Congressional Budget Office Spurns TRIA Extension

One reason cited would be that letting the program expire could mean reduced losses in the event of an attack "if the resulting higher premiums encouraged firms to adopt measures to reduce losses."

For example, the report said, an extension of TRIA could discourage businesses from taking steps to reduce terrorism exposures, such as retrofitting existing facilities and designing new ones to mitigate the risk.

In one reaction, Eric Oxfeld, president of Strategic Services for Unemployment & Workers' Compensation, based in Washington, D.C., said that conclusion contains "a certain element of cuckoo land."

Mr. Oxfeld explained that the "potential losses for business from a terrorist attack, even with TRIA in place, are so great that it is difficult to believe that, in the real world, a TRIA extension could materially reduce safety incentives."

"On the other hand," he continued, "there is no doubt that the absence of TRIA will make insurance much more costly?if you can find coverage."

But the report does say that the alleged gains in economic efficiency from allowing the Terrorism Risk Insurance Act to expire would require "a significant trade-off" and that an especially large loss from a terrorist attack would be likely to produce another episode of scarce coverage, rising prices and uninsured assets.

The report is an update requested by the Senate Banking Committee, which has promised hearings on the issue by April and action soon after the Treasury Department finishes its study on the utility of the program and the value of extending it. That is due by June.

In a more subdued response to the report, Julie Rochman, a staff official at the American Insurance Association, said it was "disappointing" that the report minimizes the cost of not extending TRIA.

Ms. Rochman said she thinks the authors of the study did so because they place "too much faith in the private sector's ability to step in and provide the backstop that TRIA currently provides," and also because they place too much faith in the loss mitigation they believe would be encouraged by ending the program.

"The CBO report contends that having TRIA in place doesn't provide enough incentive to improve loss controls," Ms. Rochman said. "But our experience is that terrorism risk is so unique that traditional loss control or mitigation techniques are not applicable."

For example, she said, "loss control is only as strong as the weakest link." In this case, Ms. Rochman explained, "the World Trade Center was a model for security and risk management, especially after the truck bombing of 1993, but there was nothing people could have done to prevent a plane taking off in Boston and flying into the building."

Amongst the arguments presented in the updated CBO report is that the "macroeconomic costs of scaling back the federal subsidy for terrorism insurance is likely to be small."

One reason, the report said, "is that the capacity of insurance companies to provide terrorism coverage has improved recently." Another, the report said, "is that TRIA does not lower the cost of terrorist attacks but shifts those costs from property owners to taxpayers. Total costs might be lower without TRIA."

Another industry official, who asked not to be named, took particular exception to a portion of the report which said that the TRIA program provides a subsidy to insurers, so current premiums for terrorism coverage should be below market rates.

The report said, "Insurance companies and brokers might be keeping a small portion?an outcome that is more likely if recent allegations of bid-rigging by insurers and brokers are substantiated." The industry official said that was "an outrageous comment."

Mr. Oxfeld noted in his comment that the authors of the report do point out that the workers' compensation system is especially vulnerable without a TRIA program.