Politics & Policy

How Not to Address Terrorism

(Lightkeeper/Dreamstime)
Let the Terrorism Risk Insurance Act expire.

House Republicans and Senate Democrats are in the midst of negotiating a deal to extend the Terrorism Risk Insurance Act (TRIA), which expires at the end of this year. They should save themselves the trouble and protect the taxpayer by allowing TRIA to expire. TRIA is no more than corporate welfare wrapped up in the flag. If anything, it has the potential to increase losses from a terrorist attack rather than reduce them, as industry claims.

TRIA is simply a mechanism for allocating the losses from a terrorist attack. It does nothing to deter terrorists. Do we truly believe that terrorists say to each other, “Let’s not attack that building, it’s insured”? Under the best of circumstances, TRIA has zero impact on the cost of a terror attack. To justify TRIA, one must demonstrate why the taxpayer instead of market participants should bear its costs.

TRIA, like all insurance, is about the pooling and sharing of risk. The most likely physical targets of TRIA would be either public buildings or trophy commercial properties, like the World Trade Center. In the case of public buildings, the public already backstops these properties. 

With private commercial properties, there are many possible mechanisms. For instance, a REIT (real-estate investment trust) structure provides a ready avenue for spreading the risk of losses that may result from terrorism. A REIT by its very nature is a diversified vehicle for spreading risk. A common form of risk-sharing is the publicly traded corporation. As most trophy commercial properties are owned by publicly traded corporations, the risk of loss from a terror attack is already spread out across shareholders. Again, the argument must be: Why are taxpayers thought to be better able to bear that risk than shareholders in publicly traded corporations, given the concentrated holdings of corporate equity? Why should middle-class taxpayers subsidize the 1 percent?

The same holds for defenses of TRIA based on workers’ compensation. Let us not forget that the workers’ compensation system is already an insurance system. You don’t need TRIA as an avenue for pooling terrorism-related workers’ compensation risk. The workers’ compensation program is already set up to do so. Does that mean some employers would see their premiums go up? Perhaps, but again, why should the taxpayers bear this risk instead of employers? There’s no free lunch here, just the allocation of losses.

It would be bad enough if TRIA simply redistributed losses from corporate America to taxpayers, but TRIA runs the risk of increasing the losses from terrorism. If developers faced the full cost of their design choices — say, that between a glass building façade or reinforced concrete — they would build safer structures. We’ve sadly seen this play out in the national flood-insurance program, where subsidies have encouraged poor construction while also encouraging families to live in harm’s way. Even the Congressional Budget Office has acknowledged that TRIA lessens the incentives to reduce losses from a terror attack. Let’s hope we never find out.

Facing the full costs of their choices, companies may well choose to locate their activities elsewhere. That’s a good thing, as it reduces the potential losses from a terror attack. Arguments that commercial construction would come to a halt without TRIA are simply absurd. The absence of TRIA may well force changes in leverage, design, or the location of real-estate transactions, but these are appropriate responses and should be welcomed.

Perhaps the most important lesson of the financial crisis was that when you underprice risk, people make poor choices. That has been repeatedly demonstrated when Congress has attempted to hide the costs of certain activities, like subprime-mortgage lending. Similarly distorting the pricing of terrorism risk will also lead to poor choices.

The insurance industry’s initial reaction to 9/11 was the correct one: have states allow for the exclusion of coverage for terrorism, as it is excluded for damages resulting from wars. The obstacle was that California, Florida, Georgia, New York, and Texas would not provide such exclusions. While I am reluctant to see preemption of state insurance laws, the creation of TRIA has dragged the federal government into this field and therefore demands a national solution.

A simple fix would be for the federal government to allow for an exclusion of terrorism coverage nationwide. These few states are significant enough to form their own voluntary risk pools. If Florida can establish a state-run homeowner’s insurance fund, then surely New York can form a state terrorism-risk pool without federal involvement or backing.

Short of ending TRIA, Congress should at a minimum increase the losses required to be borne by the insurance industry before TRIA kicks in. There’s tremendous capacity today in both the primary and the re-insurance markets. Similar to catastrophic-risk bonds, other capital-market solutions to sharing terror risk can be developed once the federal government gets out of the way.

— Mark A. Calabria is director of financial-regulation studies at the Cato Institute.

Most Popular

PC Culture

Hate-Crime Hoaxes Reflect America’s Sickness

On January 29, tabloid news site TMZ broke the shocking story that Jussie Smollett, a gay black entertainer and progressive activist, had been viciously attacked in Chicago. Two racist white men had fractured his rib, poured bleach on him, and tied a noose around his neck. As they were leaving, they shouted ... Read More
World

Ilhan Omar’s Big Lie

In a viral exchange at a congressional hearing last week, the new congresswoman from Minnesota, Ilhan Omar, who is quickly establishing herself as the most reprehensible member of the House Democratic freshman class despite stiff competition, launched into Elliott Abrams. She accused the former Reagan official ... Read More
PC Culture

Fake Newspeople

This week, the story of the Jussie Smollett hoax gripped the national media. The story, for those who missed it, went something like this: The Empire actor, who is both black and gay, stated that on a freezing January night in Chicago, in the middle of the polar vortex, he went to a local Subway store to buy a ... Read More
U.S.

Questions for Those Who Believed Jussie Smollett

The “we reported the Jussie Smollett case responsibly” contention has been blasted to smithereens. Twitter accounts and headlines in the Washington Post, the New York Times, and the Los Angeles Times reported as fact Jussie Smollett’s wildly implausible allegations, and many other journalists did so as ... Read More
U.S.

White Progressives Are Polarizing America

To understand how far left (and how quickly) the Democratic party has moved, let’s cycle back a very short 20 years. If 1998 Bill Clinton ran in the Democratic primary today, he’d be instantaneously labeled a far-right bigot. His support for the Religious Freedom Restoration Act, the Defense of Marriage Act, ... Read More
Elections

One Last Grift for Bernie Sanders

Bernie Sanders, the antique Brooklyn socialist who represents Vermont in the Senate, is not quite ready to retire to his lakeside dacha and so once again is running for the presidential nomination of a party to which he does not belong with an agenda about which he cannot be quite entirely ... Read More