One of the top legislative priorities for the insurance industry this year has been to see that the Terrorism Risk Insurance Act, which reinsures carriers for terrorism losses, is renewed before its Dec. 31 expiration date. Indeed, it may have been renewed by the time this magazine gets into your hands. If so, it will be because the House and Senate were somehow able to reconcile the widely divergent positions they held prior to Thanksgiving.

Regardless of whether a new TRIA exists as you read this, the effort to renew the act has provided entertaining political theater. It has affirmed that German Chancellor Otto von Bismarck's famous 19th century observation–”There are two things you don't want to see being made-sausage and legislation”–remains as relevant as ever today.
Particularly entertaining was the hoisting of the Democratic majority in Congress on its own “pay as you go” petard, where it spent months trying to wriggle off. To show they could be fiscally responsible (an issue with which the Republican administration has had a little trouble itself), the Democrats set rules at the start of the year requiring any legislatively mandated spending increase to be offset by savings or revenue elsewhere in the federal budget.
This first caused a problem in the House, where TRIA's backers wanted to extend the act for 15 years, expand it to cover domestic as well as foreign acts of terrorism, and apply it to group life insurance. Their legislation, H.R. 2761, also required insurers to offer nuclear, chemical, biological and radiological terrorism coverage, which TRIA would back, and called for the act to be triggered by a terrorism event causing $50 million in losses, rather than the existing $100 million figure. Then the Congressional Budget Office estimated that the government's tab for all of this would come to $8.4 billion net over the next 10 years alone.
Barney Frank (D-Mass.), chairman of the House Financial Services Committee, which drafted H.R. 2761, at first favored simply waiving the “pay as you go” budget rules, but the House leaders nixed that idea as a little too politically expedient. Instead, the House came up with a “workaround” under which Congress wouldn't approve any spending under TRIA until after an attack. That approach somehow got around the problem, although it struck me as just as arbitrary as waiving the rules. Rep. Paul D. Ryan (R-Wis.) apparently agreed. “I've seen gimmicks in my day, but this takes the cake,” he was quoted as saying in September.
The Senate had its own problems with “pay as you go.” Its reauthorization bill, which it finally passed last month, wouldn't expand TRIA at all, other than to cover domestic acts of terrorism. It also extended TRIA for only seven years. Even so, the CBO estimated that the Senate bill would cost the government $5.1 billion net over the next 10 years.
The Senate Banking Committee got around that problem by adding an amendment to its legislation (S. 2287) that would accelerate TRIA's repayment provisions. The federal government always has been authorized to recoup whatever it pays out under TRIA through surcharges on policyholders. But under the existing law, it could take it years to get its money back. Indeed, the CBO said in its cost estimate for S. 2287 that the surcharges would recover only about $1.5 billion of the estimated $6.6 billion the government would lay out for TRIA between 2008 and 2017. “Surcharges could continue for many years beyond 2017,” the CBO added.
The Senate Banking Committee's notion was to hasten the payback. If a terrorist attack triggered TRIA anytime in the first four years of its proposed seven-year extension, policyholders would have to reimburse Uncle Sam by 2012 for any money it put down (after private insurers first absorbed their required retentions). If the country were hit in the last three years of the extension, policyholders would have to make the government whole for any expenditure by 2017. With these changes, the CBO agreed that the proposed legislation had become revenue neutral. Shortly thereafter, it was passed by the full Senate, and the White House announced it would go along with the bill. Insurers, meanwhile, indicated they preferred the Senate's approach to getting around the “pay as you go” rules to the House's.
While Congress apparently solved the “pay as you go” problem, the problem itself had an air of unreality about it. After all, the objective of the whole game was to come up with a way to cancel out the CBO's loss projections. But does anybody–even in Washington–think those loss projections are much more than a shot in the dark? After all, the CBO was trying to set expected losses for an event that has occurred exactly once in the past seven years. Certainly, the CBO doesn't claim great accuracy for its numbers. “While this estimate reflects CBO's best judgment on the basis of available information, the cost of this federal program is a function of inherently unpredictable future attacks,” the CBO noted in its initial evaluation of S. 2287. “Such costs are likely to vary significantly from the estimated amounts.” (Emphasis added.)
With luck, the solution to the “pay as you go” problem will have prompted Barney Frank to back off from a previous threat to try to extend TRIA in its current form for four months and continue to fight over renewal terms. Regardless, Congress could have–and should have–dealt with this issue months ago by focusing on a couple of realities. First, it long has been evident that a majority of insurers were not going to back a mandate to cover acts of nuclear, chemical, biological or radiological terrorism. Second, the White House made it clear that even if it no longer had the power to shrink TRIA, as it did in the act's 2005 reauthorization, it would veto a significant expansion. Had they acknowledged those realities, the House and Senate could have waived the self-inflicted “pay as you go” problem–Barney was right about that one–passed legislation extending TRIA in more or less its existing form and called it a day.