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TRIA extension places increased burden on insurance industry

Insurance industry executives are breathing easier since President George W. Bush has finally signed a bill extending the Terrorism Risk Insurance Act (TRIA) for two more years, just about a week before the controversial program was due to expire on Dec. 31.

The extension was no slam dunk for the industry, confronted with critics accusing insurers of seeking a "bailout," a White House determined to downsize the government's exposure, as well as a Congress widely split on whether to simply renew the structural status quo or completely reinvent the federal reinsurance backstop.

In the end, the minimalists on the Senate side won out over those in the House seeking a more ambitious rethinking of the TRIA system, leaving the long-term future of federal involvement in the terrorism insurance market very much in doubt.

The triggering event, the threshold for the TRIA program to go into effect, is raised from $5 million to $50 million in the newly extended legislation. However, the old threshold will remain in effect until the end of March 2006. In 2007, the trigger will be raised to $100 million. The Bush Administration had been pushing for higher insurance industry participation.

A large-scale terrorist attack could be more damaging today than before 2001."
--OECD report.

The House had pushed for an expanded TRIA program that would cover group life for the first time while also establishing "silos" that would set different industry retention levels depending on the line of coverage. The Senate, however, wanted to keep the current structure while raising the trigger and retention levels and eliminating certain coverages from the program.

The House bill, passed overwhelmingly, was dead on arrival as far as the Senate was concerned. Indeed, no formal conference committee was ever convened, as is normally done to iron out differences between bills-one a telling indication that the Senate was in no mood to compromise on its bare-bones extension approach.

With expiration looming, and with Congress eager to break for the holidays, house members bowed to political reality and signed onto the Senate's version rather than risk seeing commercial policyholders outside of workers' compensation insureds left bare for terrorism risks.

TRIA’s extension provides important coverage of a potential terrorism insurance gap that was exposed in a report published in June 2005 by the Organization for Economic Co-Operation and Development (OECD).  The report highlighted the pending terrorism insurance gap in the USA and Europe and the lack of enthusiasm by insurers and investors to risk their own capital.

Two examples: Chicago's O'Hare airport had $750 million of terrorism insurance at an annual premium of $125,000 prior to the 9/11 attacks; afterward, it paid $6.9 million for $150 million in coverage. San Francisco's Golden Gate Park was unable to obtain any terrorism coverage after 9/11, and its non-terrorism coverage was reduced by 80% to $25 million, for which its premium doubled to $1.1 million.

The OECD report said "a large-scale terrorist attack could be more damaging today than before 2001." That is because fewer than half of all U.S. companies and only 3% of eligible German companies are believed to have sought terrorism-related coverage.

No terror bonds

OECD researchers also found that although investors have displayed some appetite for what are known as catastrophe bonds — high-yielding securities underwritten to provide a financial cushion against such natural disasters as earthquakes and hurricanes — they have almost no interest in terror bonds. "The private market capacity is inadequate," says Peter Ulrich, managing director of Risk Management Solutions, which designs catastrophic risk models.

Federal Reserve Board Chairman Alan Greenspan concurred saying that Congress cannot expect the private insurance system to bear the financial risk of terrorism alone, suggesting that the federal government’s involvement in this area is necessary.

The Insurance Information Institute has reported that insured losses from the 9/11 attacks approached $32.5 billion. That was 30 times more costly to the insurance industry than any prior terrorist attack and nearly 11/2 times more expensive than the $21 billion cost of Hurricane Andrew in 1992, the USA 's most expensive natural disaster. The insurance industry's 9/11 losses did not stop there. OECD researchers found that claims payouts combined with downturns in the stock and bond markets, in which insurers are heavily invested, cost them about $200 billion in capital.

Going forward, the 2006 World Cup soccer championship in Germany serves as one model of how the capital markets might eventually complement private insurers in covering terrorism risks. To provide a financial guarantee for the World Cup host, Wall Street investment bank Credit Suisse sold $260 million in securities that provide a backstop against the tournament's cancellation.

Underwritten in 2003, the World Cup bonds were hailed as a breakthrough in spreading the financial risk against terrorism. The soccer bonds pay investors a handsome yield while subjecting them to the risk of losing up to 75% of their capital. But the financial markets have been slow to find investor appetite for terrorism-related securities in other venues.

For now, Congress is likely to look at whether insurers should be given tax and accounting incentives to become more active in terrorism insurance.

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