Insurance relies on uncertainty most of the time, so we price premiums based on events that the actuaries say are predictable en masse instead of unpredictable on an individual basis. But there is one totally predictable and possibly catastrophic event looming over the U.S. economy – one that is man-made and can be unmade, but only if Congress acts in time.
TRIA, the Terrorism Risk Insurance Act, was enacted in 2002, after the September 11, 2001, terrorist attacks, and has twice been extended, but if Congress doesn’t act soon the law will expire on December 31, 2014. Even before it expires, the lack of an extension may cause serious economic harm that will directly impact insurance consumers.
Because TRIA provides a government backstop for some kinds of truly catastrophic terrorist attacks, it has created stability in the market for terrorism insurance. The adoption rate for all terrorism coverage, which rose from 27 percent in 2003 to 62 percent 10 years later, soared on the strength of that stability. (See “Impending Expiration of TRIA – A Race to the Finish Line?” Deloitte Services LP, September 3, 2013.)
Here’s how TRIA works: A covered terrorist event that causes $100 million or more in insured losses is eligible for TRIA protection, after a retention of 20 percent of each carrier’s annual insured premiums in the given line of business. The aggregate retention is estimated to be $27.5 billion. Above that threshold, TRIA’s coverage is for 85 percent of losses, up to $100 billion. (Nuclear attacks and some other horrific events are not covered under TRIA.) Federal payments below $100 billion are required by law to be repaid through a premium surcharge levied by the Department of the Treasury – to date there have been none.
What do those big numbers really mean? To put them into perspective, the total property losses caused by the September 11, 2001, attacks have been estimated at $23 billion. (See the March 2014 research report, “National Security Perspectives on Terrorism Risk Insurance in the United States,” published by the RAND Corporation.) The property losses from Hurricane Katrina were $47.4 billion. Dwarfing those figures, the federal government’s payouts in the American Reinvestment and Recovery Act in 2009 totaled $840 billion.
TRIA’s efficacy in stabilizing the insurance marketplace and its potential impact on U.S. taxpayers are perhaps best explained in testimony by Dr. Erwann Michel-Kerjan of the Wharton School of Economics before the Senate Committee that is considering a bill to extend TRIA on September 25, 2013. Dr. Michel-Kerjan compared the taxpayers’ possible exposure under TRIA with their actual payments toward events such as Katrina, and concluded that the TRIA model is superior because it provides a mechanism to recover at least some of the government’s payouts.
Why would letting TRIA expire hurt the economy? Existing multiyear commercial construction contracts that require terrorism coverage to be in place could go into default if TRIA is not reauthorized. We have seen during the past 30 years the overall effects on the economy of a sudden shutdown of large commercial construction projects – in the aftermath of the 1986 Tax Reform Act, the Savings & Loan debacle, and the Credit Crisis. Care to relive those days?
The insurance industry could adapt to a world without TRIA, but not all at once. And what effect would a sudden shift of market capacity to terrorism insurance or reinsurance mean for consumers of less exotic coverages? A phase-out of the law over a period of years would be one thing; what we’re facing today is quite another.
There are signs of movement in Congress, as Business Insurance reported on March 18, 2014. But, like other “foregone conclusions” such as immigration reform, these efforts could be derailed.