The recent anniversary of the devastation of September 11th reminds us that the threat of terrorism in the U.S. is still very real. That fact calls attention to the importance of protection, vigilance and security in America. However, along with keeping our preparedness on high alert, Americans need to get back to doing things as they did before. For lawmakers, this means asking a very important question – should the U.S. government continue being in the business of providing terrorism insurance?
Answering this question requires a 12-year look back.
Businesses and consumers often buy insurance as protection against a catastrophic loss. Insurers protect themselves by spreading their risks among reinsurers, who spread their risks across the world. Twelve years ago, terrorism in the U.S. changed all of that. Reinsurers were on the hook for covering much of the losses from September 11th.
Terrorism, unlike typical insurable events, is hard to predict, especially if it involves nuclear, biological, chemical or radioactive exposures. As a result, immediately after September 11th, reinsurers changed their approach to terrorism, changing their modeled assumptions, breaking the coverage out separately from broader, multi-peril products and increasing the rates charged. Some primary insurers sought regulatory permission to exclude terrorism from their policies. The price increases and atmosphere of uncertainty produced challenges for many businesses – including real estate developers, energy companies, investors and others seeking to buy property insurance to protect their infrastructure against potential terrorist events, particularly in peak risk zones like New York City and Washington, DC. Back then, lawmakers were rightly concerned.
As a result, eleven years ago, Congress passed and the President George Bush signed the Terrorism Risk Insurance Act (TRIA) which put the Federal government on the hook to provide a backstop for losses suffered by insurance companies. Many will say that TRIA gave the industry confidence and fostered economic development, including new construction and investment.
Of course, since the terrorist attacks coincided with an economic recession, and since passage of the bill coincided with an economic upturn (think more construction and investment), there is some disagreement about the extent of the bill’s success. In any case, TRIA helped settle the market and it had a positive short term benefit. Since its passage, TRIA, extended twice, is now set to expire by the end of next year.
So, is TRIA still necessary?
Actually, a lot has changed in the last decade, particularly as budget-conscious members of Congress are eying spending cuts. Some, including the Cato Institute, have called for ending TRIA.
The facts show that the insurance market is now well capitalized and reinsurers are offering terrorism insurance across the globe, thanks to improved and sophisticated modeling. In addition, there is excess capacity in the reinsurance market – suggesting that prices are favorable for insurers and policyholders. In fact, reviewing Cato’s analysis, R Street showed that re-insurance prices continue to slide to about half the rates of just five years ago. If there is plenty of cheap capital in the private market, why not bring the private sector back into the business?
One thing is certain, however, that the panic that initially ensued has vanished, which means that the major reason for TRIA’s passage has passed, and the private market should once again begin to take on this burden. Expecting government programs to continue to subsidize corporate America is wrong. Given the current federal debt and the ability of reinsurers to provide terrorism insurance across the globe, making a step in the right direct would be responsible and fiscally sound. The private sector can take care of itself.
Several practical solutions come to mind. One would be to phase-out the TRIA program over the next three years by letting the private sector resume its role. A phased-out approach would allow a reasonable transition back to the way things were. Alternatively, TRIA could continue for extremely severe events, like those in excess of $250 billion, with anything below that threshold remaining with private industry. Finally, legislators could decide to keep the risks associated with nuclear, biological, chemical, and radiological hazards with the government and return conventional risk to the insurance companies. In any of these scenarios, private insurance companies would return to markets they traditionally insured prior to September 11th.
As for the government, its job should not be to insure insurance companies; its focus should be in preventing terrorism in the first place. That would be government money well spent. As Americans are expected to go on with their lives, policymakers should think about putting things back into place too.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a nonprofit educational and research institute. For more information, visitwww.theamericanconsumer.org.