Either allow TRIA to expire and subject the market to uncertainty, higher prices and the potential for insurer solvency;

Or extend a program that likely will prevent development of a private sector solution.

The reporttitled “Federal Terrorism Reinsurance: A Solution Of A Problem”sums up the arguments for and against TRIA. But it appears to give special emphasis to comments made two years ago by former Sen. Phil Gramm, R-Texas, that TRIA was designed in a way that would “destroy the incentive of the industry to do the things that need to be done to get the government out of this business.”

“Two years from now,” Sen. Gramm said at the time, “if we don't change this bill, we are going to be back here, and the same people who are saying today we have to have this bill are going to say you have to extend this bill for another two years, another 10 years, forever.”

The report noted that Sen. Gramm's complaint was that TRIA's company-specific deductibles eliminated any incentive for insurance companies to pool risk and share premiums. Indeed, the report notes, Sen. Gramm's point was that since company-specific deductibles are, in effect, government reinsurance contracts with each and every insurer in the industry, insurers are actually discouraged from pooling risk.

“Opponents of TRIA extension argue that by discouraging the kind of insurance industry cooperation that would allow the industry to build capacity and provide coverage on its own, the government will never be able to extract itself from the insurance business,” the report said.

But the report also identifies the arguments in favor of TRIA extension. First, the report said, TRIA extension would avoid market uncertainties. In addition, TRIA supporters argue that it is far more efficient to have a reinsurance plan in place before any future attacks rather than rely on ad hoc federal appropriations to cover uninsured losses.

There is a widespread presumption, according to the report, that because of the $20 billion appropriation approved by Congress following the Sept. 11, 2001 terrorist attack to help redevelop lower Manhattan, “free” insurance via federal aid would be available following another attack.

But the report said that implicit insurance guarantees encourage economic actors to not only take more risk than if no insurance existed, but also to take more risk than if an explicit, but limited, government insurance scheme conditioned their expectations. “By extending TRIA, supporters contend that the federal government could actually reduce the total amount of taxpayer assistance triggered by a terrorist attack and reduce private-sector risk-taking,” the report says.

Finally, the report adds, TRIA supporters say that without a federal backstop, insurers will be at risk of insolvency if they are forced by states to continue covering terrorism risks, particularly in workers' compensation.

The report noted that the Treasury Department is scheduled to produce a report on TRIA's effectiveness by June 30, 2005. However, the report said, because insurance policies covering potential post-TRIA risks will be written this fall, Congress will be faced with the unpleasant choice of whether to extend TRIA very soon.

Gary Karr, a representative of the Washington-based American Insurance Association, praised the report for saying that TRIA must be addressed soon, but said it misses the mark in three areas.

First, he said, none of the private market alternatives to government reinsurancesuch as commercial mortgage backed securitieshas been able to generate enough capacity to respond to market needs. There is little investor appetite for terrorism risk, he said.

Second, he said the report suggests that insurance operates in a free market, but that is not always so. Many states, he noted, impose rate controls on insurers and refuse to accept exclusions. This makes it hard, he said, to structure actuarially sound terrorism insurance programs.

Third, he said the report is incorrect to state that TRIA has discouraged the development of private reinsurance. To reinsurers, he said, terrorism risk is not much different from war risk, and there is little desire among reinsurers to assume this type of exposure.

Julie Gackenbach, assistant vice president of government relations with the Des Plaines, Ill.-based Property Casualty Insurers Association of America, agreed that the report overstates the possibility of private market solutions. The industry, she said, is looking forward to exploring the possibilities long-term, but it is not feasible to look to the private markets short-term.

Indeed, she noted, the industry examined the possibility of establishing a pooling arrangement for workers' comp, but found it would take 10 years just to build up enough capacity to meet an industry deductible.

Marliss Browder, federal affairs representative for the National Association of Mutual Insurance Companies in Indianapolis, added that the report fails to mention or address the inherent nature of terrorism. “Terrorism risk cannot be predicted or modeled as can tornadoes and hurricanes,” she said. “The most predictive data that could help determine the risk of terrorism is intelligence information which is, and should remain, classified.”

Reproduced from National Underwriter Edition, June 18, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.