In 2002, Congress passed the Terrorism Risk Insurance Act in an effort to bring certainty to a market severely disrupted by the 9/11 attacks. After the attacks and before the act’s passage, terrorism insurance coverage completely dried up. Consumers were unable to find coverage at affordable rates, leading to stalled or cancelled real estate and construction contracts. The White House Council of Economic Advisers estimated that 300,000 jobs were lost as a direct result of these aborted projects.
Since that time, TRIA has brought stability to the insurance marketplace, increased capacity and decreased prices, all while costing the taxpayer nothing. As the voice of the commercial insurance consumer, the Risk and Insurance Management Society believes it is time for Congress to pass another long-term extension.
Justification for allowing TRIA to expire relies on the unsubstantiated belief that the private insurance industry would continue to offer necessary terrorism coverage capacity at affordable rates. A 2009 study conducted by Aon found that 70 percent to 80 percent of the commercial property insurance market would discontinue terrorism coverage if TRIA were allowed to expire. A recent study by Fitch Ratings seconded that opinion, stating that it is “unlikely that substantial private market capacity would arise as a substitute to [the Terrorism Risk Insurance Program Reauthorization Act] coverage if the program is allowed to expire.”
This drastic reduction in capacity would lead to a dramatic increase in price. Many businesses will simply be unable to afford coverage, leaving them uninsured. These businesses would then be in breach of lender agreements and lines of credit which require them to have terrorism coverage on collateral. The effect on construction, corporate expansion and public works projects would be devastating at a time when our country is slowly working its way out of the Great Recession.
The argument has been made that TRIA does nothing to lower the cost of terrorism, but simply shifts that cost to the taxpayer.
TRIA will actually save the taxpayers money. As Superstorm Sandy has shown us, Congress is quick to step in to fund relief and recovery of areas hit by disasters. This would certainly remain true in the event of a major terrorist attack on U.S. soil; however, with TRIA in place, there is an established mechanism through which the private insurance industry will be responsible for a substantial portion of the losses.
Another argument made is that TRIA somehow discourages businesses from relocating from high-risk areas. This implies that only major metropolitan areas on the East and West coasts are at risk of a terrorist attack. One need look no further than the 1995 Oklahoma City bombing to know that is not the case.
Any venue that brings together a large group of people is a potential terrorist target, including universities full of students, hospitals full of patients and football stadiums full of fans.
In arguing for the expiration of TRIA, opponents inaccurately equate terrorism risk with natural catastrophe risk. Insurers price natural catastrophe coverage based on a long history of such events. This wealth of data pertaining to when and where events occurred, or nearly occurred, allows for more accurate modeling of potential events and resulting losses. We do not possess the same wealth of experience with regard to terrorist events. Let’s hope that we never do.
Equating terrorism risk with natural catastrophe risk ignores another key difference between the two: the human element. Natural catastrophes are fortuitous events; terrorist attacks are not. For a terrorist event to occur, a plot must be hatched and then executed by one or more individuals. The motives, targets and actions of these actors are ever-changing and their motives are frequently affected by government actions that modelers and insurers are not privy to. This factor only adds to the difficulty in modeling and pricing terrorism risk.
In short, TRIA brings a degree of stability and certainty to a segment of the insurance market that desperately needs it. Without TRIA, insurance carriers will not offer terrorism coverage at competitive rates, if they offer at all, leaving many businesses uninsured and exposed. The ripple effects from canceled construction and lending agreements will cost jobs and unnecessarily slow economic growth. Any terrorism losses would be born exclusively by the government, and therefore the taxpayers. Reauthorizing TRIA seems like a very small price to pay to avoid these hardships.
John R. Phelps is president of RIMS, the Risk and Insurance Management Society.