As USA Today reports, a
Terror Insurance Gap Looms for USA. At the end of this year, the
Terrorism Risk Insurance Act of 2002 will expire.
A $100 billion insurance safety net that makes up the losses of American workers and businesses caused by a terror attack is set to disappear at year's end amid growing concerns that no replacement is in the offing.
Why it matters: Banks and other commercial lenders don't like risk. If a company builds, buys or refinances a hotel, office building, shopping center or what-have-you commercial property, it takes out a loan. The lender demands that its borrower get property insurance including coverage against risk of loss due to terrorist acts. If the borrower can't get insurance coverage for its project, then it can't get a loan either -- and that means no project. The possibility of an economic slowdown triggered by the expiration of TRIA is very real.
More on the flip.
Under the U.S. terrorism insurance program, the government pays about 90% of an insurer's post-deductible losses, capped at $100 billion a year.
And for good reason. TRIA is about more than bailing out insurance companies. As summed up in the Act's preamble, full-text link here, spreading these risks is truly a national concern and not limited to any one industry. From Treasury's website linked above:
The law establishes a temporary federal Terrorism Insurance Program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk. In addition, it will allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving State insurance regulation and consumer protections.
So there is a huge demand for terror risk insurance, driven by the risk-averse commercial lending industry (and to be fair, the no less risk-averse land developers and investors).
But insurers also don't like risk, or at least not risk that cannot be quantified, so there is little or no appetite in the insurance marketplace for underwriting terror risks.
High demand, low supply.
That's where the federal government came in with the enactment of TRIA. And that's where Treasury wants the government to get out again.
In a June 30 report the U.S. Treasury said that the imminent expiration of the Act "should encourage the development of the private reinsurance market and other risk-transfer mechanisms." There's that word, "should." Unfortunately this is more wishful thinking than a statement of reality in the marketplace. What's happening now, and reflected in Treasury's June 30 report, may be another iteration of the Bush administration's free market ideology triumphing over the facts, or it may be a case of the deficit chicken coming home to roost. Perhaps this administration believes we can no longer afford a safety net against terrorist acts.
Either way it's bad public policy. The risk of a terrorist attack is a public evil that should be a collectively shared risk, shouldered by all of society and not borne by one industry. If this is not a public risk, what is?
The expiration of TRIA is hardly non-controversial in the insurance industry either, as the comments to this Insurance Journal article make clear. One commenter takes the view that the expiration of TRIA is a non-event for insurers because the insurance industry will simply go back to denying coverage; let the insured go take it up with their political representatives, because it's their problem.
A broader view, of course, is that we all live downstream; we are all insured. As a society, and as a functioning economy, we depend on the assumption that insurance is available for spreading risk.
Or not.
Update: Slate's Daniel Gross posted his Moneybox column on this subject the day after this diary entry. As usual, Gross pulls it all together quite well, pointing out that the Republicans' real motivations for advocating the end of TRIA are unclear at best. However, I don't see that Gross included any sources for his closing assertion that calmer minds will prevail and that Congress will ultimately vote to extend TRIA. Given that this issue seems to be getting little coverage in the MSM it's hard to know where those soothing thoughts are coming from.