Tomorrow, the Senate Banking Committee will markup its reauthorization of the Terrorism Risk Insurance Act, or TRIA.  Terrorism – both international and domestic – still poses a significant threat to America.  Last year’s Boston Marathon bombing served as a harsh reminder of that reality.

Terrorism’s greatest cost is the terrible loss of life that can occur from an attack.  But it is important to remember that these type of attacks have other severe impacts—both from the damage caused by the attack itself and from the uncertainty of risk associated with possible future attacks.  The September 11th terrorist attack, the largest and most deadly in American history, cost insurers $32.5 billion in 2001 dollars and brought untold additional financial losses as businesses and individuals curtailed activity.  In the event of a large-scale terrorist event, research and experience on the subject paints a picture of a private insurance market incapable of providing the support and certainty the US economy needs.

The American Academy of Actuaries predicts that a large scale chemical, nuclear, biological, or radiological attack on New York City could cost more than $775 billion, nearly 25 times more than September 11th.  Under that nightmare scenario, commercial property losses would reach more than $150 billion, a level three times higher than the property and casualty insurance market’s ability to pay.  A tragedy of that magnitude – whatever the cause of the attack might be – would essentially bring the entire insurance industry to standstill.

Making the issue even more complicated, a recent report from the RAND Corporation entitled National Security Perspectives on Terrorism Risk Insurance in the United States points out “[t]errorism risk models based on historical events or theories of terrorist decision-making are limited” in that “[t]hey cannot extrapolate to estimate the likelihood of future attacks from terrorist threats beyond those that have been already recognized.”  In other words, it is essentially impossible for private insurers to price the risk associated with terrorist attacks, making it equally difficult to create terrorism risk insurance policies and set premiums.

In a scenario where risk may be virtually impossible to price and costs may treble the insurance industry’s combined ability to protect American investment in infrastructure, the federal government is the only entity with the ability to step in.  That is not to say the private insurance markets should not be called on to cover losses within its ability.  Under TRIA – currently set to expire at the end of this year –insurance companies would be required to absorb the initial losses before a single taxpayer dollar was spent.

TRIA has worked.  A recent survey by the Mortgage Bankers Association of $1.5 trillion of mortgages backed by commercial and multifamily properties shows 70 percent required terrorism coverage, and 93 percent of those had terrorism risk insurance in place.  With TRIA, affordable coverage is in place and private capital is in a position to absorb all but the largest attacks, wherein the federal government would step in to ensure communities could rebuild.

The fact is terrorism is always evolving and adapting to measures meant to prevent its success.  The insurance industry can model and price some of the risk of terrorism, but not all of it.  Congress must reauthorize TRIA so as not to leave America’s communities exposed to breakdowns, losses and uncertainty that could make an already tragic event even more catastrophic.  In the end, that is exactly what the terrorists hope to accomplish.

Stevens is president and CEO of the Mortgage Bankers Association.  He previously served as assistant secretary of Housing/Federal Housing Commissioner at the U.S. Department of Housing and Urban Development, in the Obama administration.