Is TRIA Doomed?

Is TRIA Doomed?

Extending the Terrorism Risk Insurance Act seems like a no-brainer, but this wouldnt be the first time members of Congress would be guilty of not using their heads when they vote.

What is the alternative? Dumping an unpredictable risk into the laps of the insurance industry, only to see carriers bankrupted when terrorists strike again? The party in power claims to be big believers in the free market, but do they understand that private individuals are free to refuse to put money at risk? Thats what will happen if Congress kills TRIA and removes the critical reinsurance backstop it provides to carriers.

Without the government providing catastrophic coverage, insurers will exclude terrorism whenever they can. When they cantsuch as with workers compthey simply wont write in certain high-profile areas or wont cover those with too much concentration of risk. In any case, rates will soar, discouraging risk managers from buying coverage.

TRIA weighed heavily on the minds of those at the industrys annual family reunion. “If TRIA is allowed to expire, it is very conceivable to have a terrorism event that could wipe out many commercial lines carriers,” warned Ed Kelly, chairman, president and CEO of Liberty Mutual, during a panel discussion at the recent Property-Casualty Insurance Joint Industry Forum, sponsored by a bakers dozen associations. He echoed other heavyweights in predicting that TRIA will be extended, “but it will cost us somethinga bigger share will be paid by insurers.”

Thats one key point critics keep forgettingthat insurers are not being “bailed out.” They are being asked to assume an enormous financial risk before going to the federal government for what is, in effect, catastrophic stop-loss coverage unavailable in the private market.

Another misconception is that TRIA is discouraging private industry from taking steps to secure their facilities. A Congressional Budget Office report contends that allowing TRIA to expire might result in fewer losses from a terrorism attack “if the resulting higher [insurance] premiums encouraged firms to adopt measures to reduce losses.” What nonsense!

Warren Heck, chairman and CEO of the Greater New York Mutual Ins. Co., best summed up industry reaction to the CBOs preposterous claim during the Joint Industry Forum. “Its almost as if they dont have a clue at all what terrorism is, and that private business cannot shoulder this exposure alone,” he lamented.

No matter how much sense it makes to extend TRIA, the insurance industry is not going to be able to make the case alone. At the forum, it was clear insurers realize they need help to lobby a skeptical Congress. “I dont think we can get TRIA extended on our own,” said John Phelan, chairman and CEO of American Re-Insurance Co. “We need real estate and other industries to back us up.”

They also need the top dog in D.C. to put his capital on the line, a point made emphatically by Mr. Kelly. “TRIA was originally passed because President [George W.] Bush put his political muscle behind it,” he recalled. “He will have to do so again. Its the only way were going to get an extension.”

Even if TRIA is mercifully extended by Congress, the industry cant go begging on Capitol Hill every couple of years. “We agree we need a more permanent solution,” conceded Mr. Heck, “but we dont believe it can be done without government participation.” Perhaps insurers can coax Congress to go along with an extension if a government-industry panel is created to come up with a long-term alternative. Its worth a try.

Sam Friedman

Editor-In-Chief

Reproduced from National Underwriter Edition, January 20, 2005. Copyright 2005 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.