Today, we are joined by three witnesses who have evaluated and written extensively on the Terrorism Risk Insurance Program, including Mr. Tarique Nageer, Terrorism Placement and Advisory Leader with Marsh; Dr. Howard Kunreuther, Co-Director of the Wharton Risk Management and Decision Processes Center; and Mr. Baird Webel, Specialist in Financial Economics with the Congressional Research Service.

The terrorist attacks on September 11, 2001 devastated U.S. citizens, households and businesses.

In the wake of those attacks, Congress passed and the President signed into law the Terrorism Risk Insurance Act of 2002 to establish the Terrorism Risk Insurance Program, or TRIP, and to stabilize the market for terrorism risk insurance.

Since then, Congress has reauthorized the Program three different times in 2005, 2007 and 2015.

My goal in each reauthorization was to build on existing data to find ways for the private insurance industry to absorb and cover the losses for all but the largest acts of terror, ones in which the federal government would likely be forced to step in were the program not there.

Congress made several improvements to the Program during the 2015 reauthorization. It increased the program trigger from $100 million to $200 million in increments of $20 million each year; increased the level below which insurers are subject to mandatory recoupment $2 billion each year to what is now a floating amount based on insurers' deductibles; and decreased the coinsurance rate from 85 percent to 80 percent in 1 percent increments each year.

That bill garnered overwhelming bipartisan support in the Senate with a vote of 93 to 4.

The Program is once again set to expire on December 31, 2020.

Well ahead of that expiration date, the Banking Committee has already started meeting with key stakeholders and is exploring whether there are additional balanced reforms to improve the Program and reduce taxpayer exposure without having a material negative effect on the cost and take-up rates for terrorism coverage.

In 2018, the Treasury Department issued a report on the Program's effectiveness, which also discussed key developments in the marketplace for terrorism risk insurance.

In addition to Treasury concluding in the report that “The Program has accomplished its principle goals identified in TRIA,” Treasury also observed that “Private reinsurance of terrorism risk has significantly increased under the Program, and there is now increased private reinsurance capacity for the exposures that remain wholly with the private market under TRIP.”

Each of today's witnesses has written extensively on the Program's effectiveness, structure and market developments.

In 2018, Dr. Kunreuther co-authored a report on the Program, which found that “Overall, TRIA has worked well. It has stabilized a very disrupted market in the aftermath of 2001, making terrorism insurance widely available and affordable. Take-up rates among enterprises small and large are rather high and premiums a few percentage points of what firms pay for their property insurance, even though cost and take-up rates vary widely by size, industry, geography, and line of business.”

In its 2019 Terrorism Risk Insurance Report, Marsh discussed take-up rates, as well as cost, geographic and corporate trends in terrorism risk insurance in the U.S., as well as globally.

Marsh emphasized in the report that “…the federal backstop created by TRIA and reauthorized as TRIPRA – along with similar public-private mechanisms that exist in other countries – remains crucial to the continued stability and health of the property terrorism insurance market.”

Finally, the Congressional Research Service has published numerous reports, including one as recently as April 2019, providing a comprehensive overview of the Program, its history, statutory changes in past reauthorizations and key considerations for this Congress.

During this hearing, I look forward to hearing more about: specific considerations in evaluating the Program's effectiveness; how the Program has evolved over time; how the marketplace has responded to changes to the Program made by Congress in previous reauthorizations; what additional room exists to further reduce taxpayer exposure; and how different market participants may react to changes in different Program levers.

Thank you all for joining us today to share your perspectives and research.

U.S. Sen. Sherrod Brown (D-OH) – ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs – delivered the following opening statement at the hearing: 

Thank you Senator Crapo for holding the Committee's first hearing on the reauthorization of the Terrorism Risk Insurance Program. While the Program expires at the end of next year, after the lapse at the end of 2014 we all understand that we need to start early to make sure that does not happen again.

The Terrorism Risk Insurance Program is critical to keeping our economy healthy. TRIA isn't just a program that helps in the event of a terrorist attack. Many businesses rely on this insurance in order to get access to credit, even in healthy economic times. Without government assistance, the insurance market would be unable to provide affordable insurance to these businesses, including small businesses, across the country.

While TRIA was initially designed to be temporary after 9-11, Republicans and Democrats have agreed several times since then that there is value in keeping it. People may hear the word “terrorism” and think this doesn't apply to their community, that only businesses in places like New York and Washington or big national landmarks would need to worry about insuring against terrorism.

But unfortunately, terrorism isn't confined to big cities and the groups perpetrating it don't only come from abroad. Ohio communities that have faced threats from white supremacists groups know all too well that this is a risk we all have to contend with.

That's why I'm glad we've been able to work on it in a bipartisan way. We all agree there are some issues that the free market just can't solve on its own. This is one of them, and it's an example of the kind of successful government intervention that is only possible when we come together as a country.

There are some in Congress who would prefer the United States not make these kinds of guarantees – whether it's for workers' pensions and Social Security, for mortgages and affordable housing, for healthcare and food for low-income families, or for protections against economic destruction after terrorist attacks. Some politicians just aren't interested in coming together on behalf of Americans that live in Mansfield or Cleveland or Chillicothe in Ohio, or in Boise or Idaho Falls from the Chairman's state.

I disagree, and I think the Terrorism Risk Insurance Program is emblematic of our ability to use government to make the economy work better for everybody, especially during the most difficult of times. As we look at other issues on this committee, I hope we will remember the success of this program, and our capacity to use government to solve tough problems when we work together.

In the last bipartisan authorization of the Program, we worked to strike a balance, which seems to work well. By increasing the program trigger to $200 million and gradually reducing the government's share in the losses, we've made the program efficient without decreasing access to coverage. We have an opportunity to make the program even stronger by creating certainty in the marketplace through a long-term extension of the program. I hope we can work together to do that.

I look forward to hearing the witnesses' testimony today.

Thank you, Mr. Chairman.

There is not unanimous support for renewing the law. The Consumer Federation of America recently sent the following letter to the committee:

Dear Chairman Crapo and Ranking Member Brown,

Consumer Federation of America, a nonpartisan nonprofit organization, urges you to review the extraordinary growth and level of the property/casualty insurance industry's surplus capital as you contemplate the next steps for the Terrorism Risk Insurance Act (TRIA). It is our assessment that industry has the capacity to insure properties against terrorism losses without continuing the massive taxpayer subsidies it has been provided under TRIA, and we believe the program should not be renewed. As we discuss below, an alternative to ending TRIA would be to charge an actuarially sound premium to insurers for the federal backstop that TRIA makes available.

By the end of 2018, the surplus of the property/casualty insurance industry (the amount of money backing up the business the insurers write) was $742 billion, according to data released by the Insurance Services Office and American Property Casualty Insurance Association.1 Prior to the 9/11 attacks, the industry's surplus was $326 billion, or only 44 percent of the current surplus. TRIA was not, of course, in effect at the time of 9/11 and the industry survived that large claim in 2001 without much difficulty.

The current industry surplus of $742 billion dwarfs the $27 billion (in 2019 dollars) of insurer losses from 9/11. Even in the extremely unlikely event of a claim or series of claims totaling four times larger than 9/11, the industry is financially positioned to handle the losses. Under the current rules of TRIA, we estimate that insurers would be responsible for about $85 billion of losses before the federal reinsurance kicked in. Without TRIA, the industry would be responsible for an additional $23 billion, the full $108 billion of such an extraordinary event or series of events. That is well within the capacity of the insurance industry without any need for a federal bailout.

The key measure of the safety and soundness of the property/casualty industry is its ratio of net written premiums to policyholder surplus. In recent years, because of the increase in weather-related catastrophic events and fear of terrorism, the ratio considered to be safe by experts has been lowered from 2.00 to 1.50. However, at the end of last year, the industry's ratio stood at an extremely safe level only 0.82. The after-tax effects of $85 billion of industry losses from a terrorist event equivalent to four 9/11s would only increase this ratio to a still extremely safe level of 0.93. If TRIA expired, the ratio, after paying $108 billion claims from four 9/11 size events would be a mere, and still overcapitalized 0.97. Indeed, the industry could sustain a series of claims 12 times the size of 9/11 and still maintain a safe premium to surplus ratio of 1.47.

It is clear that the industry does not need any taxpayer support for even extreme terrorist events. Since the industry does not need TRIA, why is it urging Congress to renew the act? One explanation for industry insistence that TRIA continue unchanged is that, despite the absence of any significant terrorist losses since 9/11, they have become risk averse on the issue, preferring extreme caution to (a) the risk-taking role that is the purpose of the industry and (b) the loss mitigation role in which the industry develops safeguards to help insureds make properties less vulnerable to loss. As an example of what should be expected of the insurance industry, we note more appropriate responses from the sector in years past. In response to increasing auto accident risks, insurers developed the Institute for Highway Safety to make roads and cars safer; the industry developed Underwriters Labs to make homes safe from electrical appliance risk; and insurers invented lifeboats for cruise lines and developed safe boilers in reaction to increasing claims for those risks. But with limited terrorism exposure, the industry has less incentive to address terror loss mitigation and resilience.

Another explanation is that insurers are profiting from TRIA. In 2007, the Congressional Budget Office estimated that, from 2008 through 2012, the cost to U.S. taxpayers would be $3.1 billion, with an additional $3.3 billion expense projected through 2017. CFA estimated at that time that the total subsidy from 2002 to 2012 was $7 billion and now estimates that the corporate welfare to insurers from 2002 to date approaches $10 billion. The subsidy occurs because the federal reinsurance program in TRIA, which backs up the private insurers, is free – no premiums are charged. Had actuarially sound premiums been charged, the Treasury would have collected nearly $10 billion in premiums that would be reserved to offset future terrorist attack costs. To this end, the industry appears to support the promise of a permanent government giveaway to surplus-rich insurers, even though TRIA was never intended to be permanent.

Given the devastating loss of life and property and the social and cultural shock of 9/11, we acknowledge the possibility that an event an order of magnitude more destructive than 9/11 could occur. Such a large-scale, widespread act of terror – possibly involving nuclear, biological, chemical, or cyber-attacks – may lead us to, once again, contemplate federal taxpayer assistance for insurers. Therefore, we propose that Congress eliminate TRIA and replace it with a mechanism in FEMA designed to react to the details of any such extreme event and provide taxpayer funded coverage for an act of terror only if, and after the industry surplus is diminished by 30%.

It is not surprising that insurance giants want to keep a free reinsurance program and further expand their profits, but at a time of record-breaking federal budget deficits and near all-time high insurer surpluses, we question the wisdom of providing multi-billion dollar subsides to an industry that can easily afford to insure several terrorist events even larger than 9/11. If there are instances where it has been difficult to obtain insurance coverage, the Federal Insurance Office should work with appropriate state insurance departments to examine and efficiently mitigate these deficiencies.

While it is our view that a reauthorization of TRIA is not necessary and that an alternative backstop for an extreme series of events could be developed, we also offer an alternative to non-renewal of TRIA. TRIA is a reinsurance policy for property and casualty insurers. Its primary difference from reinsurance is that the insurance companies that benefit from this ceding of coverage above a certain amount do not pay any premium for capping their exposure. If Congress feels that insurance companies need access to reinsurance and that it is not available in the private market, then taxpayers should receive a premium for that protection. This was the approach used in the Riot Reinsurance Program, under which the federal government profited from the sale of riot reinsurance. In other words, if TRIA is maintained, all insurers that rely on TRIA for coverage above the 20% deductible plus 19% of losses above that deductible should pay a reinsurance premium to the Treasury of the United States to spare burdening the public with further subsidies to this industry.

We would be happy to discuss our views on TRIA further at your convenience. Thank you for your consideration.

Sincerely,

s/ J. Robert Hunter

CFA, Director of Insurance

s/ Rachel Weintraub

CFA, General Counsel and Legislative Director

1 Property/Casualty Insurance Results: 2018, ISO and APCIA, available here.