The Terrorism Risk Insurance Act of 2002 (TRIA) is set to expire in 26 days, and today’s Wall Street Journal opinion page editorialized about the measure. The gist of the editorial is that TRIA was supposed to be a temporary measure in the aftermath of the 9/11 attacks, but it now seems to be becoming a permanent government program. The WSJ suggests that the insurance industry have had ample time since 2001 to develop actuarial models for the terrorism risk, and points out that the government would certainly step in (as it did in 2002) once again if a truly catastrophic event were to occur. Therefore, why should taxpayers continually be on the hook for the TRIA backstop more than a dozen years after the 9/11 terrorist attacks?
Those arguing in favor of extending TRIA include powerful business interests who fear that economic damage will result from an absence of insurance capacity for the terrorism risk. They suggest that without the government backstop provided to the insurance industry by TRIA, there will be little to no appetite for providing any insurance protection whatsoever against terrorism losses. Given the current volatile state of affairs in the world, that may well be true. But what about the notion that the private insurance industry can and should develop actuarially sound rates for this exposure? Perhaps the most sensible solution is a compromise suggested by Reps. Hensarling and Neugebauer whereby TRIA is extended for five years but the threshold of the government backstop is gradually raised. This would force the business-world and specifically the insurance industry to handle a gradually increasing portion of the risk. Structured this way, everyone can plan accordingly and the economic disruption can be minimized. Sounds like a reasonable approach to me, and I’m no fan of permanent government programs for any industry. What do you think?