Using Insurance to Address Terrorism Risk
The Terrorism Risk Insurance program, set to expire this year, needs to get more than a holiday ride into an extension; any bill should include a requirement to consider more broadly the government’s role in insurance against catastrophic risks.
Given current budget and immigration imbroglios, few on the Hill have time to focus on other important issues, let alone think ‘big picture’ now. One issue at risk of being lost in the race to the holiday recess is risk itself — that is terrorism risk insurance and the broader question of how to manage catastrophic risks.
The federal-government-backstopped terrorism risk insurance program expires at the end of this year. The House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has had serious questions about the program and has not supported the seven-year extension of the Terrorism Risk Insurance Act (TRIA) that the Senate passed 93-4. Political negotiations continue, with a TRIA extension of some sort likely to pass. However, the last-minute nature of the dealing has not allowed for the much-needed larger review of the program and the national interest in moving toward more risk-based insurance. Such a review over the next 18 months should be required in any final bill.
The debate around TRIA should raise important questions: What risks can be assessed? How do we want actors to respond to those risks? What is the appropriate role for government, if any, in facilitating that response?
We cannot simply ask government to stay out of private markets. Government has been and will always be the insurer of last resort, as Harvard Business School Professor David Moss pointed out in his 2004 book, “When All Else Fails: Government as the Ultimate Risk Manager.” The political reality is that government helps the public manage disasters. This can happen ex ante, with well-conceived government support for resilience programs and insurance backstopping, or ex post via disaster aid or loans.
For instance, in the area of natural hazards — which can be modeled — we should want to move toward less government influence on rates and terms but may want to consider more required coverage — so the post-event payouts could be reduced. The federal flood insurance program with its subsidized rates wrongly encouraged continued building in flood-prone areas. Changes in the program are moving toward more market-based risk assessments, but issues about rate setting and participation rates still continue.
Encouraging appropriate reactions to the realities of Mother Nature is one thing, but we may not want our actions to be held hostage to terrorists’ intent. Terrorism risk insurance helps to allow continued growth in our major cities. But we should also want to encourage insurance terms that promote resilience against all hazards. This is the type of broader discussion that is needed not just on terrorism insurance but on all types of related hard-to-insure risks, including some issues not explicit in the existing TRIA program such as cyber or chemical, biological, and radiological incidents.
It is necessary to continue to assess the availability and take-up rates of terrorism risk insurance. However, there should be a discussion of whether, after an incident, government will inevitably help a business that did not have terrorism insurance and how fair that is to the neighboring business that did buy terrorism coverage. We need to know more than what the House Financial Services Committee-passed bill required the GAO to assess, i.e., the effect of charging reinsurance premiums up front. Any measure should look more broadly on who has insurance, how the insurance pool is structured and what can be learned from this. As the Organization for Economic Cooperation and Development comparison of terrorism risk programs shows, some states require coverage, some explicitly cover chemical, biological, and radiological incidents, etc. There are many models. Which is best for us?
Catastrophes have gotten bigger with increased economic development, but the gap in insurance coverage worldwide has also increased. We share our neighbors’ risks one way or the other. Any TRIA renewal would do well to include a requirement to consider these broader issues of catastrophic risk that need addressing.