Terrorism risk insurance: A smart, fiscally responsible, and necessary plan

The Terrorism Risk Insurance Act must be renewed because the rationale that drove its creation has not disappeared. If anything, the need has become more prevalent and pressing. While protecting our safety is the top priority, ensuring economic growth continues to be important to the nation. The threat of terrorist attacks has not decreased, but our vigilance and preparation has in fact increased. We should be reminded that terrorism activity is not directed at only large metropolitan areas. No fewer than 29 states and the District of Columbia have been targeted and in at least 17 jurisdictions, attacks actually occurred. These facts underscore the reality we live in where the specter of terrorism casts a shadow on everything from national security to economic security.

Additionally, there are three main points worth noting ahead of the hearing.

First, terrorism risk insurance helps the economy grow and encourages commerce; the premise of the Act to begin with was to mitigate severe disruptions in the economy after a terrorist attack, which, can happen in any rural or urban area across our country. Insurance enables businesses to hire, expand, and develop properties that they might otherwise not be able to do. And, timing really is everything. Often, insurance contracts are negotiated months in advance. While the Terrorism Risk Insurance Act is scheduled to expire at the end of 2014, if insurers believe that it will not be extended or will be significantly changed, as we’ve seen in the past, they could write contracts differently or include conditional exclusions to avoid aggregations of certain risk, particularly in workers’ compensation as early as January of 2014. So the uncertainty about Terrorism Risk Insurance reauthorization will soon begin to have negative impacts on the marketplace.

Second, terrorism risk insurance enables immediate rebuilding in the case of a terrorist attack because it provides both a plan and a private pool of capital to help with the recovery process. The reality is that terrorism is not a fully insurable risk, there is no accurate way for insurers to adequately predict the likelihood and frequency of the impact of a terrorist attack. Terrorism is very different from something like car insurance or homeowners insurance. Insurers provide estimates, based on historical data, roughly how many car accidents will occur in a year, where they are more likely to occur, and what they are likely to cost. The same goes for homeowners insurance. No such historic data is available to insurers with respect to terrorism.

Third, terrorism risk insurance is fiscally responsible and protects taxpayers. To date, taxpayers haven’t had to pay a single cent in direct payments for terrorism risk insurance. Under the plan, insurers have to pay a deductible before the Terrorism Risk Insurance Act pays anything. And there is a mechanism that will enable the federal government to recoup any loss payments it does make above that amount. Without the Terrorism Risk Insurance Act, no such pool of private capital would exist and the federal government and the taxpayers who fund it would be 100% responsible for covering the cost of rebuilding.

The Terrorism Risk Insurance Act is critical for our national and economic security. It is both a sound plan in a post-9/11 world and a cost-effective mechanism that is enabling job growth while protecting taxpayers. Recent events show that we need to extend the Terrorism Risk Insurance Program – and we need to extend it now.

Sampson is the president and CEO of the Property Casualty Insurers Association of America.