R Street welcomes hearing on private options for terrorism insurance
Passed in November 2002 in response to a large-scale withdrawal of private coverage for terrorism perils, the Terrorism Risk Insurance Act established a federal reinsurance facility offering $100 billion of funding for certified terrorism losses on certain commercial property and casualty lines of business, including workers’ compensation and business interruption. TRIA was extended in 2005 and 2007 and is next set to expire on Dec. 31, 2014.
Under the law, insurers must make terrorism coverage available on either a stand-alone or package basis to U.S. companies, although companies are permitted to opt out. The private industry retains 20 percent of losses on covered lines of business – repaid to the Treasury through post-event assessments – while the federal government picks up 85 percent of eligible losses above that deductible up to an aggregate loss of $100 billion.
Most witnesses before the Sept. 11 hearing on TRIA hosted by the House Financial Services Committee’s Insurance, Housing and Community Opportunity Subcommittee testified that the private insurance and reinsurance markets are still constrained in their ability to provide terrorism coverage without a federal backstop, given enormous uncertainties about the frequency and severity of future attacks.
“In an ideal world, TRIA would not be necessary and the private sector alone would provide sufficient solutions for America’s terrorism insurance needs,” said R.J. Lehmann, senior fellow and public affairs director for the R Street Institute. “Even if we do not yet live in such a world, there remain a number of options Congress should explore to draw on private sector solutions and better protect taxpayers as it looks forward to TRIA’s expiration in December 2014.”
Among the options for restructuring that R Street encourages Congress to explore over the next two years as it debates renewal and extension of the Terrorism Risk Insurance Program:
- The program should look to transfer at least a portion of its $100 billion of exposure to the global reinsurance markets through traditional retrocession agreements, catastrophe bonds and other alternative risk transfer mechanisms. This would better protect taxpayers, serve to ensure terrorism risk is not concentrated within the United States and encourage development of catastrophe models and other underwriting tools to better assess terror risk.
- The federal government should clear any regulatory hurdles that would stand in the way of pooling arrangements by sophisticated commercial insurance buyers for terrorism coverage, include true reciprocal arrangements that would rely primarily on post-event member assessments. The pooling arrangements could be either fully private, or public-private partnerships, such as those in place in Germany and the United Kingdom.
- Treasury should consider charging companies a premium for the reinsurance cover offered, much as the federal government did with the 1970s Riot Reinsurance Program. This would protect taxpayers by offering a funding source either for claims payments or for risk transfers of the sort of mentioned above. It also would provide price signals that encourage insureds to invest in various forms of mitigation, including security, stronger building design and spreading operations geographically to reduce the concentration of risk in any one location.
- In concert with charging premiums for TRIA coverage, Congress should consider dropping or loosening the make-available provisions so that the program would more closely resemble voluntary coverage. This could also include offering — in exchange for appropriate risk-based reinsurance premiums — voluntary coverage for domestic terrorism or for nuclear, chemical, biological and radiological attacks, both areas where the current TRIA program does not currently provide extensive protection.
- Congress should re-examine which lines of business should be covered by the program, as well as whether changes could be made to the trigger amounts, industry retention and industry co-payments to leave more terrorism risk in the private sector.