James T. Brett is president and chief executive officer of The New England Council, the nation’s oldest regional business organization, which is dedicated to promoting economic development and a high quality of life in the six-state region.
As Congress enters the final 50 legislative days of the 108th congressional session, it is critical that an issue of particular importance to the New England region is addressed. Congress must extend the Terrorism Risk Insurance Act program for an additional two years and the secretary of the Treasury must extend the “make available” provision to ensure greater market certainty.
TRIA was enacted in 2002 after it became evident that policyholders in the transportation, energy, real estate, manufacturing, retail and entertainment industries were finding it difficult, if not impossible, to find adequate insurance coverage in the event of a terrorist attack due to the fact that insurers did not have the ability to price potential exposure to terrorism risks. It was vital both for the region and the nation at that time that terrorism insurance legislation was enacted.
The fundamental purpose of TRIA was to return stability to the market so that policyholders could get the coverage they needed in a viable insurance marketplace. The legislation accounted for much of the complexity of the nation’s unique insurance market and provided a federal backstop against potential losses.
The enactment of TRIA enabled real estate development projects to go forward, contributed to better credit ratings for commercial mortgage-backed securities and allowed the construction and transportation industries to recover without significant disruption. While looked at in isolation this may not seem noteworthy, it has, however, been an important part of the nation’s economic recovery after the events of Sept. 11, 2001.
Despite our hope that the market would develop a private-sector mechanism that could provide capacity to absorb losses from terrorist acts in the 18 months since TRIA took effect, it has not done so. As reflected in a recent U.S. Government Accounting Office report on the issue, insurers and reinsurers have been unable to find a reliable way to price their exposure to terrorist losses in the absence of a cap as provided under TRIA.
As the nation and the world have struggled with how to predict and evaluate terrorist risks, so too has the insurance industry. The models traditionally used by insurance experts to evaluate risks simply have no place in the context of terrorism. Historical data as to frequency or severity provides no clues. Likewise, the type of attack, which could be of a nuclear, biological, chemical or radiological nature, complicates the ability to actuarially predict the probability of an event.
It is, therefore, necessary that Congress and the Bush administration consider the implications of current global uncertainty on the insurance industry, which has resulting effects on the many economic sectors that require insurance to conduct business. Should a significant terrorist event occur and the market is without a private mechanism or federal backstop to capture the losses, the effects would be felt on every major industry. As we support efforts by our Department of Homeland Security to both prevent acts of terror on our soil and respond to the human tragedy in the event a despicable act should occur, so too must we be able to respond to the economic ramifications.
Given the timing of underwriting practices and state regulatory requirements, Congress cannot delay action on this important legislation. Congress must act this year to extend the TRIA program for an additional two years and the Treasury secretary must extend the “make available” provision to prevent disruption of the insurance business cycle. This would provide sufficient time for Congress, the Treasury and others to consider a more permanent solution and to avoid market uncertainty this fall.
