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Property Insurance: A Permanent Backstop?

Terrorism Risk Has Become a Lingering Government Responsibility

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Landmarks such as the Golden Gate Bridge saw dramatic increases in their insurance premiums after the attacks.

The al Qaeda attacks of a decade ago have left an indelible imprint on the policies that the United States government projects around the rest of the world, from its harsh treatment of suspected terrorists to its lasting efforts to remake Afghanistan and Iraq. One of the longest-lasting and most important policy changes, however, has very little to do with global affairs — and everything to do with the mundane office-park world of writing real estate insurance policies.

Almost overnight in September 2001, companies that were faced with tens of billions of dollars in losses said they would not be able to insure against the threat of another terrorist strike like the one that brought down the World Trade Center’s twin towers, which for three decades had been the premier architectural symbols of American capitalist might. Costs skyrocketed for providing coverage against the loss of similarly iconic structures, such as the Golden Gate Bridge and O’Hare International Airport. And the suddenly uncertain economic climate brought fears that construction of any new skyscrapers or factories or strip malls would come to a full stop. 

After a sustained lobbying campaign by insurance companies and real estate developers, Congress stepped in to try and calm those worries. Fourteen months after the attacks, George W. Bush signed a law providing a three-year federal backstop for commercial property and casualty insurers in the event of cataclysmic terrorist acts.

In the nine years since the enactment of what was supposed to be a temporary measure, the law — known in the business world as TRIA, the acronym for the Terrorism Risk Insurance Act — has been extended twice and remains on the books. And it will be in place at least through 2014.

Because of that federal backstop, it has been easier and cheaper for companies to obtain terrorism insurance and the risk modeling by insurance companies has improved, according to a report issued in February by the President’s Working Group on Financial Markets, which is based in the Treasury Department. Moreover, advocates say that the law has accomplished its main purpose — to provide assistance to the insurers during a time of crisis, and to help prevent the economic slowdown that might have resulted from a falloff in construction.

“What it did was allow the normal process of lending to go forward,” argues Barney Frank of Massachusetts, the top Democrat on the House Financial Services Committee, who as chairman of that panel in 2007 shepherded the current extension of the program to enactment.

Still, terrorism remains a fundamentally difficult event to provide coverage against. And the industry remains unable on its own — or perhaps unwilling — to provide the range of terrorism insurance options that companies say they need. Critics say that is proof TRIA has evolved into a permanent government insurance program, and that it is performing a function that more appropriately would be handled by private industry.

Once Written, Twice Renewed

Worry that TRIA will become a permanent fixture at the nexus of government and commerce is hardly a new phenomenon. Indeed, creation of the program was hardly a slam dunk, even in the economically anxious aftermath of the Sept. 11 attacks.

Insurance companies paid out $32.5 billion after the attacks, which rank today as the second-costliest event ever for insurers — behind only Hurricane Katrina, which devastated the Gulf Coast four years later. And while some nations, the United Kingdom and Israel among them, long have had policies for dealing with compensation in such cases, the Sept. 11 attacks redefined the U.S. insurance industry’s view of terrorism.

Reinsurance companies, which take some of the risk off of primary insurers, stopped renewing terrorism coverage in their contracts. That, in turn, prompted the insurance companies — which had watched Congress put together a multibillion-dollar package of cash and loan guarantees to rescue the airline industry only a couple of weeks after the hijackers struck — to run to Capitol Hill for their own measure of help.

The  industry’s push stalled soon thereafter. There were fights over tort issues, and Republicans — wary of promising too many crisis-fueled bailouts — questioned whether a lack of terrorism insurance would indeed hamper the economy. The commercial real estate lobby and a variety of industries that rely on their own ability to buy property insurance then got involved as well, providing enough additional lobbying muscle to bring the effort to fruition a year later.

As originally written, the law permitted the government to pay 90 percent of insurance companies’ terrorism-related losses — once the insured losses the companies were facing exceeded specified levels — and capped the government’s exposure at $100 billion. In 2005, Congress extended the program for another two years, but raised the threshold for deploying the federal backstop. In 2007, Congress extended the program again — for seven years — and once more raised the threshold. In that legislation, the program was expanded to cover acts of domestic terrorism.

As the law requires, the government  periodically has been taking the temperature of the industry, testing both the availability and cost of terrorism insurance. Commercial policyholders increased their purchase of terrorism insurance after the program was created, and the total “takeup rate” reached 60 percent by 2006, when the last report was issued. Since then, purchases of terrorism policies have leveled off. Moreover, the Treasury group reported this winter, policyholders, insurers and reinsurers “remain uncertain about the ability of models to predict the frequency and severity of terrorist attacks.”

“The industry better understands aggregate risk and the increased capacity and competition have resulted in decreases in price generally,” the working group added. And the report says that although the marketplace for terrorism insurance has expanded, in the case of certain high-risk locations and properties, it remains difficult to obtain. “Capacity is constrained in some markets,” the report said, “and some commercial insurance policyholders in high-risk urban areas have difficulty obtaining coverage with sufficient limits.”

Assessments such as those fuel concerns that insurance companies are collecting the premiums for terrorism insurance, but not truly taking on the risk, because of the federal government’s backstop.

Still Working, but Still Necessary?

In a recent study, two researchers concluded that preliminary evidence shows insurance companies haven’t necessarily diversified their terrorism products as a result of TRIA. “Primary insurers are less concerned about the costs of bearing the risk from a major loss,” wrote Erwann Michel-Kerjan of the University of Pennsylvania’s Wharton Center for Risk Management and Paul Raschky of Monash University in ­Australia.

Concerns about who is taking on the risk have affected the debate over the future of the law. In 2007, Republicans forced Democrats to scale back their plans for a 15-year reauthorization, arguing that repeat extensions were building a foundation for a permanent federal insurance program.

“I was here for the vote on the first extension, and I supported that extension. I believe there was, indeed, a great calamity in this marketplace. I believe that people in the marketplace needed time to react, to plan, to model. But, again, is this something that is going to go on in perpetuity?” said Texas Republican Jeb Hensarling on the House floor during the 2007 debate. “I simply don’t buy into the argument, Mr. Speaker, that we have a market failure here . . . that somehow, some way, the market can’t create this particular insurance product.”

Corporations, meanwhile, say that the federal program remains vital, and the Coalition to Insure Against Terrorism, a group formed at the time to lobby for a federal backstop, remains its foremost defender. That group — which represents a range of industries, including hotels, insurers, banks, entertainment companies and stadium owners — told Treasury last year that the cost of terrorism insurance has declined considerably. But it warns that the price drop has nothing to do with an evolution in the private market.

“Members do not believe that the general insurance market condition is the primary driver of the affordability and availability of terrorism risk insurance — rather, it is the continued availability of the TRIA backstop and the absence of catastrophic terrorism losses in the United States in recent years,” the business coalition told the Treasury working group.

The coalition also says that the availability of insurance against nuclear, biological and chemical attacks remains limited.

In many ways, it’s a classic case of a government intervention. It’s not what happened as a result of a federal program’s creation — it’s what didn’t happen. “If we hadn’t done it, you would have had people not being able to go ahead,” Frank says . “But construction’s going ahead.”

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