Despite the negative tone of the U.S. Treasury's June re- port on the federal terrorism backup, the debate at this point is not whether the Terrorism Risk Insurance Act (TRIA) will be extended, but on what terms. In his testimony on Capitol Hill in July, Treasury Secretary John Snow made it clear that the Bush administration will accept an extension of TRIA–as long as Congress goes along with some changes, including a big increase in the level of losses that is required to trigger the use of the federal backstop.
Insurance experts say that the London terrorist bombings, which occurred a week after Treasury's report was released, contributed to the administration's willingness to extend TRIA. Robert Hartwig, chief economist for the Insurance Information Institute, credits the bombings with influencing not only the administration, but legislators as well. "Now, it looks like there's bipartisan support for bills in both houses," he says.
Another factor was a report from the Organization for Economic Co-operation and Development (OECD), a group of 30 industrialized nations, also issued the week after the Treasury's report. The OECD report says another major terrorist attack could reveal shortfalls in terrorism coverage and argues that at this point, the insurance industry doesn't have the capacity to provide all the terrorism coverage that's needed.
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But the Catch-22 may be that the very existence of the federal backstop could inhibit the industry from ever developing sufficient capacity on its own–or at least that is Treasury's fear. It seems likely that reinsurers would have a hard time competing with TRIA's guarantee, which comes free of charge unless the backstop is actually triggered. Treasury also considers the trigger–currently at $5 million–much too low and has suggested raising it to $500 million. Secretary Snow also called for increases in the program's deductible of 15% and the industry co-pay of 10%, although he didn't provide specific figures. A Treasury spokesperson said charging a premium for the backstop is not being considered.
Insurance executives say that in many cases, the $500 million trigger would make little difference because TRIA's 15% deductible, which is calculated on all the coverage an insurer wrote the previous year, means big insurance companies have to incur hundreds of millions of dollars of losses before they see any money from the federal backstop anyway. But they say the higher trigger could leave smaller insurers and big buildings vulnerable. "I think everybody agrees that the $5 million was just a ridiculously small event," says Suzanne Douglass, a managing director for property at Willis Risk Solutions. With a $500 million trigger, the destruction of a single building insured by just one carrier could leave the insurer with $500 million of losses and no federal backup, Douglass says. "If I owned a small insurance company or a captive, I would be looking at the possibility that I could retain $500 million [of losses] with no government backstop."
Thomas Player, chair of the insurance group at Atlanta law firm Morris Manning & Martin LLP, argues that the $500 million trigger could cause a replay of the problems that occurred in 2002, when large real estate projects found it hard to get the insurance coverage they needed in the market. "I just don't think that a [$500 million trigger] is a workable solution," Player says. "The capacity you would need to [cover] losses up to half a billion [dollars] I do not think is currently available in the industry." Robert Blumber, managing director of the property practice at insurance broker Marsh Inc., says that faced with the higher trigger, companies with facilities that are likely targets for terrorists would probably have to put together coverage from a number of different insurers to get the total amount of insurance they need. "It's going to cause some changes in terms of the way property programs are structured," he says.
However, the Insurance Information Institute's Hartwig contends that the $500 million trigger won't prevent TRIA from providing the industry with what it really needs–a government backup that comes into play in the case of an extremely destructive attack. "What we're looking at are the cases that would destabilize the industry … and trying to make sure [they] don't," Hartwig says.
Meanwhile, the uncertainty about TRIA's extension is creating turmoil in the market, as customers arrange for coverage that extends into 2006 without knowing whether TRIA will be available and, if it is, on what conditions. Blumber says property renewals detail various scenarios–TRIA renewed on the same basis, on a different basis or not renewed at all–but notes that the options make it hard for companies to budget.
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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.
