Despite only a few gasps left until Congress adjourns this year, much still needs to be done.  Among the less publicly-noted items in this holiday limbo is terrorism risk insurance. This program that provides government support for insurers to cover terrorist attacks on commercial interests will expire on December 31, 2014 unless Congress acts. It needs to do so – and smartly.

The original intent behind the 2002 Terrorism Risk Insurance Act (TRIA) was to help insurers limit their exposure and make reasonably-priced terrorism coverage available while markets adjusted to the new realities of terrorism risks.  Struck with 9/11 losses, the insurance industry had begun to pull terrorism coverage. This affected big city real estate developments but also concerned shopping malls, stadiums and other likely targets.  Investors and bankers questioned their risks and put plans on hold.  Many are holding their breath again as the legislation that provides federal government backstopping to the insurance industry for certified terrorist events expires.

However, the truth of the matter is that no one – not insurers nor the FBI nor the Department of Homeland Security(DHS)  – can reasonably estimate such risk. Terrorism is not a high frequency event with actuarial data for developing models. According to the Insurance Information Institute, terrorist incidents accounted for only 6 percent of catastrophe losses in the US over the last 10 years.  Risk advisors can estimate effects; but frequency, the other part of a risk equation needed for insurance, is impossible to estimate.  For this, modelers do little more than elicit opinions from “subject matter experts” whose estimations of intent and capability of terrorists often vary widely.

Acknowledging these difficulties, Congress extended the act twice. Today, the House and Senate need to extend the act again, but competing bills complicate any true reflection.

Sen. Charles SchumerCharles (Chuck) Ellis SchumerTrump defends 'crime buster' Giuliani amid reported probe Louisiana voters head to the polls in governor's race as Trump urges GOP support Trump urges Louisiana voters to back GOP in governor's race then 'enjoy the game' MORE (D-NY)’s  bill, reauthorizing the program for seven years with some changes putting insurers more at risk, cleared the Senate with a vote of 93-4.  Meanwhile, the House Committee on Financial Services reported out a bill that extends the program for five years but with different changes.  House Republicans say House rules requiring them to cut general government spending to cover expected expenses mean that the Congressional Budget Office funding estimates of the Senate bill vs. the House bill make it hard for them to simply pass the different Senate version.

The machinations of going to a conference committee to reconcile the bills at this last minute can be avoided.  The smart way to proceed would be for the House and Senate to negotiate as if they are in conference right now and vote on a new agreed bill.

A five-year extension should be fine to support industry in the short term. However, the final bill should ask for a broader study of issues going beyond what is currently outlined in either proposed bill.  A study should not simply look at insurance industry capacity and pricing  but also how and to whom insurance is and should be extended.  Issues to research should include:

·         How to encourage insurance availability and terms so that businesses are rewarded for being more robust and resilient.  Threat may be too hard to estimate but vulnerability and consequences of different scenarios can be. The 9-11 Commission supported development of resilience standards; however, the resulting DHS preparedness standards program never gained ground and is being revamped. Insurers and TRIA should be intimately involved.

·         Consideration of the unintended effects of insurance-linked securities and other related instruments given their potential moderating effect on good risk estimates. Simply having terrorism insurance capacity is not sufficient. We should want underwriting to be priced without distortion from government or speculators.

·         Whether and how to explicitly cover nuclear, biological, chemical and radiological (NBCR) events beyond workers’ compensation. As the Risk and Insurance Management Society (RIMS points out, the TRIA program not directly addressing this has caused many insurers to exclude such events.

·         Exploration of terrorism and bundled catastrophic insurance programs for businesses as well as homes, including other countries’ approaches and ways to have a larger risk pool.  Wouldn’t you buy terrorism coverage on your DC-area home?

The goal should be to build a system in which American businesses and individuals can be rewarded appropriately by insurers for making sound decisions to invest in better protecting themselves and in more rapidly recovering from a catastrophic event.  Given growing concerns about terrorism, Congress needs to act to renew TRIA and engage in broader study of this important issue.

Decker is a senior adviser with the Stimson Center’s Managing Across Boundaries Initiative, which teamed with industry to produce the Partners in Prevention Task Force Report  earlier this year.