The approved legislation reflects the administration's desire to wean insurers off federal assistance as much as possible but still preserves a meaningful backstop. Under terms of the compromise legislation, TRIA will be triggered upon the certification of an act of foreign terrorism causing $50 million or more in losses in 2006. The trigger goes up to $100 million in 2007; it had been just $5 million in the old act. Insurers' deductibles, which had been 15% of their previous year's direct earned premiums, increase to 17.5% this year and 20% the next. After the deductibles are met, the government pays 90% of covered losses up to $100 million.

Lines of coverage also were scaled back. In keeping with the Senate version of the bill, the compromise legislation drops coverage for commercial auto insurance, burglary and theft, professional liability and farm owners multiperil. While the House was willing to go along with dropping commercial auto, it also wanted to add coverage for group life insurance and for acts of domestic terrorism. This strikes me as thrusting the camel's nose further under the tent, rather than withdrawing it, as the House purported to be doing.

Rep. Michael Oxley (R-OH), the chairman of the House Financial Services Committee, acknowledged that the extension of TRIA was a good thing but lamented that it should have been better. “Important reforms in the House legislation that would have helped the insurance industry to eventually assume all terrorism risk have been left behind, again at the recommendation of the Senate and the Administration. In this short-sighted legislation, we have missed a golden opportunity to frame the TRIA program more effectively and to move to a more market-based solution,” Oxley said. “When members (of Congress) inevitably are asked again to renew this 'temporary' program, they will correctly conclude that in 2005, the can was simply kicked down the road without any real reform.”

With all due respeect, I have to disagree. Granted, the House version of TRIA would have created a Commission on Terrorism Risk Insurance, made up largely of insurance industry representatives, to encourage the creation of private risk-sharing mechanisms, including mutual reinsurance facilities and pooling arrangements, as a way to cover the terrorism exposure. But on the other hand, it also directed the U.S. comptroller general, in consultation with insurance industry representatives, to essentially check out the need for terrorism insurance in the personal-lines market . To me, this sounds like an effort to get the government more involved in terrorism insurance, not less. The comptroller general also was supposed to investigate whether the government ought to get involved in a natural-disaster insurance program–which should be viewed as the entirely separate animal it is. So not only was the House bill not helping the insurance industry “to eventually assume all terrorism risk,” but it also appeared to be interested in shifting other exposures to taxpayers.

Not that insurers should be expected to cover all terrorism risks anyway. Insurers always are going to have difficulty predicting and prefunding terrorism insurance losses, and it could well be that there will be a permanent need for some kind of governmental involvement. That said, the government's role should be as small as possible. Over the next two years, while the industry has TRIA's protection, it should do everything it can to figure out to what degree it can capably assume more of the terrorism exposure. With budget deficits as high as they are, simply saying it can't be done is not an option. Providing unsubsidized (or at least less subsidized) terrorism insurance away from major metropolitan areas or prominent targets like nuclear power plants might be a good way to start. Certainly, insurers also should explore pooling arrangements and other nontraditional mechanisms. Taking such steps would be the best way to persuade the feds to keep a hand in where it is absolutely needed.

Congress did the right thing.