Politics & Policy

The Terror of Tria

Leave terrorism insurance to the insurance business.

The end of the year is rapidly approaching and Congress is embroiled in a heated debate over the so-called budget-reconciliation process that will provide some needed savings in mandatory spending programs while preserving and extending recent tax cuts. Although the budget discussions are very important, most Americans are probably unaware that Congress may soon pass legislation that could actually increase the burden on taxpayers, putting them on the hook for billions of dollars in the event of a future terrorist attack.

Conservatives in the House of Representatives often criticize the Senate as “the place where good bills go to die,” but this time, the Upper Chamber, thanks in large part to the leadership of Banking Committee Chairman Richard Shelby (R., Ala.), has been far more responsible in tackling renewal of the “terrorism reinsurance” program that was created in the wake of the 9/11 attacks.

Originally conceived as a “temporary” bridge to promote the creation of a private market for terrorism insurance, the Terrorism Risk Insurance Act (TRIA) was intended to be a three-year program — set to expire at the end of this year — in which the federal government covers 90 percent of all terrorism-related insurance losses (up to $100 billion a year) after individual insurance companies pay an initial (below market rate) deductible. Under the current program, taxpayers would be forced to cover large insurance claims resulting from war or acts of terror on American soil because the government-built backstop has a loss-trigger that is too low.

Treasury Secretary John Snow has gone so far as to say that extension of TRIA is unnecessary, and that the private market is now able to resume insuring against terrorism. Nonetheless, the insurance industry has managed to convince House Financial Services Chairman Michael Oxley (R., Ohio), House leadership, and a variety of advocacy groups that continued federal subsidies are essential. Thus, some kind of extension will likely pass; the question is whether it will protect taxpayers and assist in the creation of a private market or not.

That is why the National Taxpayers Union and other citizen groups vastly prefer the Senate bill to the version now moving through the House. The Senate legislation recognizes the temporary nature of the program and places terrorism insurance on the right path to full private-market participation. It protects taxpayers in part by increasing the portion of losses insurers would have to pay and eliminating certain lines of coverage from the program. Also, the amount of overall loss that triggers a federal payment would rise to $50 million in 2006 and $100 million in 2007. Current law places the trigger at $5 million. The government’s maximum liability would remain $100 billion.

The House bill, on the other hand, is an abomination and should be rejected out-of-hand. This legislation does little to reduce taxpayer exposure to terrorism losses and would actually increase payouts for larger terrorist attacks by having the program pay for 95 percent of all losses above $40 billion instead of the 90 percent called for in current law. The House bill also extends coverage into group life insurance and “domestic” terrorism, a significant expansion of the program, and establishes a Commission on Terrorism Risk Insurance to review the future of the program. Contrastingly, the Senate bill more sensibly utilizes an existing structure (the President’s Working Group on Financial Markets) toward the same end. Finally, the House bill looks to expand the program to natural disasters, with authorization of a study on how to do just that.

Like so many other federal programs, when TRIA was created it was described by its congressional advocates as a limited expansion of government’s power into the marketplace. It was clear then and is even clearer now that some in Congress intend terrorism reinsurance to be only the first government intrusion. It would of course be ideal if Congress followed Secretary Snow’s advice and avoided further meddling in the insurance sector. Barring that outcome, hopefully the House will follow Senator Shelby’s lead by putting terrorism reinsurance on a glide path to a freer market, rather than caving in to well-connected special interests and creating yet another permanent federal insurance program.

Paul J. Gessing is director of government affairs for the National Taxpayers Union


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