Terrorism Insurance: Another Subsidy That Will Not Die
In the aftermath of Sept. 11, 2001, Congress created a program in which taxpayers would backstop private insurance in the event of another major terror attack. The program, called the Terrorism Risk Insurance Act (TRIA), was supposed to be a temporary effort to both stabilize the insurance industry and prevent a broader economic meltdown after insurers stopped writing property and casualty coverage for many urban commercial developments.
Well, the P&C insurers regained their footing, as they always do, after an initial period of uncertainty. Indeed, they were again writing terrorism policies even before the law passed. Yet, the federal program lives on. Indeed, on Dec. 18, Congress renewed it for another seven years. It is now officially immortal.
This isn't about preventing terror attacks. Reducing the risk of these events is obviously the job of government. Insuring against financial losses is not.
As my TPC colleague Nada Eissa reminds me, TRIA is an object lesson in how temporary programs never go away and how, when left alone, they worm their way into the market and hinder its development. As Congress and the White House think about what they are going to do about the mortgage mess, they should keep this little episode in mind.
The first incarnation of TRIA actually expired back in 2005. At that time, the Treasury Dept. certified that the law achieved its goals and the Administration argued there was no need to renew it. The Republican Congress ignored the advice and extended the law for another two years. President Bush, who wasn't vetoing bills then, signed it.
Now, the Democratic Congress has given the insurance subsidy yet another lease on life—this time for seven more years. It might have been worse. The House version of the bill would have extended TRIA for 15 years.
Although the bill was sold as an effort to create a market for terrorism insurance, it is hard to imagine it will do anything but stifle its development. TRIA works like this: If an attack does more than $100 million worth of damage, taxpayers will pay 85% of claims up to $100 billion (after the industry pays a deductible). But that cap is misleading since the government is unlikely to walk away from losses so catastrophic that they'd exceed that amount.
So carriers can sell policies at artificially low prices, which will give them even fewer reserves from which to pay claims, increasing the likelihood they'll turn to the government for yet another bailout. Thus, TRIA joins dozens of special interest tax breaks and scores of direct spending programs that serve no clear purpose and are probably counterproductive, but will never die.