R Street warns time is short to consider TRIA reforms
This morning, the Senate Banking Committee hosts a hearing on reauthorizing the Terrorism Risk Insurance Act beyond its Dec. 31 expiration. However, with a witness list consisting entirely of representatives of the insurance industry and major commercial insureds, the input the panel is receiving is limited to those who wish to extend the program under its current terms.
“We’re concerned that Congress appears to be polarized between those who wish to see the program sunset and those who refuse to consider any improvements, no matter how small,” R Street Senior Fellow R.J. Lehmann said. “There are a variety of options that should be considered to shrink the federal government’s footprint in terrorism insurance, just as has happened in each of the prior two reauthorizations, but we’d much rather see those ideas considered through thoughtful deliberation, rather than hammered through in a hasty last-minute rush.”
In testimony last November to the House Financial Services Committee, R Street Associate Fellow Ernest Csiszar— a former president of the National Association of Insurance Commissioners —proposed raising the program’s $100 million loss trigger significantly, perhaps to as much as $20 billion or $25 billion, to keep the TRIA program in line with industry loss warranties in the private markets.
He also recommended raising the industry’s horizontal deductible to 40 percent of the past year’s direct earned premium for commercial lines subject to the law, from its current 20 percent, as well as raising the quota share cost-sharing arrangement for insurers to 25 percent of losses that exceed an insurer’s deductible, from the current 15 percent. Csiszar also recommended the U.S. Treasury begin charging a risk-based price for the reinsurance coverage it extends to the industry, and to invest those premiums in risk transfer, including reinsurance, catastrophe bonds or other vehicles.
Lehmann added that Congress could also consider separate terms and conditions for different lines of commercial insurance. Given its mandatory nature, requirement to cover nuclear, chemical, biological and radiological risks and potential impact on the still-fragile jobs recovery, the workers’ compensation insurance market may require additional support not granted to commercial property coverage, Lehmann said. On the other hand, an argument could be made that commercial liability insurance could be dropped from the TRIA program altogether.
“As believers in pragmatic free-market solutions, we recognize that some federal program is likely still necessary to encourage private capital to participate in the market to insure terrorism risk,” Lehmann said. “At the same time, we think it is appropriate that Congress recognize that more capacity has entered this market since the last reauthorization and look for ways to encourage capital formation to better protect taxpayers. The time to find such solutions is running short.”