WASHINGTON (Feb. 5, 2013) — As Congress prepares to consider the fate of the Terrorism Risk Insurance Program – the $100 billion federal reinsurance backstop set to expire at the end of 2014 – the R Street Institute urges a thorough and comprehensive debate over whether the program should be renewed, phased out or reformed in significant ways.

Passed in 2002, the Terrorism Risk Insurance Act was designed as a temporary response to the contraction in coverage for terrorism risks following the Sept. 11 attacks. The law both created the federal terrorism reinsurance backstop and also required insurers to offer terrorism coverage to their commercial property/casualty clients — including excess, workers’ compensation and surety – on terms equivalent to coverage for other perils.

The program has been renewed twice, in 2005 and 2007, each time with Congress making changes to its structure.  Rep. Michael Grimm, R-N.Y., is introducing legislation that would extend the program for five years under its existing structure.

However, following a decade of TRIA, R Street Senior Fellow R.J. Lehmann said it is worth examining the degree to which the program remains necessary, as well as whether reforms might be possible to move more risk into the private market and better protect taxpayers.  Lehmann notes that, over the past ten years, pricing for terrorism insurance has fallen significantly; take-up of coverage, which grew rapidly in the early years of TRIA, has remained flat since 2005, at about 60 percent; and private reinsurance capacity has grown from non-existent in late 2001 to at least $6 to $8 billion today.

“The market for terrorism insurance today is very different than it was a decade ago. Modeling firms now offer a suite of products to aid insurers in pricing and underwriting a variety of terrorism risks. The catastrophe bond and collateralized reinsurance markets also have exploded, offering whole new means to transfer risk,” Lehmann said. “There’s no question TRIA served to stabilize the market and ensure the availability of terrorism coverage. But if there are opportunities to reduce the government’s role and find more private solutions, Congress should explore every avenue.”

Under the program’s current terms, terrorist acts that cause at least $5 million in damage, with an aggregate loss to the industry of at least $100 million, are eligible to be certified by the U.S. Treasury Department as covered by TRIA. Individual companies retain a deductible of 20 percent of their premiums before government coverage attaches.

Beyond those thresholds, the federal government pays 85 percent of insured losses from terrorism up to a maximum of $100 billion. If aggregate losses are less than $27.5 billion, Treasury must recoup TRIA outlays through post-event surcharges on property/casualty policies. If losses exceed $27.5 billion, it’s left to the Treasury secretary’s discretion as to whether to assess surcharges.

Among the alternative structures R Street encourages Congress to explore are:

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