I hate to say I told you so. Actually, scratch that. I love to say I told you so. I just wish it weren’t necessary in this case.

Back in January, when Congress passed a six-year extension of the federal backstop for terrorism insurance risks, I warned that the measly “reforms” it proposed did not go nearly far enough. Though it raised the trigger at which the program kicks in from $100 million to $200 million and will gradually raise the risk retained by the insurance industry from $27.5 billion to $37.5 billion over five years, I contended there was “ample evidence that private insurers, reinsurers, brokers and underwriting syndicates are ready and able to do more.”

In the five months since, the market evidence for that stance has only continued to grow. And now, even Congress’ own budget watchdog is backing me up.

In a new update on the status and potential future for the Terrorism Risk Insurance Program, the Congressional Budget Office notes that “relatively few policyholders would drop their coverage” even if the program’s various triggers were significantly higher than those Congress was considering for the 2015 extension, as “the demand for terrorism insurance is relatively insensitive to price.”

Among the possible tweaks under which that demand would still hold, CBO said, was if the program’s trigger was raised to $500 million and insurers’ deductibles and copayments were raised from the current 20 percent to 30 percent. The suggested proposal would keep the industry’s retention at $50 billion, the amount it is expected to reach in 2020, the final year of the extension, when current law requires the U.S. Treasury Department begin calculating the retention as the average aggregate of insurers’ terrorism deductibles over the prior three years.

CBO also offered estimates of the additional taxpayer protections that such changes would enable. Should the United States suffer a hypothetical $40 billion terrorist attack, compared with the program as it will stand in 2020, the proposed structure would see the insurance industry’s outlays increase from $20.8 billion to $28.8 billion, while taxpayers’ responsibility would drop from $19.2 billion to $11.2 billion. What’s more, the surcharges Treasury would have to assess on all commercial insurance policies – including even those that don’t cover terrorism – would be $11 billion less.

As to that $28.8 billion for which the industry would ultimately be responsible, CBO notes that private reinsurers could pretty well cover that whole nut already:

By some estimates, reinsurers could cover most of the current aggregate retention amount under TRIA ($27.5 billion) under current market conditions either by raising new capital or by reallocating their existing capital…There is probably a limit to the capital that investors would be willing to supply for terrorism reinsurance in the short run, but the amount is unknown

Of course, to anyone who’s been paying attention, this is hardly shocking news. The trade press is full of stories about how commercial insurance buyers are seeing double-digit declines in the price of terrorism coverage, with major corporations like Verizon even moving back into the stand-alone market and away from relying on TRIA to back-up their own captive insurers. The stand-alone market is now offering between $3.5 billion and $4 billion of per-occurrence capacity, making the $200 million trigger that was renewed by Congress totally laughable.

The graph below demonstrates just how far prices have fallen in the past decade. For large accounts, in particular, pricing has come way down, falling by more than 50 percent for businesses with total insured values of between $500 million and $1 billion. Prices came down — and take-up remained flat, at around 60 percent — even as Congress scaled back the TRIA backstop pretty significantly in 2006 and 2007.

CBO - terror pricing

This is all a result of the massive build-up in capital held by the private insurance and reinsurance industries. Overall, property/casualty insurers’ capital grew from $290 billion in 2002 to more than $670 billion in mid-2014. From 2007 to 2013, the capital reinsurers devote to property/casualty risks grew by 50 percent, from $200 billion to $300 billion. And while insurers would like to keep their exposure to terrorism risks below 20 percent to avoid adverse rating agency actions, right now, most insurers see exposures of only about 8 to 12 percent, underlining that they could take on significantly more risk.

One option for the next renewal would be to move toward a system where insurers pay an upfront premium for the reinsurance they get under the TRIA program, rather than the free coverage now extended by the taxpayers. That would at least offer the possibility for private reinsurers to compete with the government. If the premiums were assessed on a risk-adjusted basis, it would have the additional benefits of offering incentives for insurers to price their own coverage in accordance with risk and for policyholders to invest in appropriate mitigation strategies. CBO notes in its report that, under current law:

TRIA’s administrators would need to charge average premiums of nearly $600 million per year (for six years) to offset the government’s projected losses on a cash basis. However, any premiums paid to the government…would be subject to the same reduction in gross revenue that applies to the surcharges under TRIA—over 25 percent each year—to reflect offsetting effects on income and payroll taxes. Consequently, collections would need to average roughly $800 million a year for the net revenues to offset expected federal outlays over the life of the program.

Another option would be to move toward a system like the United Kingdom’s Pool Re, a tax-free mutual insurance pool into which participating insurers pay 50 percent of the premiums they collect for terrorism coverage. The biggest advantage of such a system is that, not only does it take the government out of the business of deciding what premiums should be, but the pool would adjust automatically to the industry’s shifting hard and soft rate environments without the need for new legislation.

But even Pool Re is seeing the ground begin to shift these days, as the length and depths of the current global soft reinsurance market has it facing increased competition from non-members who want to write U.K. terrorism coverage for their own accounts. As Julian Kirkby, senior account executive with London-based United Insurance Brokers, recently told Insurance Day:

People talk of the market needing to harden and we do see some territories apparently at rock-bottom rating, with many reinsurers walking away from risks due to the pricing on offer, but with a growing amount of participants offering extra capacity and low loss ratios this is difficult to foresee.

In a world in which there is so much private terrorism insurance capacity that rates have fallen utterly through the floor, it sure would be nice if Congress would consider tossing some of this risk back to the market and off the backs of the taxpayers.

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