Tags: TRIA | terrorism | insurance | event

Congress Tries TRIA Triage

By    |   Tuesday, 09 December 2014 08:38 AM

One of the prominent items for Congress to deal with during the lame-duck session is the extension of the Terrorism Risk Insurance Act of 2002 (TRIA), which established a "temporary" government program to support the insurance industry in the event of another attack on the scale of 9/11. For conservatives it is another object lesson in the process of temporary measures maturing into permanent entitlements.

On Dec. 8, Henry Willis appeared on C-SPAN's Washington Journal as part of the "Your Money" series to talk about the status of the costly federal program. Willis, director of the RAND Homeland Security and Defense Center and a professor at the Pardee RAND Graduate School, spoke from Pittsburgh with C-SPAN host Greta Wodele Brawner, who asked him to explain what TRIA is.

Willis recalled that as of Sept. 10, 2001, companies received terrorism coverage as a free part of their commercial insurance bundle, but as of Sept. 12, when insurance underwriters focused on the risk of terror, they decided to exclude terrorism coverage from the policies. In 2002, Congress enacted TRIA to provide a backstop for the insurance industry so that commercial property owners could cover this risk. When the Act came up for extension in 2007, the definition of terrorism was expanded to clarify that the terrorism did not have to originate from a foreign source. That extension was for seven years and expires at the end of this year.

The current Act provides that to qualify for TRIA coverage an attack must cause more than $5 million in damage to be considered an act of terrorism and total losses to the industry for a year have to exceed $100 million for the coverage to be triggered. If total losses don't exceed $27.5 billion, the industry has to pay the government back. In addition, Willis stated, if losses exceed $100 billion the law is unclear as to how much support the government will provide, and Willis allowed that RAND models indicate that a terrorist event could exceed that threshold under its worst-case scenarios (think "24"). Finally, the law provides for an 20 percent deductible and that the government will advance 85 percent of losses above this deductible, but then the industry is supposed to pay the government back 133 percent of the advance in 10 years.

The status of proposals to extend TRIA is that the Senate has passed a seven-year extension with a $100 million threshold to trigger the government backstop, while the House Financial Services Committee has proposed a five-year extension with a $500 million threshold. Since the program has not been triggered since it was enacted, thus far the costs have been negligible. However, if losses exceed the $27.5 billion figure mentioned above, the Treasury Secretary has the authority to waive the provision that the industry must reimburse the government.

This writer was in the room when the initial Act was approved by a conference between the Senate and House, and when the discretion for the Treasury Secretary was approved, a lobbyist for the industry exclaimed, "We might not have to pay it back!"

The original rationale for TRIA was that it would provide temporary relief for the industry to allow it to devise private-sector coverage, but in the meantime the industry has testified that terrorism is not amenable to such a solution because there isn't enough experience and it is subject to the volition of a terrorist, so it is not an accidental act that can be underwritten.

Industry representatives have warned that unless Congress acts, the construction of the largest real estate projects could be halted because banks would not be able to finance them without terrorism coverage. Moreover, the football stadiums that people see on television would be subject to untold risk. The industry argues further that since everyone knows that in the event of a catastrophic attack the government would step in as it has for hurricanes like Katrina and Rita, the industry is doing the government a favor by entering into these arrangements.

The fact that the real estate industry has not in fact ground to a halt is testimony to the fact that the titans of finance are confident that action will be taken, perhaps in conjunction with the expiration of the current budget deal on Dec. 11. TRIA was enacted before the financial crisis episode of 2008. In the meantime, the Treasury and Federal Reserve have engaged in an array of interventions, such as asset purchases and quantitative easing, that have turned the entire financial sector into a government-sponsored enterprise, and TRIA is just part of this new normal.

(Archived video can be found here.)

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One of the prominent items for Congress to deal with during the lame-duck session is the extension of the Terrorism Risk Insurance Act of 2002 (TRIA), which established a "temporary" government program to support the insurance industry in the event of another attack on the scale of 9/11.
TRIA, terrorism, insurance, event
Tuesday, 09 December 2014 08:38 AM
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