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The Terrorism Risk Insurance Act, created by Congress with strong bipartisan support in the wake of the Sept. 11, 2001, terrorist attacks, is a piece of legislation that has enabled the private insurance markets to provide an essential type of coverage that otherwise wouldn’t exist. It has helped create thousands of jobs, has cost next to nothing and gives private markets incentives to take a first-loss position in the event of another terrorist strike.
In short, it is legislation that works and that can be embraced by individuals throughout the political spectrum today.
Terrorism risk insurance provides economic protection against terrorist attacks on people and property. Following the tragic attacks of Sept. 11, reinsurers withdrew from the terrorism risk insurance market, forcing insurance carriers to exclude terrorism coverage from policies. That left policyholders exposed, slowed economic activity and stalled construction.
Since 2002, TRIA and its subsequent extensions have provided continuity to the marketplace so that policyholders — American businesses large and small — are able to obtain the insurance coverage they need to manage terrorism risk, grow their businesses, create jobs and protect the workers they employ.
While TRIA was originally intended to be a temporary measure — a bridge to a time when reinsurers returned to the marketplace — reinsurers remain unable to accurately measure the type, frequency and potential losses from a large-scale terror attack. A recent analysis by Bloomberg Government indicated that “there is no reason to assume that reinsurers will re-enter the market if the TRIA program expires, and every reason to assume that the availability of coverage will fall.”
At almost no cost to the taxpayer, TRIA has made it possible for businesses to purchase terrorism risk coverage for more than a decade. Rather than simply shift cost onto the federal government, the plan requires insurers and policyholders to bear the first dollar loss of up to $100 million in annual claims resulting from terrorist attacks.
Plus, insurers must meet a deductible of 20 percent of their prior year’s premiums — a substantial amount for any insurer — before the government shares in the cost of losses above that level. Through the plan’s recoupment provision, the government is required to recoup any federal payments of up to $27.5 billion and has the discretion to recoup government payments in excess of that amount.
According to a RAND Corp. study, taxpayers are better served if TRIA remains in effect rather than being allowed to expire by Congress. TRIA allows the insurance industry to play a larger role in compensating losses caused by smaller — and presumably more likely — terrorist attacks by sharing responsibility for catastrophic terrorist attacks with the U.S. government. TRIA replaces government exposure with private capital, because insurers retain the cost of all but the largest terror incidents, and even in the large events the private sector bears a significant share of the losses.
The attacks of Sept. 11 had a profound economic impact: the loss of a million jobs, the delay or cancellation of more than $15 billion in real estate transactions in 17 states, a 6-year low in commercial construction. In short, the lack of availability of terrorism insurance for commercial policyholders had a very real and far-reaching effect on the economy.
In contrast, enactment of the terrorism insurance plan in 2002 helped spur billions of dollars in new construction and created thousands of new construction jobs.
Acts of terrorism are man-made, infrequent, potentially catastrophic and coordinated to overcome loss mitigation efforts, which means quantitative risk models can’t be used to accurately analyze the risk. These tools only work for exposures to disasters such as hurricanes, where there is extensive loss experience.
Unlike natural disasters, terrorist attacks are purposeful strikes against America and the American way of life, therefore concentrating on high-value or life-dense targets. Terrorism has no season, no region, no reliable pattern.
Clearly, terrorism continues to pose a threat to our nation, to American businesses and to our economy, in spite of the fact that businesses across the nation have spent hundreds of millions of dollars on enhanced security measures and risk mitigation since Sept. 11.
Economic security is central to homeland security. It is what terrorists are targeting. Without adequate insurance coverage, America’s economic stability is totally exposed. TRIA was part of an overall approach to protect the U.S. economy, including the Patriot Act and establishment of the Department of Homeland Security.
Involvement here is the proper role for our government because national security is primarily a federal responsibility. Unless the federal plan is continued, terrorism risk will once again be uninsurable, and we would expect a period of profound economic havoc, posing a very real threat to our nation’s security.
Now is the time for Congress to address the problem and enact an extension.
Martin DePoy is coordinator of the Coalition to Insure Against Terrorism, which represents businesses and organizations in the transportation, real estate, manufacturing, construction, entertainment and retail sectors. He is also a senior member of the staff at the Bockorny Group.