In recent weeks, the renewal/extension of the Terrorism Risk Insurance Act (TRIA) has been a very hot topic. I’ve written about it a few times myself, here and here. To the relief of many, the newly convened 114th Congress has now extended TRIA to 2020. The House vote was 416 to five, in a rare display of unfettered bipartisanship.
But not everyone is happy about TRIA’s extension. The Wall Street Journal’s Opinion Page called the measure’s renewal a “vast corporate welfare handout.” Though this may be blasphemy among my risk management and insurance colleagues, I must confess to my libertarian leanings and admit that I am sympathetic to the WSJ editorial board’s disappointment. On the other hand, I do take issue with some of the WSJ’s assertions. In particular, the WSJ stated that “The private [insurance] market has healed [since the 9/11 attacks] and could price in and model the danger of terror attacks, but the permanent Washington backstop interferes with such commercial evolution.” I’m not so sure I buy that.
Terrorism risk, particularly anything on the scale of the 9/11 attacks, is very difficult to price and model. Among the textbook concepts that my students learn are the characteristics of insurable risks, and two such characteristics are that the loss potential should not be catastrophic, and the chance of loss must be calculable. House fires and slip/fall liabilities meet all of the criteria for insurable losses, but using commercial airliners as weapons of mass destruction or detonating dirty bombs most definitely do not meet the aforementioned criteria.
The plain truth is that 9/11 changed everything. Before that catastrophic event, terrorism exclusions were rare. After 9/11, terrorism exclusions are all but certain in the absence of the federal backstop known as TRIA. My libertarian economic philosophy is conflicted over this reality, but I would not characterize TRIA as a “vast corporate welfare handout” as the WSJ did yesterday.