Risk Management

White House Opposes TRIA Extension

In a letter to House and Senate leaders, Treasury Secretary John Snow writes of ''the need to encourage further development of the private market.''
Stephen TaubJuly 5, 2005

The Bush Administration is urging Congress not to extend the Terrorism Risk Insurance Act of 2002, which requires the federal government to pick up the tab for certain commercial property and casualty losses resulting from foreign acts of terrorism.

President Bush signed TRIA into law in the wake of the September 11, 2001, attacks, “to help safeguard America’s economy.”

In a letter to House and Senate leaders that accompanied a Treasury Department report on TRIA, Treasury Secretary John Snow wrote of “the need to encourage further development of the private market.” Snow also stated that “the economy is more robust today than when TRIA was enacted.”

He noted that GDP growth, 2.3 percent in 2002, was up to 3.9 percent in 2004; unemployment, which reached 6 percent in December 2002, was down to 5.1 percent as of May; and construction jobs (residential and nonresidential combined) now stand at a record 7.2 million. “Extending TRIA would have little impact on the economy, given its current strength,” he added.

Snow also said 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.

In the act’s current form, the federal government would pay 90 percent of an insurer’s losses, above a deductible, in the event of a foreign-engineered terrorist attack, up to a total of $100 billion; insurers would pay the rest. According to Snow, the administration would accept an extension only if it raised the trigger for coverage to $500 million; increased the dollar deductibles and percentage co-payments; and eliminated from the program certain lines of insurance that are less subject to aggregation risks and should be left to the private market.

As deputy editor David Katz pointed out in May, in anticipation of the act’s expiration, property/casualty insurers are jacking up prices on terrorism coverage and warning that they may stop offering it altogether.

The Treasury Department’s report acknowledges this possibility. “Experience with natural catastrophe risk underwriting and assignment of agency ratings suggests that in order to avoid ratings downgrades, insurers may significantly alter their approach to terrorism risk insurance after TRIA’s expiration,” the report states. Among the changes insurers may institute, it continues, are increasing the use of private reinsurance, building surplus by tapping into capital markets, and raising premiums or placing exclusions on some policies.

In response to the report, Ellen Vinck, president of The Risk and Insurance Management Society, said in a statement that the Treasury’s recommendations “do not reflect the reality of the current environment. The removal of a federal backstop for terrorism insurance needlessly puts our nation’s economy at risk. RIMS, therefore, renews its call to Congress to pass legislation to extend the Terrorism Risk Insurance program without further delay.”

Kevin J. Madden, managing director of the real estate practice for insurance brokerage Aon, told The New York Times that if the government doesn’t backstop the insurance industry, premiums for owners of big office buildings in high-risk cities like New York, Washington and Chicago could double or triple.

On the other hand, J. Robert Hunter, director of insurance for the Consumer Federation of America, told the Times that it sided with the administration, noting, “We’re concerned about taxpayers not getting compensated for taking on huge amounts of risk that the insurance companies could afford to take on for themselves.”

4 Powerful Communication Strategies for Your Next Board Meeting