Reform and renew terrorism risk insurance
Established in the wake of the Sept. 11 terrorist attacks, when many insurers and reinsurers pulled back on the availability of terrorism coverage, TRIP is a $100 billion federal backstop. The program was created by the Terrorism Risk Insurance Act of 2002, which also requires insurers in commercial lines of business to make terror cover available to clients who wish to purchase it. The act has been extended twice before, in 2005 and 2007, both times with modifications that shifted more of the burden from taxpayers to the private sector.
As the reauthorization debate plays out once again – a fight that unites conservative budget hawks with those on the left concerned with corporate cronyism, just as it unites both Democrats and Republicans from big city districts with the insurance and commercial real industries – we believe a responsible middle ground can be found to extend the program with reforms that further shrink its size and scope.
The global insurance and reinsurance industries have changed dramatically in the past decade, and the federal terrorism insurance program should be updated to reflect those changes. Faced with record levels of capital, the reinsurance industry has been clamoring for the opportunity to take on more catastrophe business, including coverage for terrorism.
In a report issued earlier this year, reinsurance broker Guy Carpenter found that multiline terrorism reinsurance capacity is now about $2.5 billion per program for conventional terrorism and about $1 billion per program for coverages that include nuclear, biological, chemical and radiological attacks. That far exceeds not only the $100 million threshold that currently triggers coverage under TRIA, but it even exceeds the more aggressive $500 million trigger for non-NBCR events proposed in legislation passed in June by the House Financial Services Committee.
Indeed, as the Financial Times noted earlier this summer, it has become increasingly common for reinsurers to withdraw the terrorism exclusion clauses on which they once insisted. More recently, the head of war and terrorism coverages at the insurance brokerage Lockton Cos. observed that the London market “remains highly capable and willing to offer capacity to almost any country in the world, with 158 countries enjoying the comfort of terrorism cover currently.”
These changes in the fundamental market dynamics suggest a significant shift of risk to the private sector is in order. Among the changes we at the R Street Institute have proposed are that Congress require private insurers pay an upfront premium for the terrorism reinsurance they receive from the federal government. Currently, the only payments required are post-event reimbursements for a portion of the funds expended, which in the case of a particularly large attack may be waived by the Secretary of the Treasury. We also believe TRIP should cease offering coverage for commercial liability insurance, as there may be moral hazard involved in subsidizing firms that are reckless in their preparations for terrorism.
Alas, neither of those ideas are currently on the table, either in the TRIA extension bill under consideration in the House or the one passed by the Senate in July. Of these, the House bill comes much closer to the kinds of significant but responsible reforms needed to protect taxpayers and ensure a functioning private market. In addition to raising the trigger level for conventional terrorism attacks, the House bill would lower the federal government’s share of payouts and peg the amount of risk the industry retains to the amount of coverage private insurers write.
In an early test of the House bill’s prospects, it reportedly failed to pass a whip count, suggesting it will be challenging for leadership to find a balance between members who believe the reforms go too far and those who insist they do not go far enough. More recently, reports have emerged that members on converging on a compromise that would raise the trigger level to $250 million.
Whatever numbers Congress ultimately agrees to, lawmakers should be aware of this: markets are fully capable of taking on more terrorism risk and it clearly would be in taxpayers’ interest to let them.