R Street’s Csiszar recommends shifting more terrorism risk onto private market
WASHINGTON (Nov. 13, 2013) – Congress should extend the $100 billion federal terrorism risk reinsurance backstop, but only after moving much more risk off the backs of taxpayers and onto the private sector, R Street Institute Associate Fellow Ernest Csiszar said in testimony this morning before the House Financial Services Subcommittee on Housing and Insurance.
Acknowledging the need for further development of private capacity and modeling solutions for terrorism risks, Csiszar — a former president of the National Association of Insurance Commissioners — recommended that Congress extend the Terrorism Risk Insurance Program for five to ten years beyond its scheduled expiration at the end of 2014. But he said the program’s $100 million loss trigger should be raised significantly, perhaps to as much as $20 billion or $25 billion.
“This would also bring the TRIA program in line with loss triggers in the private markets for industry loss warranties,” Csiszar said. “There is simply no good reason to keep the trigger at its current low level.”
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% of losses that exceed an insurer’s deductible, from the current 15 percent. These changes would recognize the increase in private industry capacity since the original Terrorism Risk Insurance Act was passed in 2002.
Csiszar also recommended that 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.
“This initiative would protect taxpayers and support the growth of the terrorism risk market, encouraging private investment in models, data sets and other capabilities,” Csiszar said. “Also, by accessing the private market, the program would facilitate risk validation and third-party views of exposure, the efficacy of mitigation initiatives and the effectiveness of prevention regimes.”
Csiszar also made a number of recommendations to encourage the burgeoning insurance-linked securities market to take on terrorism risks, such as a uniform, sensible regulatory framework and appropriate accounting and fiscal treatment. He also proposed that Congress examine the tax treatment of catastrophe reserves to provide insurers and reinsurers financial incentives to increase their capital and expand capacity without endangering their solvency or contractual commitments.
The full text of his written comments can be found here: