House to weigh terrorism insurance, braces for clash with White House

The House of Representatives will soon consider legislation to extend the Terrorism Risk Insurance Act for 15 years. Full approval of a terrorism risk insurance bill would place Congress on a collision course with the Bush administration, which continues to maintain that a federal role in the provision of terrorism risk insurance crowds out development of more efficient private-sector approaches.

The House Financial Services Committee on Aug. 3 reported out the Terrorism Risk Insurance Revision and Extension Act of 2007 (TRIREA). The full committee passed the draft text by a comfortable bipartisan majority of 49-20.

So far, this terrorism insurance risk framework — which was enacted as a response to the Sept. 11, 2001 attacks — has yet to be tested. Nonetheless, companies have been able to find affordable terrorism risk insurance coverage, in contrast to the situation immediately after those attacks, when such private insurance was largely unavailable and figured as a prominent determinant of the economic slowdown that also occurred.

A recent survey by Marsh, the insurance broker and strategic risks adviser, shows the development of a vigorous terrorism insurance market, with more than 60 percent of businesses opting to purchase coverage in 2006. Robust demand for such products continues even though rates for property terrorism coverage have increased by nearly 10 percent over the previous year.

New terrorism risk insurance framework

The new TRIREA specifically addresses major gaps in the current terrorism risk insurance framework. The draft legislation furthers the pledge of House Financial Services Committee Chairman Barney Frank (D-Mass.) to enact legislation extending the existing Terrorism Risk Insurance Act (TRIA) before its framework expires at the end of the current calendar year. The full House is likely to approve the bill soon; the Senate has yet to begin considering a counterpart measure:

• No exclusion for CBNR attacks. Past legislation has excluded chemical, biological, nuclear, and radiological (CBNR) attacks from coverage. The current House bill requires policies to include CBNR coverage according to similar overall terms and conditions as other terrorism insurance coverage. Insurers are allowed to defer offering such coverage until the renewal or purchase of a TRIA-covered policy after Jan. 1, 2009, and the amount of their deductible is higher than for other non-CBNR attacks.

• Additional insurance lines. The original TRIA, passed in 2002, and its 2005 extension, was limited to property and casualty insurance. The version passed by the House Financial Services Committee includes group life insurance for the first time. This section caps federal exposure for each certificate holder under a group life insurance policy at $1 billion, and creates a $5 billion recoupment pool.

• Acts of domestic terrorism. Another major gap in the present TRIA framework is its exclusion of acts of domestic terrorism. TRIREA addresses this lacuna and specifically includes all terrorist acts, whether committed by foreign or domestic actors.

• Reduced qualifying trigger. TRIREA would reduce the trigger for qualifying coverage to $50 billion — half that of the current TRIA — as certified by the treasury secretary, with the concurrence of the secretary of state, the attorney general, and the secretary of homeland security. TRIREA continues the TRIA framework of apportioning coverage among the federal government and private insurers once the triggering amount is met. Total federal liability is subject to a $100 billion cap on overall damage, with the insurance industry solely responsible for coverage above that amount. Reducing the qualifying trigger for federal involvement is intended to encourage companies to take up terrorism insurance coverage.

• Mandatory reporting and study requirements. TRIREA requires the Treasury Department to report on its requirements every two years. In addition, the legislation creates a commission to propose long-term solutions for terrorism risk problems and report to Congress on an interim basis after five years, and then permanently after eight.

Bush administration opposition

The Bush administration remains strongly opposed to extending the TRIA framework. In a September 2006 report, the President’s Working Group on Capital Markets concluded that the presence of a government role in providing terrorism reinsurance prevents effective and efficient private reinsurance mechanisms from emerging. Further, the federal role raises moral hazard issues, as otherwise private actors might behave in ways that reduce overall exposure to terrorism risk. However, the influence of the Bush administration’s anti-regulatory rhetoric has reached a low point.

Congress rejects regulatory concerns

Congressional Democrats, including the influential Frank, have rejected Bush administration concerns about the pernicious effects of the TRIA framework. Instead, they have endorsed the general private/public model for insuring against terrorism risk, as reflected in the policies of other leading industrial countries, including Australia, France, Germany, Spain, and the United Kingdom. Admittedly, the policy mechanisms employed to insure against such risks differ, but all affirm the need for some state involvement to backstop private markets.

Congress is responding to pressures in the commercial-property sector to reduce uncertainty over potential terrorism risks, as well as strong insurance industry lobbying efforts:

• Regional differences. Although overall rates for terrorism risk insurance have increased, according to the Marsh report, these increases have not been uniform. Rates in regions and cities where terrorism risk is not considered significant have in fact declined over previous years.

• Disaster insurance. Further, some proponents of a TRIA extension see it as a viable model to be extended to other areas of catastrophe risk, such as bad weather or natural disasters. Property owners in coastal areas have found it difficult to find affordable insurance coverage, and the market for other mechanisms to lay off weather-related risk — such as catastrophe bonds — has not developed quickly enough to alleviate these difficulties.

Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See