DeLay urges market fix for terrorism insurance

House Majority Leader Tom DeLay (R-Texas) last week told the insurance industry to find a private-sector solution to the problem of terrorism insurance rather than count on the continued help of the federal government.

The comments are the latest indication that DeLay’s strong belief in free markets may hamper the industry’s drive to extend federal support.

Insurers have relied since 2002 on the Terrorism Risk Insurance Act (TRIA), which set up a three-year federal backstop to reinvigorate the market for terrorism insurance after the attacks of Sept. 11, 2001. That program is set to expire at the end of the year.

“Despite the stated purpose of the program [to allow for a transitional period for markets to recover] and promises from throughout the insurance industry to spend the three years of TRIA’s existence developing private sector solutions, we have seen more lobbying than progress,” he wrote to members of the Property Casualty Insurers Association of America (PCI), a trade group.

Both insurance companies and terrorism policyholders have argued that a viable private market does not yet exist and that Congress should extend the current TRIA provisions for two more years.

DeLay has long been the principal roadblock in that plan. He reiterated his concerns in the letter: “It is important for the industry to work with Congress to develop a long-term solution that does not involve the federal government serving as a reinsurer or permanent backstop. Nor can the government become a funding mechanism for the insurance industry,” he wrote.

Nonetheless, he did say he could support some sort of extension of the current program to smooth the transition. “If the industry will work with us on Capitol Hill to find a way to [establish a free market], we will likely be more understanding of a limited, short-term program to help get it started,” he wrote.

DeLay’s letter to PCI arose out of a January meeting with PCI chief Ernie Csiszar. DeLay met last week with representatives of the American Insurance Association (AIA) and the Independent Insurance Agents & Brokers of America (IIABA).

In response to the letter, industry representatives stressed how difficult it is to develop private-sector solutions.

“Ideally, the industry would much prefer a private market solution to the problem of insuring against terrorism. It’s important to note, however … that insurance markets aren’t entirely free,” PCI spokesman Scott Duncan said.

“There are innumerable regulations and requirements that insurers must abide by. … So because insurance does not operate in a truly free market, it’s very difficult for insurers to find a truly free market solution to the problem.”

AIA spokeswoman Julie Rochman said the unique nature of terrorism threats complicated a private-sector solution.

“We’ve always known that TRIA was a temporary program. Since Sept. 11, 2001, we’ve been looking at terrorism to try to get our hands around a new kind of risk. What we’ve learned is that catastrophic terrorism is different in some fundamental ways. It is so different that, at this point, no private market solution is available to us.”

IIABA chief executive Robert Rusbuldt said that thus far, the industry has not focused its efforts around a market-based solution.

“There have been thoughts about what a permanent solution should be. The industry has thought about it. However, no doubt the vast majority has thought that an extension was the way to go,” he said.

One insurance lobbyist said that the industry had only recently, within the last six months, begun to create internal working groups to explore potential market-based solutions. “[DeLay] didn’t feel the industry had done anything, and he was right; certainly nothing in depth was done,” the lobbyist said.

The industry is looking into several long-term options, the lobbyist said. One is tax-free reserving, which would set up a pot of money that could grow quickly tax-free and be available to pay claims in the event of another terrorist attack. Another involves issuing terrorism-related bonds.

Lawmakers have already introduced bills this year that would essentially extend the current program. Sens. Bob Bennett (R-Utah) and Chris Dodd (D-Conn.) introduced a bill earlier this year. Reps. Steve Israel (D-N.Y.) and Mike Capuano (D-Mass.) have introduced a House bill.

House Republican Reps. Richard Baker (La.), Sue Kelly (N.Y.), Eric Cantor (Va.) and others proposed a TRIA extension last year but have yet to do so this year. They are working with industry groups on a new bill now, lobbyists said.

Both lawmakers and lobbyists are waiting for a report from the Treasury Department, due in March, that is expected to detail the viability of a free market for terrorism insurance.