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.
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?
For many consumers and citizens, the mention of insurance and government elicits fear and loathing. Looking beyond the initial reactions and the stereotypes, we realize that both are necessary components of an orderly, prosperous economy and society. Insurance and government are necessarily intertwined, ranging from social insurance to regulation to market support. There are currently two prime examples of this relationship and the ongoing dance between the private insurance industry and government.
First, the National Flood Insurance Program (NFIP) is in bad shape, $24 billion in debt. In a rare demonstration of fiscal responsibility, the US Congress passed the Biggert-Waters Flood Insurance Reform Act of 2012. The reform would have phased in premium rates that were more reflective of the flood risk and updating the flood maps on which premium rates are based. I say “would have” because the politics of Biggert-Waters has led to its unraveling through subsequent legislation that basically undoes much of the original reform. Politicians’ knees became weak when flood-prone property owners and the realtors who sell such properties were inflamed by the eventual rise in flood insurance premiums. So the government’s fiscal train-wreck that is the NFIP is off the track once again.
The second example is the imminent expiration of Terrorism Risk Insurance Act (TRIA) later this year. After the September 11 attacks, it was apparent that the private insurance industry could not insure the losses connected with a major act of terrorism. In order to stabilize the insurance market and the terrorism exposures of our post-9/11 world, the government stepped in with TRIA which provided a government “backstop” to cover up to 90% of terrorism losses above certain thresholds. The looming expiration of TRIA has rattled the insurance marketplace because of the uncertainty over the future of the government’s terrorism backstop and its structure if it is renewed. There are some credible arguments against renewing TRIA altogether. Insurers are already hedging by writing policies that expire at the same time as the current TRIA law so that they can write new policies with different terrorism coverage provisions in response to a possible world without TRIA, or a radically different TRIA. The point is, once again the government and the insurance industry are very much intertwined, for better or worse.
There are many, many finer points in both the NFIP reforms and the TRIA expiration/renewal that I do not have time to explore here. The larger point that led me to raise these two issues today is the ongoing and unavoidable interaction between the insurance industry and government. Although these examples both originate at the federal government level, there are countless issues at the state government level – Michigan no-fault auto insurance reforms being a prime example. The libertarian in me prefers government to get out of the way of private insurance and let the markets sort it out, but the pragmatic economist in me knows that there has to be a government role in insurance. I just wish the dance between these two giants wasn’t so darn ugly.