A hold on the renewal of the Terrorism Risk Insurance Act may have been Senator Tom “Dr. No” Coburn’s last act in a long career as a relentless fiscal conservative, and with the Senate adjourning for the year tonight, the program seems to be dead. For now, at least: The large 2002 federal insurance program is overwhelmingly popular with Coburn’s colleagues, so don’t expect it to stay moribund. (The bill passed the House 411–4.)
The fight may seem obscure, but it’s a good example of a federal program that looks cheap on the budget and has some powerful fans, but isn’t good policy and or a proper role of the federal government.
The Terrorism Risk Insurance Act, or TRIA, was created after 9/11, when insurers decided that damages from terrorist attacks wouldn’t be covered by standard insurance policies because they were too hard to model and potentially too expensive. (These are policies that cover not just property damage but workman’s compensation, etc.)
So about a year after the attacks, the federal government agreed to backstop the insurance industry in the event of terror attacks. Insurance companies turn to firms called “reinsurers” to cover their own risks; the federal government now essentially dominates the reinsurance market for terrorism policies. On its face, this should seem problematic for fans of limited government and free markets — but Coburn has definitely picked a tougher fight than trying to defund fruit-fly research or cowboy poetry.
At first, TRIA would pay for any level of losses, then Congress set a floor of $100 million in losses to trigger payments, and the proposed extension of TRIA Coburn blocked would raise that floor to $200 million. Payments TRIA makes would theoretically be recouped from the industry — that’s what the law says — but it seems possible or even likely that the federal government would go easy on the debtors after a major terror attack, exposing taxpayers to losses. Then, when it comes to a hypothetical major terror attack, taxpayers are on the hook for any industrywide losses over $27.5 billion under the proposed TRIA extension. (A huge, vaguely insurer-friendly analysis of the program and its history is here.)
So the risks being borne by taxpayers are not huge, but they’re not negligible. Plenty of reasonable people argue that this is a good, even necessary, idea because the private market can’t price the risk of terrorism. It’s certainly a hard thing to do, but why is that a problem the federal government needs to fix? It’s not even a problem all firms worry about: Only about 60 percent of businesses in the market for terror insurance carry it.
It’s also not nearly as big of a problem in most places in America as it is in New York, California, and a few other states where insurers aren’t allowed to exclude terrorism coverage from standard policies. It’s no surprise that two of TRIA’s biggest defenders have been Representative Pete King and Senator Chuck Schumer of New York. Of course, New Yorkers’ disproportionate interest in getting TRIA renewed suggests, rightly, that the program is potentially unfair in the way it treats parties across the country. Some of these inequities are rather complicated, but they’re real: It’s an unfair program.
A few arguments for TRIA verge on the ridiculous: Defenders briefly claimed the Super Bowl couldn’t happen in its absence, before the NFL said that was nonsense. The RAND Corporation argued earlier this year that TRIA actually makes the U.S. more resilient to terrorism because it would boost the economy, increasing the amount of resources available to defend against or recover from terrorism attacks, or something. Cato’s Mark Calabria took apart this argument and others on NRO, even suggesting that underpricing terrorism risk, as a federal backstop would do, could increase the damages from future terror attacks.
In the short term, it’s possible that allowing markets to misprice risk really will improve economic performance. Former Bush adviser Glenn Hubbard and other researchers argued back in 2005 that in the short term, extending TRIA would boost the economy, but that a private replacement for terror insurance could develop. That will only come to pass (it still hasn’t) if the program is substantially reduced in scope or set to expire at some future point. That’s not what the current renewal bill before Congress does.
So Schumer and King aren’t entirely making it up when they say that, for instance, without the program the price of insurance would rise and some projects might take a little longer to finance. But that’s not a fundamental defense of extending TRIA for the long term.
Tom Coburn may be almost alone on this one, but he’s used to that, and it doesn’t make him wrong.