TRIA: Terror and Risk Transfer

July 7th, 2005 by

This morning’s alarming news about terror attacks in London triggers some melancholy
reflections on the way public policy evolves and the way society tries to cope with the unprecedented risks of the new milennium. At this time it appears that about 40 people have been killed and well over 300 have been injured in coordinated attacks on the London transport system.
The attacks come at a time when this country is reconsidering its own underwriting of terrorist exposures. Following the 9/11 attacks, congress implemented the Terrorism Risk Insurance Act (TRIA) of 2002, a risk sharing approach to terrorism. The legislation came with a sunset provision and is scheduled to expire at the end of this year. It appears that the administration is not inclined to renew the act, at least in its current form. An article in the online Insurance Journal indicates that Treasury Secretary John Snow does not think the insurance in its current form is needed. After today’s news of the devastating attacks in London, when the abstract risks are no longer abstract, when all the security measures that appeared to have been working are suddenly shown to be ineffective, the administration might have to reconsider its position.
Secretary Snow says that continuation of the program in its current form is likely “to hinder the further development of the insurance market by crowding out innovation and capacity building.” (These are code words, but I’m not sure what the code is!). He goes on to say that “consistent with its original purpose as a temporary program scheduled to end on December 31, 2005, and the need to encourage further development of the private market, the Administration opposes extension of TRIA in its current form.” (The private market begs to disagree, as you will see in their position statement here.)
Snow goes on to cite the conditions that should be considered for any type of
anti-terrorism insurance going forward: “Any extension of the program should recognize several key principles, including the temporary nature of the program [Does the Secretary see a pending end of terrorism’s threat?], the rapid expansion of private market development (particularly for insurers and reinsurers to grow capacity), [is capacity growing or shrinking? Is the increased cost of reinsurance increasing capacity or simply making current capacity more expensive?] and the need to significantly reduce taxpayer exposure.” [To reduce taxpayer exposure, you must increase exposure somewhere else — in this case, in the private insurance market and its business customers.]
Who’s Covered? Who Pays?
In the world of insurance, it ultimately comes down to who is covered and who pays the bills. The administration seems comfortable with transferring risk away from taxpayers and into the private sector. Private insurers, in turn, will ask their actuaries to calculate the potential exposures (no easy task) and will then try to pass the added costs along to their customers. But which customers will be willing to pay? For insureds living in high risk areas, business owners are very likely to opt for terrorism coverage. But what about the machine shop in Leominster MA? Or the Midas Muffler franchise in LaGrange GA? The fact is, the vast majority of businesses are likely to decline coverage, because we all seem to think that most of the risk resides in the big coastal cities. That leaves the burden for coverage on a relatively small number of businesss: their costs will go through the roof, while the costs for everyone else will stay pretty much the same.
James MacDonald, in the John Liner Review, presents a cogent and well written argument for continuation of TRIA here. It’s part of a very informative web summary produced by BNA, and which tracks the entire TRIA reauthorization process, available here. The extension of TRIA is about to take center stage in this country’s struggle to establish a smoother footing for the economy in the post 9/11 era. As flight attendents tell us when moving toward turbulence, “for your safety and comfort, fasten your seatbelt and remain in your seat.” Turbulence ahead, indeed.