Extend TRIA Immediately, Industry Urges

The coalition statement was in response to a request for comments from Treasury on whether to extend the "make available" requirement under TRIA through 2005. Currently, insurers must make terrorism coverage available to commercial policyholders through the end of 2004, but TRIA authorizes Treasury to extend that requirement through 2005.

However, the joint industry statement goes beyond the "make available" requirement and urges Treasury to recommend to Congress that TRIA itself be extend for at least two years beyond 2005 to minimize market disruptions. "Treasury must make this recommendation immediately," the coalition said.

"Absence of a federal role in terrorism risk insurance will recreate the affordability and availability problems that existed prior to TRIA's enactment, and might well lead to decreased construction and other economic activity in higher-risk areas of the United States," the coalition said.

This, the coalition warned, would inadvertently provide a victory to terrorists by disrupting the U.S. economy and its symbols.

The coalition said that several factors make terrorism risk uninsurable.

o First, another catastrophic terrorism event could bring financial ruin to the commercial property-casualty industry.

"The insurance sector does not have the capacity to handle truly catastrophic terrorism losses," the coalition said. "Under certain plausible event scenarios, estimated insured losses could exceed $250 billion. That level would easily exceed the industry's entire commercial capacity?capacity that is needed to back all commercial risks, not just catastrophic terrorism."

Second, terrorism risk modeling is still in its infancy. While modeling firms have been working diligently to produce terrorism risk models, they have not been able to model accurately for the frequency of terrorist attacks, the coalition noted, adding: "Only terrorists can control that variable."

Moreover, the severity component of a model is also difficult to assess because of the real possibility of a nuclear, biological, chemical or radiological attack, the coalition explained.

Third, terrorism is an interdependent risk in that no one business or system can protect itself from failures by others. For example, the coalition said, the World Trade Center was a model of security and disaster planning, but the WTC management could not have prevented the Sept. 11, 2001 attacks.

Fourth, insurers and policyholders do not have access to the classified information needed to evaluate terrorism risk. "Indeed, a government role such as the backstop established by TRIA may be necessary given the government's exclusive access to information about terrorist activity," the coalition said.

The risk will not fade when TRIA expires in 2005, the coalition noted. "Neither war nor terrorism happens by chance; they are premeditated, planned and executed with a specific purpose. Terrorism today is essentially war carried out by individuals or organizations, rather than sovereign nations."

Terrorism and war have shared characteristics, the coalition said, in that terrorism defies normal underwriting and rating principles, limiting the ability of the private market to react. "Accordingly, a TRIA extension is vital," the group concluded.

This must be done this year, the coalition said, because of the "fundamental misalignment" between TRIA's expiration date and the operational and regulatory cycle of the insurance industry.

Insurers must start notifying policyholders of the changes occasioned by TRIA's expiration in October 2004, or even earlier, because one-year policies starting in January 2005 might end up not having TRIA coverage for at least part of the policy year that extends into 2006, the coalition said.

Reproduced from National Underwriter Edition, June 4, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.