Why do so many people still believe TRIA is nothing but a handout to the insurance industry, when it is so obvious that the market cannot function without Uncle Sam’s support?
Oh, sure, insurers were able to come up with over $20 billion to cover World Trade Center losses, making it one of the worst insured disasters ever, but the private terrorism insurance market promptly dried up. There’s no way anyone would have written the coverage if Congress hadn’t passed TRIA, and then extended it until the end of 2007—other than workers’ comp carriers, of course, who have no choice in the matter.
However, even with the Terrorism Risk Insurance Act providing a federal reinsurance backstop, private carriers aren’t exactly being left off the hook here.
Indeed, the individual insurer deductible to trigger coverage under TRIA this year is 17.5 percent of 2005 direct earned premiums—jumping to 20 percent of 2006 premiums next year.
And the industry retention trigger—“just” $10 billion in 2003--is now $25 billion, rising to $27.5 billion next year.
That doesn’t sound like a bailout to me! The industry must lose a fortune before Uncle Sam comes to the rescue. That’s not a bad deal to force carriers to write this still very unpredictable, high-severity exposure.
Thanks to TRIA, coverage is available, and more and more buyers are taking carriers up on the offer—while premiums for the risk are falling, as we reported last week. (Click here for the full story.) But if TRIA is allowed to expire, the rug will be pulled out of the market so quickly, the entire economy could be sent tumbling.
Hopefully, the report on the terrorism market due from the President’s Working Group on Financial Markets by Sept. 30 will reflect these realities and serve as a wakeup call to the Feds, but I am not overly confident that the Bush Administration—not exactly known for its policymaking integrity—will back up the industry on this critical point.
What will it take to convince Congress and an extremely skeptical White House to get on board once and for all on the need for federal terrorism reinsurance? What are your thoughts???
Comments (3)
Congress and the White House will get on board after the collapse of our economy, which in my view will be worse than the period immediately after 9/11, and before the passage of TRIA.
But by then the Republicans will have lost the House and probably the White House. It is hard to understand how the Administration can be so blinded by ideology that they are oblivious to reality.
Posted by Warren Heck | September 8, 2006 11:40 PM
Posted on September 8, 2006 23:40
First of all, congrats on launching the blog.
As for this post--I would not myself use the term "bailout," but I would seriously ask why the design of the program is so peculiar.
1. There is, from what I understand, zero burden on insurers to perform risk mitigation services.
2. There are no constraints on insurers who by deliberate act or their market history put themselves in harm's way by concentrating their book in high-risk areas.
3. There are--please prove me wrong--no pressure on insurers to cover all terrorirst-related losses. This is the most peculiar of all gaps in this program, supposedly designed to make the country safer (financially at least) from a terrorist attack.
Posted by Peter Rousmaniere | September 11, 2006 7:08 PM
Posted on September 11, 2006 19:08
Pete,
Good points, sir, but I would argue that since the trigger point for reinsurance offered by TRIA is at such a high level, it certainly would not encourage insurers to write terrorism risk without regard to their accumulated exposure.
However, by passing TRIA, what Uncle Sam did was preclude insurers from excluding the exposure, thus adding trememdous risk to any commercial insurer's portfolio.
Of course, workers' comp insurers faced this all along, as they never had a choice, with or without TRIA.
sf
Posted by Sam Friedman | September 12, 2006 9:24 AM
Posted on September 12, 2006 09:24