TRIA Extension No Slam Dunk For Insurers

TRIAwhich provides a federal reinsurance backstop once a fairly high insurance industry loss is sustainedis set to expire on Dec. 31, 2005, but the industry is seeking to have it extended for at least two years while it continues to work to expand the private market for terrorism coverage.

The current thinking is that legislation extending TRIA for two years will be introduced in the House, which is also likely to hold hearings on the issue soon. The Senate Banking Committee is also promising to hold hearings and act promptly on the issue.

However, Sen. Richard Shelby, R-Ala., has said that he will not begin to take up TRIA expiration until the Treasury Department completes its report on whether the legislation is working and should be extended. That assessment is mandated to be filed with Congress by June, but reports emerged last week that it might be completed early.

The decision of Wayne Abernathy, assistant secretary of the Treasury for financial institutions, to resign effective Feb. 1 is not expected to delay the report. Mr. Abernathy has been the key advisor to Treasury Secretary John Snow on the issue.

The problems with having the bill extended lie in members outside the committees of jurisdiction, according to the consensus of industry lobbyists.

One of the conclusions of the CBO report that is raising hackles within the insurance industry is a finding that eliminating the program could result in "gains in economic efficiency." One reason offered is that letting TRIA 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 business from taking steps to reduce terrorism exposures, such as retrofitting existing facilities and designing new ones to mitigate the risk.

Charles E. Symington Jr., senior vice president of federal government affairs at the Independent Insurance Agents & Brokers of America, takes issue with that conclusion.

"To relate acts of terrorism to risks like fire or weather-related events is like comparing apples and oranges," he said. "Certainly there are steps that can be taken to minimize foreseeable risks, but it is one thing to build a structure to be more weather- or fire-resistant, and it is another entirely to try to anticipate every type of terrorist attack that might occur. No amount of structural creativity can absorb a hit from a missile, a jet airplane, a dirty bomb or any other massive, catastrophic type of attack that terrorists likely would employ if given the opportunity."

Mr. Symington explained that while "our nations economy continues to recover, one large-scale terrorist attack could have a ripple effect and forestall that recovery. This federal support is crucial and is in our best national interests."

The Coalition To Insure Against Terrorisman ad-hoc group funded by commercial real estate interestswas also highly critical of the CBOs conclusions. Martin L. DePoy, vice president for government relations at the National Association of Real Estate Investment Trusts, released a statement on behalf of CIAT. He said that the CBO report "largely misses the pointthat unlike natural disasters, terrorism is a unique catastrophic risk characterized by an ever-changing choice of man-made attack modes and targets."

Mr. DePoy added that CIAT can agree with the CBO paper on at least one point"that without TRIA an especially large loss from a terrorist attack would be likely to produce another episode of scarce coverage, rising prices and uninsured assets. That is why we urge Congress to extend the backstop through 2007 without delay."

Mr. Oxfeld said CBOs conclusion that allowing TRIA to expire could spur better risk management to combat terrorism contains "a certain element of cuckoo land." He 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, there is no doubt that the absence of TRIA will make insurance much more costlyif you can find coverage."

However, Mr. Oxfeld noted that the report does at least acknowledge the workers comp system is especially vulnerable without a TRIA program since workers comp carriers cannot exclude terrorism from their policies.

Julie Rochman, a staff official at the American Insurance Association in Washington, said it was "disappointing" that the CBO report minimizes the costs of not extending TRIA. She said she thinks the authors of the study place "too much faith in the private sectors ability to step in and provide the backstop that TRIA currently provides," as well as in the loss mitigation they believe would be encouraged by ending the program.

"The CBO report contends that having TRIA in place doesnt provide enough incentive to improve loss control," she noted. "But our experience is that terrorism risk is so unique, 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 [at the WTC] could have done to prevent a plane taking off in Boston and flying into the building."

Among 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."

Another industry official, who asked not to be named, took particular exception to a portion of the report that said TRIA provides a subsidy to insurers, so current premiums for terrorism coverage should be below market rates. "Insurance companies and brokers might be keeping a small portionan outcome that is more likely if recent allegations of bid-rigging by insurers and brokers are substantiated," noted the report, which the industry official called "an outrageous comment."

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.