TRIA Extension Gets Bipartisan Backing

Rep. Kanjorski's comments reflected a constant theme during a hearing on the effectiveness of the TRIA program, as members raised concerns about the uncertainties in the marketplace with TRIA set to expire at the end of 2005 and with Congress facing a very short time frame in which to decide whether or not to reauthorize it.

Rep. Richard Baker, R-La., who chairs the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, tried to prod a Bush administration witness to take a position on a short-term extension.

There is no apparent downside to some extension, Rep. Baker told Wayne A. Abernathy, the Assistant Treasury Secretary for Financial Institutions, and it would provide some certainty for businesses and insurance companies as Congress decides whether to continue the program or allow it to dissipate.

Rep. Baker noted that TRIA requires Treasury to report to Congress on the effectiveness of the program and the ability of the private market to offer terrorism insurance by June 30, 2005, just six months before TRIA sunsets.

Realistically, Rep. Baker said, given the month-long August recess and the fact that Congress usually adjourns in November, Congress will have perhaps 90 days to respond following presentation of the report.

Why not, he asked, enact a one-year or two-year extension, with the proviso that it will be a one-time-only event and that the study will be determinative on the question of whether to reauthorize the program?

Mr. Abernathy, however, declined to commit the administration to supporting a short-term extension. The problem, he said, is that there is not enough factual information to say whether the program works.

Because the TRIA program changes every year in terms of its insurance industry retention levels and proportionate share of losses, it is really like three different programs, he said.

Treasury, Mr. Abernathy said, is doing a phased study focusing on each year of the program in order to move past "snapshots" and anecdotal evidence and provide a dynamic view of the marketplace.

But that is exactly the point, Rep. Baker said. There is still a lack of information, but there is a need to remove the volatility that comes from the uncertainty in the market.

He repeated his comment that he sees no downside risk to a one-year or two-year extension solely for the purpose of allowing Congress to receive Treasury's report.

Rep. Kanjorski challenged Mr. Abernathy on whether the administration is planning to use TRIA as a vehicle to enact broad tort reform.

He said shortly after the Sept. 11, 2001 terrorist attacks, the House passed legislation. But the legislation was then held up for more than a year because the administration tried to attach tort reform to it.

"We did not expect or appreciate using this as a vehicle to carry something entirely different," Rep. Kanjorski said.

Indeed, when Mr. Abernathy said that President Bush was instrumental in getting TRIA enacted, Rep. Kanjorski cut him off and charged that President Bush did not demonstrate any great leadership on the legislation. The legislation passed, Rep. Kanjorski said, almost in spite of the administration.

Mr. Abernathy said he "respectfully" disagreed. The issue with tort reform, he said, was that the administration did not want to open an avenue for abusive lawsuits that would have access to the Treasury.

He added that it was only because President Bush pushed hard against people who opposed creation of a new federal program that TRIA was enacted.

Rep. Sue Kelly, R-N.Y., who chairs the Subcommittee on Oversight and Investigations, called on Treasury to provide Congress with information on the future of TRIA in a "timely manner" in order to allow informed decision-making.

Even now, she said, businesses and insurers are beginning to make decisions that affect operations beyond the sunset of the legislation.

"Until there are meaningful alternatives in place, we should not function without a federal backstop," Rep. Kelly said.

"It is better to have a program in place and not need it, than to need a program and not have it," she said.

Rep. Michael Capuano, D-Mass., said that even though this is an election year, there is bipartisan support for a temporary extension.

"In an election year, where you have a bipartisan consensus, take advantage of it," he said.

But one committee member, Rep. Ed Royce, R-Calif., questioned whether a temporary extension might create distortions in the marketplace.

An extension, he said, could create a moral hazard in that businesses will refrain from taking actions that could mitigate damages from a terrorist attack, such as dispersing their operations to several locations instead of maintaining one central location.

Mr. Abernathy agreed that extending TRIA could remove one motivation to mitigate potential damages. That is the case with the flood insurance program, he said, in that people behave differently in terms of where they build their homes than they would if the flood insurance program did not exist.

In addition to extension of the program, the hearing focuses on whether Treasury should extend the "make available" requirement for the final year of the program.

Under TRIA, insurance companies are required to make terrorism insurance available to commercial policyholders through 2004. Treasury is to decide by Sept. 1, 2004 whether to extend the "make available" requirement to the final year of the program, which is 2005.

New York Insurance Superintendent Greg Serio urged Treasury to make that decision as quickly as possible.

It is not in anyone's interest to wait until Sept. 1, he said.

He added that the "make available" provision is linked to extension of the TRIA program. Extending the "make available" requirement without reauthorizing TRIA in some form will create uncertainty in the marketplace.

This situation, he said, will result in mandatory coverage being offered in policies issued in 2005 that extend into 2006 without the benefit of a federal backstop if TRIA expires.

Beginning in 2005, insurers will be compelled to make difficult choices of whether to exclude terrorism coverage or not write property coverage at all in states like New York which have not permitted exclusions outside the scope of TRIA, Mr. Serio said.

He also urged Congress to consider allowing insurance companies to establish tax-deferred catastrophe reserves. He called this the "single most empowering tool" to allow primary insurers to create capacity.

This tool, Mr. Serio said, is currently unavailable to primary insurers in the United States because the federal tax code does not recognize reserves created for events that have not yet occurred.

While accumulation of catastrophe reserves would take time, Mr. Serio said, it would diminish and possibly remove the federal government from the backstop role.

Richard J. Hillman, director of financial markets and community investment with the United States General Accounting Office, said that currently, the private market has not found ways to provide terrorism insurance after TRIA expires.

Insurers and reinsurers, he said, have not found a reliable method for pricing terrorism insurance. Moreover, Mr. Hillman said, while TRIA has provided reinsurers with the opportunity to reenter the market to a limited extent, they have not created a mechanism to replace TRIA.

As a result, he said, reinsurer and insurer participation in the terrorism insurance market likely will decline significantly after TRIA expires.

In a separate statement presented to the committee, a coalition of insurance groups called for Congress to extend TRIA.

The groups signing the statement are the American Insurance Association, the Property Casualty Insurers Association of America, the Reinsurance Association of America, the Council of Insurance Agents and Brokers, the Independent Insurance Agents and Brokers of America, the National Association of Professional Insurance Agents, the Surety Association of America, and Strategic Services on Unemployment and Workers' Compensation.