As one of the first priorities of the new Congress, Republicans promised to extend the Terrorism Risk Insurance Act (TRIA). They kept their promise as the Senate approved legislation Thursday to reauthorize TRIA for six years. This is good news for taxpayers and an early indication that Republicans are serious about economic growth. The bill, which cleared the House a day earlier, passed the upper chamber on a 93-4 vote. Despite the wide margin, there was controversy in that some conservative pundits had labeled TRIA as a crony, corporate bailout.
Politicians of all stripes like to claim the mantle of protecting taxpayers. Former Senator Tom Coburn (R-OK) made a career out of such a claim. The senator was celebrated for highlighting ridiculous government spending and waste. However, it was Coburn’s eleventh hour opposition to TRIA during the waning days of the last Congress that caused the bill to stall. Yet, Coburn’s opposition — in the name of taxpayer protection — ultimately put taxpayers at risk.
In the wake of the catastrophic attacks on 9/11, the market realized that terrorism insurance was no longer a “just in case” luxury but rather a crucial necessity. Unlike other forms of insurance like the auto or natural disaster markets, the marketplace here had not yet figured out how to accurately value the risks associated with terrorism. So any company offering terrorism coverage was blindly risking financial ruin. Unsurprisingly, companies refused to offer such coverage. The absence of coverage hit the commercial real estate and construction industries hard costing tens of thousands of jobs and killing economic growth.
In response, TRIA was passed to set up a federal backstop of loss for insurance companies. TRIA is essentially a loan program trigged by a major, catastrophic attack. The government is not providing insurance or creating a crony boondoggle. On the contrary, TRIA is helping to facilitate the private market.
TRIA worked as intended and was up for reauthorization again in 2014. Despite pro-market reforms added to the bill as it passed through the House by conservative Financial Services Committee Chairman Jeb Hensarling (R-TX), Senator Coburn objected and the bill died in the Senate last year causing the program to lapse on December 31, 2014.
Mr. Coburn’s objection was that taxpayers would be on the hook in the event of another massive terrorist attack. Some called it crony capitalism. However, the reality is that whenever a major disaster happens, government routinely rushes in with cash and lots of it. Super Storm Sandy cost taxpayers untold billions that will never be repaid. TRIA, in contrast, only kicks in if insurance company losses exceed $200 billion, and it caps federal exposure while requiring repayment of 150 percent of the money government lays out. These measures are why the Congressional Budget Office scored TRIA as costing taxpayers exactly zero dollars from now through 2019.
Blocking TRIA in the name of fighting cronyism only diminished the true definition of cronyism. The reality is that each day TRIA was delayed put taxpayers at risk and economic growth in jeopardy. Without TRIA, insurers would have been forced to drop terrorism insurance, and taxpayers would have absorbed all the losses from a future attack.
Those who cried cronyism were wrong on TRIA. The Hensarling bill with its conservative reforms will facilitate a private marketplace for terrorism insurance which will provide the best — the only — protection for taxpayers. TRIA is pro-taxpayer and pro-market. The important lesson for free market advocates is that we can not allow elected officials and pundits to cry cronyism over every idea or bill they oppose — if everything is crony capitalism than nothing is crony capitalism.
Congress got the job done right. President Obama is expected to sign the bill, the first sent to his desk from the new Republican-controlled Congress.