010 and by $720 million between 2006 and 2015.

During the debate on extending TRIA, proponents countered the notion that the bill was a "bailout" of the insurance industry by noting it requires the Secretary of the Treasury to recoup any money paid out by the federal government through surcharges on insurance policies.

In crafting its estimates, the CBO took this into account but also noted the timing of the surcharges would be a factor. In all of its analyses, the CBO makes its projections within a window of 10 years into the future.

"The act allows the Secretary to reduce annual charges after considering the effect on taxpayers, the economy, or burdens on small and medium-sized businesses," the CBO said. "Therefore, if annual losses were very high, we expect that the Secretary would limit annual collections by spreading them over many years."

Overall, the CBO said it expects the total surcharges from the two-year TRIA extension to total $1.5 billion, but it also expected it would take 10 years just to collect that total, and that the Secretary would not begin assessing surcharges until two years after a major event.

This article originally appeared in The National Underwriter P&C. For the complete article, please click here

Special Reports /

Feds See TRIA 10-Year Cost at $1.5 Billion

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