Study: Short-Term TRIA Renewal Recommended; Long-Term Solution Needed

A 224-page report from the Wharton School at the University of Pennsylvania recommends that Congress renew the current federal Terrorism Risk Insurance Act backstop but “only for a relatively short period of time.”
The study suggests that the trigger for providing TRIA coverage should be raised from $5 million to $500 million.

The Wharton study concludes that there is a need for long-term government involvement with the private sector in providing terrorism insurance. It stresses that after renewing the TRIA short-term program, Congress should study the entire issue and various long-term options before installing a permanent program.

The Wharton Risk Management and Decision Processes Center published “TRIA and Beyond,” an analysis of the Terrorism Risk Insurance Act of 2002, which expires Dec. 31, and what roles the public and private sectors should play with respect to terrorism coverage. A nine-person team, led by Howard Kunreuther, co-director of the center, and Erwann Michel-Kerjan, a senior research fellow at the center, produced the report.

TRIA now requires insurers to offer coverage against foreign terrorism. The federal government agreed to underwrite most of the risk for the three-year life of TRIA after the private reinsurance industry largely withdrew from coverage following the Sept. 11 attacks.

The U.S. Treasury and the Congressional Budget Office have argued that TRIA was meant to be a transitional program and that private markets should have been able to find ways to offer coverage at reasonable rates by now. However, the Wharton report suggests that the necessary changes and adjustments have not yet been made and that some form of long-term private-public partnership is needed.

Long-term solution
The Wharton report calls upon Congress to name a national commission on terrorism risk coverage to comprehensively assess the issues involved before permanent legislation is enacted.

The study says that the current private-public TRIA partnership should be “modified so it is more equitable and efficient” and that Congress should consider other arrangements to deal with catastrophic losses in the long run. These include allowing insurers to establish tax-deferred reserves, actions that could stimulate private reinsurance, the possible creation of mutual pools and federal reinsurance with explicit premium charges.

The report discusses factors that currently prevent the private market from confidently pricing terrorism coverage risk, as well as factors including state mandated workers’ compensation and fire coverage that restrict free markets.

“The mandatory coverage of terrorism losses in workers’ compensation policies in all states and mandatory coverage in approximately one-third of the states of any losses from fires that occur following a terrorist attack, whether or not the firm has purchased terrorism insurance, opens up insurers to the possibility of large losses that could lead to some insolvencies,” notes the report.

The funding for the report came from 10 industry-affiliated companies and was provided before the study began.

The insurance industry has already taken steps to utilize policy forms that would exclude terrorism coverage on Jan. 1, 2006, should TRIA not be renewed. Congress is expected to act on TRIA in the next weeks or months.

“I would hope that TRIA will be renewed with appropriate modifications but that over the next two years Congress will also authorize a study of the whole terrorism insurance program,” Kunreuther said.

Topics Catastrophe