When the Terrorism Risk Insurance Act (TRIA) of 2002 was set to expiretwo years ago, Congress did a last-minute dance, extending the legislation through the end of this year, with a caveat to insurers: Get your act together now and create a commercial market absorbing terrorism risks. Once again, we are looking at TRIA's sunset, and there are still no signs on the horizon of a private-sector solution.
There is, however, a decided change in Congress, with the current Democratic leadership favoring another TRIA extension–and not even for a scant two years. "We're hearing another extension will sail through Congress," says John Iten, a director at Standard & Poor's in New York. "The Democratic leadership has a very different view than their Republican counterparts in terms of the desirability of a longer solution."
According to Capitol Hill observers, Congress is likely to be voting on proposals to either make TRIA permanent or at least give it a longer life of seven or even 10 years. "The Democrats who control the Senate Banking Committee and House Financial Services Committee, many of whom hail from larger urban states, are attuned to the risk of terrorism and understand that it is a unique exposure that does not lend itself to insurability," says Robert Hartwig, president and chief economist at the New York-based Insurance Information Institute.
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Is Congress rushing to a hasty decision? Given that there have been no terrorist incidents on U.S. soil since 9/11, and the property/casualty industry is both highly profitable and well capitalized at the moment, is TRIA still necessary? "With all the money the insurance industry has right now, they can take on much more risk, including terrorism risk," insists Robert Hunter, director of insurance at the Consumer Federation of America, which opposes another TRIA extension.
As originally envisioned, TRIA was to be a temporary federal measure helping the private insurance industry cope with the threat of terrorism risks in the U.S. Almost five years into the program, insurers evidently still can't cope. "Carriers are not prepared to take on the risks that the government is currently assuming. Neither is the reinsurance community," says Don Bailey, CEO of insurance broker Willis North America. "This is a risk that cannot be underwritten."
Hunter, a trained actuary who led the government's National Flood Insurance Program in the 1960s, says most catastrophic terrorism risks can be absorbed by the insurance industry. "We're not opposed to government money for nuclear, biological, chemical and radiological attacks on U.S. soil, but to continue TRIA for conventional terrorism makes no sense," he argues. "I disagree that this risk cannot be underwritten."
At a recent meeting of the Casualty Actuarial Society in Atlanta, David Lalonde, senior vice president of risk modeling company AIR Worldwide, seemed to concur. Lalonde noted in a seminar that his company had developed a model in 2002 using probabilistic terrorism scenarios to assist insurers to underwrite terrorism risks. The model estimates potential losses based on the types of weaponry used, possible geographic targets, the types of property attacked and potential human injuries, among other factors. "The model captures scenarios ranging from potential targets in commercial areas that are small with little potential for damage, to downtown cores with high density that can greatly affect the distribution of damage," Lalonde stated.
Hunter believes such models can assist insurers and reinsurers to underwrite a wider range of terrorism risks at much higher financial limits, with only truly catastrophic nuclear, biological, chemical and radiological losses covered by a government reinsurance program. To absorb the cost of this program, he wants insurers to pony up. "Carriers need to pay a premium, which right now under TRIA is free," he says. "Had insurers been paying premiums [to TRIA] since 2002, there would be something like $4 billion in the till for the next terrorist incident."
For risk managers renewing their property and casualty insurance policies, TRIA's extension remains the big question mark. "The issue with TRIA is that we keep putting it on and off life support," says Lance Ewing, vice president of risk management at Harrah's Entertainment Inc. "We need some intestinal fortitude from Congress to make a decision as to whether [TRIA] is going to keep limping along in its current form, be given a robust transplant or let it pass away so the marketplace can get busy trying to decide to respond to a world without TRIA."
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