Should Congress Have Renewed TRIA?

Should Congress Have Renewed
The Terrorism Risk Insurance Act (TRIA)?
By Pete Lester, Sr.
January 16, 2008

In the aftermath of September 11th and the terrorist attacks on the Twin Towers of the World Trade Center, Congress passed the Terrorism Risk Insurance Act (TRIA). Enacted in 2002 and later extended in 2005, TRIA established a federal program that would provide at least partial relief in the event of catastrophic losses as a result of a terrorist attack.

As far as I can tell, Congress did not extend TRIA as it expired on December 31, 2007.

On November 26th, 2002, when the President signed the bill into law, the Bush Administration stated that the Act was a temporary solution allowing the free market and private insurance industry time to respond and develop reasonable solutions associated with the threats associated with the war on terror and events that, heretofore, were not covered by insurance carriers.
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A Few Words About TRIA (skip below if you do not want to know the details of this legislation, frankly it gets a little tedious, and it was difficult to condense):

The program established by TRIA is essentially a reinsurance program established by law to offer a source of restitution in the event of a terrorist attack. In order for insureds to receive proceeds from the Federal Program, several thresholds must be crossed (as briefly described below):

1. First the losses must be deemed to have come from an “Act of Terrorism” as certified by the Treasury.
2. The Act must be violent or dangerous to human life, property or infrastructure.
3. The Act must result in damage within the United States or a vessel or air craft that is principally based in the US and insured in the US, or occur on the premises of any US Embassy.
4. The Act must have been committed by a person as a part of an effort to coerce the civilian population of the US or influence the foreign policy of the US.
5. It must produce losses to property and casualty insurance in excess of $5 Million (US$). This original limit was raised to $50 Million in 2006 and to $100 million in 2007.

The ACT voided all terrorism exclusions currently in force on commercial property and casualty policies. Deductibles and retentions apply on a calendar-year basis. The total benefits received from the federal program was capped at $100 Billion per year. The deductible for an individual company was 17.5% in 2006 and 20% in 2007. The insurance industry covered losses before federal assistance was made available. The amounts were graduated: $15 Billion in 2005, $25 Billion 2006, and $27.5 in 2007. That should be enough minutia for you to understand that there were certainly hurdles to jump before you would receive assistance.

For the first two years, commercial policies were required to offer terrorism insurance.

So, if a loss had to occured in 2007 totaling $40 Billion and 100 insurers were impacted:

• TRIA would cover 100 Insurers in the amount of $30B after
• A 20% deductible and 15% coinsurance
• TRIA would pay $27.9 Billion
• Insurers would pay $12.1 Billion

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As one could predict, new products were slow to come to the market – it is a rare occurrence when the free market can operate or offer a product successfully when the government is also involved. Now that the program has seemingly expired, the market will respond – if there is demand.

Interestingly, when the ACT was first passed, it was welcomed by both the industry and those at risk. However, since 2002, premiums have dropped. This undoubtedly provided fuel to the debate and supported those who believed that TRIA placed too much risk on taxpayers; and that those subject to risk had voted with their dollars and decided not to participate in the public-sponsored plan.

Truly, one could easily make the case that the private sector has not responded adequately. Every company is unique. I question whether the government possesses the expertise to appropriately assess the risk associated with various industries and companies, much less the variances due to location. In light of the inadequate assessment of weapons of mass destruction leading up to the Iraq War, we could certainly question whether the government has the expertise to assess the political and military risk – which should be its primary focus. Additionally, companies desirous of mitigating the risk have been slow to change their own business practices, adopt disaster recovery processes, and reduce their risk by changing the concentration of assets in high-target areas and employee location patterns.

In fact, the problem goes much deeper than just covering operations and brick & mortar. In the wake of the attacks, many life insurance carriers assessed the risk and began to express reluctance to place insurance on executives – particularly “key man insurance” on employees with addresses that were considered high profile. Since 9-11, the risk and associated charges vary widely and can be assessed on a block-by-block basis in some key markets.

Having said this, a report produced by Marsh & McClennan in 2005 stated that 59 percent of companies in the US purchased or renewed their property terrorism coverage in 2006, which was up 1% from the prior year. One could conclude that the market has spoken – targets located from Austin to Birmingham, Spokane to Toledo have evaluated the risk and 41% have determined to either self-insure or not insure at all.

In truth, cities, companies and employees would learn a lot if the free market did respond. Each of us would know by the premiums paid, the assessment or risk related to our place of employment and our vary lives. We would have a clear understanding of the relative risk of simply going to work.

QUESTIONS for STUDENTS of ECONOMICS:

1. Is TRIA an appropriate use of public resources?
2. In a broader sense, what types of losses should the government be prepared to resolve for those who suffer a loss (floods, storms, fires, plane crashes, earthquakes, etc)?
3. Does government involvement retard the response of the marketplace or does it stabilize the marketplace?
4. For those of you interested in law: is this an issue for the various States to address (insurance carriers and their products are subject to state insurance laws and must be approved by each state) or is it a Federal/National issue?
5. Did 9-11 impact you in terms of: what you want to do for a living, the careers you will consider, your desire to live and work in a major city?