Insuring Against Terrorism
The attacks on September 11 cost Al Qaeda roughly $500,000 to plan and execute, but created up to $500 billion in economic costs in the United States. The insurance industry paid more than $30 billion in claims for a risk it had not anticipated before 2001. As a result, terrorism risk insurance for businesses became expensive and difficult, if not impossible, to obtain.
In response, Congress passed the Terrorism Risk Insurance Act, or TRIA, in 2002, and renewed it in 2005. The program provides for a sharing of terrorism risk between the government and the private commercial insurance market, subject to specific limitations regarding what lines of insurance are affected, which types of terrorist attacks are covered, when federal support kicks in, the percentage of loss retained by insurance companies, and how the government will be reimbursed.
The House of Representatives yesterday passed a 15-year extension of TRIA. The issue now moves to the Senate, which may favor a more limited measure. The current Terrorism Risk Insurance Program expires on December 31, 2007.
The Bush administration wants to see the program eventually phased out, despite the fact that Treasury Secretary Henry Paulson favored government support while he was chairman of Goldman Sachs. Paulson was right then and Congress is right now to extend the Terrorism Risk Insurance Program.
As long as the United States faces a significant threat from Al Qaeda and other such networks, we must ensure that the U.S. economy—Osama bin Laden’s declared target—is properly protected. If this threat constitutes a war as the president suggests, the government should be expected to share responsibility for managing the terrorism risk that its policies directly influence.
The Iraq invasion and occupation in 2003 exacerbated the terrorism threat to the United States, as the recent National Intelligence Estimate acknowledges. Four and a half years later there is a general consensus among foreign policy experts that the threat is not decreasing. Yet the Bush administration still would expect the private sector alone to pick up the tab if another attack occurs.
The Center for American Progress sponsored a symposium on the issue earlier this year. Participants favored extending government support to the private insurance market for terrorism risk insurance that would be far more limited and expensive without the needed help.
Insurance to cover another terrorism attack along the scale of September 11 became scarce and expensive immediately after the attacks, particularly in major metropolitan areas that could be future targets such as New York, Washington, Chicago, Los Angeles, and Houston. This uncertainty had broader economic impact and also security implications. Post-attack recovery would be slower and economic losses higher—an objective repeatedly cited by bin Laden himself—without adequate terrorism risk insurance.
Terrorism risk insurance has been widely available at an affordable rate with the government reinsurance protection. Take-up rates by commercial property owners have steadily increased, particularly in presumed target cities.
The extension of the program makes sense, but it is also important that specific provisions are consistent with the program’s security purpose, which is to guarantee that the United States is able to recover rapidly from a future attack. By minimizing the economic loss and disruption of a terrorist attack, we prevent groups such as Al Qaeda from achieving their strategic objective.
Not every line of insurance requires government support—symbols of our economic strength like the World Trade Center towers are targets, while your personal house or car are not. But the program should ensure that businesses that could be significantly affected by terrorism have the insurance coverage they need. Where potential gaps exist, the government should provide support until it is clear that private markets can meet the broader social and economic requirement.
Several principles can guide the on-going debate:
- Terrorism risk insurance should be viewed as a vital dimension of national preparedness. At the same time, the existing approach should be viewed as temporary, not long-term. A three-year extension is too short, but a 15-year extension is too long. Something in the middle—seven to 10 years—is more appropriate. The ineffective federal recovery program for Hurricane Katrina demonstrated that it is better to have an established program in place before the next attack than invent one after the fact.
- In the short-term, the government’s objective should be to provide the maximum possible coverage for affected companies in lines of insurance where the private market has demonstrated gaps. Commercial property should remain the primary program focus as it faces a significant threat of terrorist attack, but workers’ compensation coverage should be provided as well. Since states mandate this coverage, small businesses are put at significant risk with little ability to manage it.
- The existing program covers foreign-sponsored attacks, but excludes domestic terrorism. It is becoming difficult, if not impossible, to distinguish foreign-sponsored attacks from domestic ones given the emerging nature of terrorist networks. If an attack is perpetrated by an American citizen inspired by Al Qaeda, how will it be interpreted? The program must create clarity, not uncertainty. Define terrorism appropriately, but cover all incidents within the boundaries of the United States.
- The government and the private sector need to develop long-term mechanisms to manage terrorism risk. Over time, private markets should be able to cover most of the risk, but no single approach will be adequate. The development of mutual risk pools, catastrophe bonds, and other instruments will attract adequate capital into the private insurance market. The government should consider favorable tax treatment as an incentive.
- Government involvement should narrow as private markets better understand the threat of terrorism, but some sort of shared public-private arrangement will still be necessary to cover the risk posed by weapons of mass destruction, particularly a nuclear threat, and even a pandemic that could endanger tens of thousands of people.
States and the federal government already cover severe events like floods or earthquakes that are considered uninsurable. Extreme forms of terrorism are no different. Reauthorizing the Terrorism Risk Insurance Program is the right move at this time to protect America’s economy.
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