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Treasury TRIA Report Unduly Sanguine about Private Market’s Ability to Provide Terrorism Insurance

Conclusion Not Consistent with Report’s Own Data and Analysis

INDIANAPOLIS (June 30, 2005)—“Overall, our assessment is that the immediate effect of the removal of the TRIA subsidy is likely to be less terrorism insurance written by insurers, higher prices and lower policyholder take-up.”

That, in a nutshell, is the common-sense finding of a long-awaited Treasury Department report on the Terrorism Risk Insurance Act of 2002. “NAMIC and virtually all other credible insurance industry observers have predicted that outcome all along, which is why we have strongly urged Congress to pass legislation to extend the Terrorism Risk and Insurance Act (TRIA) for two more years,” said NAMIC Director of Public Policy Robert Detlefsen. The Act is scheduled to expire at the end of 2005.

At the same time, however, Detlefsen expressed dismay at the report’s unduly optimistic conclusion that “over time, we expect that the private market will develop additional terrorism insurance capacity.” That expectation is based on the authors’ belief the lack of available and affordable terrorism coverage caused by TRIA’s expiration will “spur the buildup of surplus as insurers tap into capital markets; the development of private reinsurance and other risk-shifting mechanisms; and additional mitigation and terrorism deterrence efforts by policyholders.”

Yet the report is silent as to what these capital market solutions and “other risk-shifting mechanisms” might be, or how they would work. As for “development of private reinsurance,” that market already exists under TRIA. As the Treasury report acknowledges, primary insurers’ deductibles under TRIA have steadily risen to several billion dollars in the case of some large insurers. Reinsurers could theoretically offer coverage for these deductibles, but few have done so because they lack the capacity for covering the risk.

The large deductibles under TRIA have likewise created—again, in theory—a demand for the creation of capital market risk-bearing instruments such as terrorism-related catastrophe bonds. To date, however, only two such bonds have been issued, but both are multi-peril bonds rather than pure terrorism bonds tailored to a specific type of attack.

The Treasury report acknowledges that the few terrorism risk models developed since 9/11 are for the most part unreliable in assessing terrorism risk, stating that “the losses of specific attacks are not known with certainty, and the probabilities assigned to attack occurrences are speculative.” “This is consistent with what insurers have been telling Congress,” said Detlefsen. “Terrorism risk is inherently uninsurable because it combines the potential loss magnitude of a natural disaster with the unpredictability of a single intentional act.”

Nevertheless, Treasury Secretary Snow asserted in a letter to House Financial Services Committee Chairman Michael Oxley that “continuation of the [TRIA] program in its current form is likely to hinder the further development of the insurance market by crowding out innovation and capacity building.”

Secretary Snow went on to suggest that the administration “would accept an extension only if it includes a significant increase to $500 million of the event size that triggers coverage,” as well as “increases [in] the dollar deductibles and percentage co-payments….” That would be virtually tantamount to no program at all, observed Detlefsen.

“Interestingly, one way to increase private market capacity for terrorism coverage would be for the government to make changes in tax, accounting, and regulation to make it less costly for insurers to hold surplus capital and allow prices to adjust freely,” Detlefsen noted. “Yet that approach is not even mentioned in the Treasury report or in Secretary Snow’s letter.”

Posted: Thursday, June 30, 2005 12:00:00 AM. Modified: Friday, July 08, 2005 11:03:36 AM.

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