FEATURE ARTICLE, OCTOBER 2005

WHY PRESERVING TRIA SHOULD BE A PRIORITY
The American Insurance Association's position is that extending the national terrorism insurance mechanism is vital for businesses in the Northeastern United States.
Michael Moran

Although most Americans have never heard of it, the Terrorism Risk Insurance Act of 2002 (TRIA) is a core component of our nation's critical infrastructure. Inarguably, TRIA has secured virtually every sector of our economy against the real and present dangers posed by terrorists determined to destroy the American way of life. TRIA expires December 31, 2005; sadly, the threat of catastrophic terrorism will not also expire at that same time. As a result, Congress must act as soon as possible to put another terrorism insurance mechanism in place beyond December 31, 2005.

Terrorists seek to maximize fear among Americans, inflict great economic harm and loss of life, and generate worldwide attention. That is why high-profile American icons and gathering places such as skyscrapers, major amusement parks, hotels, resorts, ports, athletic and entertainment venues, and public transportation systems find themselves listed as likely terrorism targets. Also, recent reports indicate al Qaeda looks for “softer” targets where its primary targets are well-protected. Such soft targets include suburban and rural schools, shopping malls and industrial plants. Unfortunately, the Northeast region of the United States is full of likely terrorist targets.

Immediately following the horrific attack of September 11, 2001, commercial real estate policyholders found it virtually impossible to obtain adequate commercial property and casualty insurance, including workers' compensation, due to concerns about further attacks. TRIA brought stability to the marketplace and made terrorism insurance available to every U.S. business that sought such coverage.

Some academics now suggest that the “free market” — including insurance companies — should be wholly responsible for dealing with private sector financial losses resulting from catastrophic terrorism. However, private property-casualty insurers operate in a forced, rather than free, market. Under the state-based insurance regulatory regime, complex government price and product controls artificially suppress terrorism insurance rates, force insurers to bear unbearable risks, and deny product choices to consumers. In addition, the private sector simply lacks financial capacity to handle potentially infinite terrorism losses. Under plausible event scenarios, experts estimate that insured losses from catastrophic terror attacks on U.S. soil could exceed $250 billion. This would greatly surpass the capacity of approximately $181 billion for lines affected under TRIA. Importantly, this capital is not solely dedicated to terrorism; it also backs other commercial risks, such as natural disasters or workplace incidents unrelated to terrorism. This capacity will take a significant hit from the losses inflicted by hurricanes Dennis and Katrina.

While other catastrophic risks are shared among insurers and reinsurers around the world, the reinsurance market has no real appetite for terrorism risk in the United States. The Reinsurance Association of America estimates that current terrorism reinsurance capacity totals only $4 billion to $6 billion — a small fraction of what is needed to secure the U.S. economy.

For these and other compelling reasons, the Risk Management and Decision Processes Center at the Wharton School of the University of Pennsylvania recently concluded in a comprehensive study (“TRIA and Beyond: Terrorism Risk Financing in the U.S.”) that a long-term public-private partnership to insure against terrorism risk is appropriate. Federal Reserve Chairman Alan Greenspan also recently told a House committee that “there are regrettable instances in which markets do not work, cannot work,” adding that, “You cannot have a voluntary market system and the creation of markets, especially insurance markets, in a society subject to unanticipated violence … [W]hile I think you can get some semblance of terrorism insurance [without government involvement], I have not been persuaded that this market works terribly well.”

As TRIA's end-date looms, commercial insurers face difficult decisions about whether to underwrite terrorism insurance without a federal backstop. This all-or-nothing proposition is bad for insurance customers and the economy, and could lead to job loss, stalled commercial transactions and delayed construction projects.

TRIA was enacted as a temporary market-stabilizing mechanism. However, the need for a workable public-private partnership to deal with terrorism risk will continue well beyond December 31, 2005. All employers in the Northeast — and across the country — should be telling their congressional representatives about how important commercial insurance is to protecting individual businesses and the economy in the event of another terrorist attack. Congressional leaders have indicated they will deal with terrorism and insurance this fall, but this issue must be made a priority as the deadline looms.

If there were another terrorist attack today on the scale of September 11, 2005, because of the TRIA backstop, insurers would react as they did 4 years ago — claims would be paid quickly and fully. Also, as the result of insurer claims dollars flowing to victims, the U.S. economy would recover and move forward. For individual workers, businesses, cities, universities, hospitals and all other American enterprises that could become the next victims of catastrophic terrorism, the vital economic safety net that TRIA provides must not be allowed to unravel at the end of 2005.

Michael Moran is the public affairs director of the Northeast Region of the American Insurance Association.


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