Renewing the success of TRIA

For many years, pundits in this town could get a chuckle by repeating the old nugget that there are two things that should not be observed at close range —the making of sausage and the making of law. It does not take much imagination to grasp the wisdom of the first thought. However — far too often, in my opinion — the cynicism that surrounds the second thought has prevented an appreciation of the hard work and honest efforts of good people to actually get something done.

In an era filled with bitter divisions based on partisanship, it is far from automatic that good public policy dictates what happens in the halls of Congress.  In addition to divisions based on party, ideology, regions of the country and a variety of competing (special) interests standing in the way of passing legislation, there is a historical, and ongoing, tension line between the House and the Senate. Operating with different rules and distinct cultures, there are plenty of examples of it being more difficult to get House leaders and Senate leaders to agree than to get Republicans and Democrats to agree. To be sure, the two are usually intertwined.

Such is the case of extending the Terrorism Risk Insurance Act (TRIA). With the passage of time, some forget the details of Sept. 11, 2001. After the attacks, insurers paid out more than $35 billion in claims — financial resources that enabled businesses and the economy to head toward recovery — even though they had not priced policies with a belief that terrorists would ever attack us on our soil and to such a magnitude. For the first time, insurers tried to determine how to price for terrorism. The task proved impossible because no data exists that enables them to estimate the likely number of terrorist attacks or the probable cost of an attack.

With insurers unable to price terrorism insurance, the private market essentially became non-existent. Something had to be done. With huge bipartisan majorities in both chambers, Congress passed the original TRIA. The White House estimated that in the 14 months after Sept. 11 and before TRIA became law, nearly 300,000 jobs were put on hold. The Real Estate Roundtable calculated that nearly $14 billion in real estate transactions had either been stalled or canceled because of a lack of terrorism insurance.

The program has been one of the most successful public-private partnerships ever created. In exchange for insurers making terrorism insurance available to all commercial insurance buyers and for private insurers assuming the burden of paying the first $27.5 billion in losses from a future attack, the federal government promises to serve as a backstop once damages exceed a well-defined threshold. More than 60 percent of commercial insurance buyers elect to purchase the coverage. The program works.

In spite of the obvious necessity of TRIA, passage of legislation to extend the program before it expires on Dec. 31, 2007, is in jeopardy. No less a friend of private markets than Alan Greenspan has stated “[t]here are nonetheless regrettable instances in which markets do not or cannot work … I have not been persuaded that this [terrorism insurance] market works terribly well.”

Largely thanks to the leadership of Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, the House has already taken action. The House version would extend TRIA for 15 years. It also reduces the cost threshold that would trigger coverage from $100 million to $50 million. The Property Casualty Insurers Association of America supports both of these provisions.

Now, it is the Senate’s turn to act. The Senate bill, which passed out of committee but still awaits a floor vote, would extend the program for seven years. We think the Senate has wisely chosen not to include a mandate to require coverage for attacks involving weapons of mass destruction (WMD) — nuclear, biological, chemical and radiological weapons. The Senate recognized that handling a WMD attack is the role of government, not private insurers. We believe careful study is needed before deciding the best way to handle this important matter.

While there is still time to pass a TRIA that improves existing law, we need the Senate to act on final passage. The days on the calendar are becoming fewer and fewer. With so much of the health of our economy resting upon the need of markets to be certain about TRIA, the Senate should pass legislation so that a process for reconciling the differences in the House and Senate bills can proceed.

Sampson is president and CEO of the Property Casualty Insurers Association of America, which represents more than 1,000 insurers in the United States.