As the third anniversary of the Sept. 11 terrorist attacks approaches, insurers are urging Congress to renew the Terrorism Risk Insurance Act (TRIA), which is now slated to expire at the end of 2005. When TRIA was enacted in 2002, insurance companies were expected to use the three years of government-backed terrorism coverage to come up with a private sector alternative for providing companies' policies. So far, no industry program has emerged, and the proposed TRIA renewal raises the prospect that the U.S. government may play a long-term or even permanent role in terrorism coverage.
Those calling for TRIA's renewal say the market for terrorism coverage could get choppy again as early as the fourth quarter of this year if the deadline is not extended again. That's because, as things stand now, any policies renewed after Jan. 1, 2005 would leave insurers exposed to losses on the days the policy extends into 2006 after the government backstop sunsets. The uncertainty that creates is expected to make terrorism insurance more expensive and less readily available. A bill has already been introduced in the House of Representatives to extend TRIA through 2007. But Joel Wood, senior vice president for government affairs at the Council of Insurance Agents & Brokers, says it may be hard to get legislation through this year. There's little backing in the Senate so far, he says, and not many days left in this year's legislative session.
Even with the government guarantee, the majority of companies are still opting to go without terrorism coverage, although recently usage has spiked. Statistics from New York-based brokerage Marsh Inc. show that as of the first quarter of 2004, 44.2% of its customers had terrorism coverage, up from 32.7% in the fourth quarter of 2003. Stephen Lundin, a senior vice president at Marsh, attributes the increased demand not to renewed nervousness about terrorism, but to the fact that companies are paying about 10% to 15% less for their property coverage and are using those savings to buy other insurance, including terrorism coverage.
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Observers say that if TRIA expires, another terrorist attack would result in the same market turmoil that occurred after 9/11. And some executives argue that it's impossible for insurers to provide such coverage without the government's involvement. Jacques Dubois, CEO of Swiss Re America Holding Corp., a leading provider of reinsurance, says the problem is that insurers don't have enough information about terrorism risks. "We have only one data point with regard to frequency and severity" of terrorist attacks, Dubois says, referring to 9/11. "How can you price when you have just one data point?"
John O'Connell, a professor at Thunderbird, the Garvin School of International Management, contends that terrorism also differs from events like fires or floods because the risks may change over time, as terrorists alter the way they attack or what they target. "Even with all of the modeling and all of the mathematical projection types of tools, [insurers] still can't get a handle on this," he says. Since there's no good model for insurers to use to calculate how big a premium to charge or how much to hold in reserves for terrorism policies, they risk encountering a loss they haven't prepared for adequately. "Something has to be done to allow an industry that really is unable to predict what is going to happen to assure that they won't go under if something does happen," O'Connell says.
The reality remains, however, that another extension would most likely mean the government will never get out of the business. "It's clear that doing nothing is not an option," says Thomas Russell, associate professor at the Leavey School of Business at Santa Clara University. "I don't think there's any government in the world that doesn't have some intervention in the case of terrorism."
Even so, Russell argues that TRIA was enacted in haste, and if Congress is going to renew it, it should think about reshaping it as well. Under TRIA, the U.S. government is basically subsidizing terrorism reinsurance, he says. "If TRIA is extended beyond '05, we'll be providing subsidized capital to the industry on a permanent basis, and I don't think the industry needs that."
Some observers have suggested that the U.S. could adopt a scheme similar to the U.K.'s Pool Re, in which insurers contribute to a pool, which passes some of that money on to the government to pay for reinsurance. Swiss Re's Dubois says there have been many discussions of a U.S. solution similar to that in the U.K., but notes that such a plan requires "a substantial commitment on the part of the government." However, Russell proposes a different solution for the U.S., based on the precedent of the Federal Reserve's provision of short-term liquidity to banks: Congress could pledge that the government will provide capital on a temporary basis if the insurance industry suffers crippling losses as the result of future terrorist acts.
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
