Terror insuranceAs TRIA is set to expire in December, reauthorization by Congress is not a sure thing

After the 9/11 attacks, the U.S. insurance industry sustained an estimated $32.5 billion in total losses. In 2002, to encourage insurance companies to continue covering terrorism as part of commercial policies after many dropped the coverage for fear of more financial loss should another terror attack occur, Congress passed the Terrorism Risk Insurance Act (TRIA), a public-private partnership that provides a federal backstop against losses from a terrorist attack. Under the legislation, the federal government would cover 85 percent of losses incurred from a terrorist attack if the total insurance industry losses range between $100 million and $100 billion. Insurers would be required to pay a deductible. When insurers’ losses are under $27.5 billion, the federal government would recoup its contribution through surcharges on all property and casualty policies. Losses of more than $100 billion in total would be covered by affected policyholders, and not insurers or the government.

The Pew Charitable Trusts reports that there has yet to be a TRIA payout due to the absence of a large-scale terrorist attack since the law went into effect. Still, there continues to be significant increases in terrorism insurance purchases. A report by Marsh found that 62 percent of businesses purchased terrorism insurance in 2013 — up from about 27 percent in 2003.With TRIA expected to expire on 17 December 2014, businesses and some members of Congress are advocating the extension of the legislation, but two pending proposals in Congress have yet to gather the needed support to reauthorize TRIA.

A bipartisan Senate bill passed unanimously by the Banking Committee in June, would extend TRIA for seven years and make minor modifications. The House version passed by Republicans in the Financial Services Committee without Democratic support, would extend the program for five years, and would require the federal government to assist insurance companies only when losses amount to $500 million, instead of the current $100 million. Committee chairman Jeb Hensarling (R-Texas) believes that the insurance industry should cover far greater portions of the risk. “By the industry’s own admission, taxpayers are currently forced to bear incalculable amounts of risk with only a fleeting promise that they might someday get a portion of their investment back,” Hensarling said in support of the House bill.

In addition to property insurance, TRIA also covers workers compensation. Since insurers have to include terrorism coverage in those policies, an end to TRIA may force some insurance companies to drop their workers compensation policies. “If there are on-the-job casualties because of terrorism, insurance companies have no say. They have to pay out,” said Michael Dworsky, an associate economist at the RAND Corporation who has studied TRIA. Dworsky adds that some insurance companies fear that without TRIA, they could become insolvent should a terrorist attack occur.

Nearly every state requires businesses to provide workers compensation and when businesses are unable to obtain their coverage with private insurers, they could end up relying on a state fund (as New York provides) to get workers compensation coverage. Should a terrorist attack occur, New York taxpayers could end up paying for the losses. “The governors should be worried because workers comp is a state responsibility and there’s more potential for the whole market to get disrupted,” Dworsky said.

While Congress debates how to extend TRIA, some groups are opposed to the entire legislation. “This is a program that really just benefits a few fat cats in five cities, sort of a giveaway program,” said Robert Hunter, director of insurance for Consumer Federation of America, a nonprofit consumer advocacy group. The Heritage Foundation has labeled TRIA “welfare for insurance companies,” and the Cato Institute insists TRIA shifts the cost from insurers and property owners to taxpayers.