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Anew report from a presidential commission looks set to shake up the debate over terrorism insurance. At issue is the Terrorism Risk Insurance Extension Act, or TRIEA. The law, passed in a rush last year, extended 2002’s Terrorism Risk Insurance Act by another two years. TRIEA expires at the end of 2007. What comes next could have a dramatic impact on New York’s economy. The report released yesterday by the President’s Working Group on Financial Markets suggests that the private market for terrorism insurance is indeed developing, raising questions about how much longer the government will need to stay involved.
TRIA created a federal “backstop” on losses to insurance companies in the event of a large-scale act of terrorism. Insurers are on their own to pay out claims up to a certain deductible before the government steps in to pay most of the tab; the deductible varies by company. Insurers and their re-insurers argue that terrorism defies the kind of actuarial tools that are necessary for insurers. The fear is that unless the government steps in companies would stop writing policies, and skyscraper-building and other economic activity dependent on such polices would grind to a halt.
Insurers are arguing that markets alone can’t do the job, particularly in the case of a terror attack featuring a nuclear, chemical, or biological weapon that could inflict mass casualties or mass property damage or both. While accepting that logic in respect of attacks with unconventional weapons, yesterday’s report questions this thinking in respect of other acts of terror, noting that domestic terrorism, like the 1995 Oklahoma City bombing, is not covered by TRIA and yet insurers have been writing those policies all along. As the working group puts it, “the functioning private market for domestic terrorism risk insurance indicates that terrorism risk is not inherently uninsurable.”
Critics have charged that TRIA may be hindering the development of private ways to insure against more “conventional” foreign attacks, even large ones like September 11. Such means might include new types of risk-pooling among insurers or methods of securitizing risk, like “catastrophe bonds.” Under TRIA, the taxpayer is, in effect, subsidizing risk to the tune of more than $5.1 billion in unpaid premiums since insurers don’t pay for the government backstop. Insurers argue that this “subsidy” hasn’t cost taxpayers anything, at least not yet, because there hasn’t been a terrorist attack that necessitated a payout under TRIA. But one TRIA critic, J. Robert Hunter of the Consumer Federation of America, argues that the $5.1 billion could have gone into a trust fund to cover potential future losses that will instead have to be paid out of tax revenues if an attack does happen.
The trick for Congress will be to pass as much of the burden as possible on to the private markets, which will then have an incentive to find ways to spread the risk around while not leaving unwitting taxpayers on the hook. One option Mr. Hunter suggests might be a program with a $100 billion deductible. That would take taxpayers off the hook for events like September 11 for which insurance companies should be able to prepare themselves financially, while protecting companies in case of a massive attack.
New York’s economic resilience and its building boom are dependent on the ability of builders, building owners, and employers to obtain terrorism insurance. The biggest threat to that insurance by far is uncertainty emanating from Washington. Whatever TRIA’s virtues or vices as a stopgap, it’s clearly not a permanent solution. Such a solution needs to provide as many incentives as possible for the market to develop creative solutions to the problem of insuring against terrorism. The best government insurance is for America to win the war on terror.