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The Terrorism Risk Insurance Act (TRIA) was enacted in 2002 after the attacks of Sept. 11, 2001. The law was intended to create a shared public-private insurance system for losses due to acts of terrorism. It is scheduled to expire at the end of 2005. The question in the current debate is whether TRIA should be renewed for another limited period of time or whether a long-term solution should be crafted now. Part of the difficulty in the discussion is the very emotional nature of the underlying act of terrorism and our very human response. Two months ago assessments of the chances of an extension of TRIA were mixed at best. Memories of the March 11, 2004, Madrid rail bombings had receded, and there were those who believed that the insurance industry had built sufficient capacity since Sept. 11 to withstand any future losses. In fact, the insurance industry had weathered the Sept. 11 losses, and policyholders’ claims were paid. Then came the July 7 subway bombings in London and then the second, aborted terrorist attempt in that city on July 21, followed by the July 23 attacks on a tourist site in Egypt. These events have re-energized the push to extend or restructure TRIA, and the act now appears likely to be extended, perhaps in a modified form. Extending TRIA is an important initial step to deal with the economic threat of terrorism. Sept. 11 and the subsequent terrorist attacks in other countries reveal the clear need for a long-term mechanism that protects property owners, and thus the U.S. economy, from terrorist attacks. A key part of protecting the value of current property and encouraging the construction of new property is to guarantee property insurance that can cover the large losses from terrorism. This goal is particularly important given that the costs from terrorism are so significant in comparison with traditional losses from natural disasters such as hurricanes. The Insurance Information Institute estimates that losses from Hurricane Andrew — the worst recorded to date in the United States — were just under $21 billion (in 2004 dollars). It also estimates that the entire hurricane season in 2004 caused $22 billion in losses in Florida. By comparison, the estimated losses from the Sept. 11 attacks exceeded $30 billion. Despite this $30 billion loss, some ask why the federal government should support the insurance industry. The better question is whether government should support the common good by fostering a sound economy. Insurance of all kinds (life, health, workers’ compensation, etc.) is an essential part of a sound economy, and property insurance in particular enables new construction and helps keep current buildings occupied (particularly in high-risk areas like New York City and Washington, D.C.). So some form of government action is necessary, and extending TRIA is an important step in addressing the problem. A NATIONAL REINSURER What does TRIA do? Essentially, it acts as reinsurance. Reinsurance is basically insurance for insurance companies, meaning insurers pay money to another insurance company to accept a portion of their insured risks. It is meant to spread risk to a broader economic base. Under TRIA, the risks of a terrorist attack are spread across America. If a terrorist attack (as defined by the secretary of the Treasury) results in insured losses of more than $5 million, then the government partially reimburses insurers for the losses. Each insurer retains losses based on a formula that currently comes to 15 percent of its direct earned premiums. Above that, the U.S. Treasury reimburses 90 percent of industrywide losses up to $100 billion. The insurance industry remains at risk from dollar one, and the government assumes no economic risk for losses exceeding $100 billion. Congress can choose to act beyond that limit if it decides such action is in the nation’s interest. Is this guarantee without precedent? No, there are many instances where states have determined that they must subsidize insurance coverage for economic reasons. Examples include coverage for earthquakes in California and for hurricanes and windstorm damage in Florida. What are the common elements in these state systems? A risk that is too great for private industry to bear and a decision by the state government that the economic well-being of its citizens is threatened by the lack of private insurance protection. For example, if insurers excluded damage from hurricanes in property policies issued in coastal states, little construction would occur in these areas. What institution would finance a mortgage if the building were not protected against loss? Without financing, few houses or commercial structures would be built. Without the protection of insurance, even the very wealthy might hesitate to invest in a home or business that could be severely damaged or wiped out by the frequent storms. With such an impediment to construction, the economies along our coastlines would suffer. To avoid this scenario, states have adopted a common approach of funding a public entity generally by assessments on the insurance industry (and therefore on the policyholders in those states). The entity provides low-cost reinsurance, thus making coverage more affordable to the insured. The funding of the entity spreads risk to insureds beyond those most likely to suffer a direct loss and spreads the cost of an extreme economic loss to a broader financial base. Unlike TRIA, state plans do not dip directly into the public treasury. Yet the citizens (albeit only those in the insured population) ultimately still bear the cost. If this concept of cost-sharing among a broader public is sound for safeguarding the economy from huge losses from hurricanes, it should be acceptable for terrorism, as well. WORSE THAN FLOODS There is even federal precedent for TRIA in the National Flood Insurance Program administered by the Federal Emergency Management Agency. Virtually all property insurance excludes damage caused by floods. To provide flood coverage at affordable prices, a public-private partnership was developed. Private insurers agree to participate by issuing policies, the form of which is mandated by the federal government. In return, the insurers receive the backing of the U.S. Treasury as protection from the immediate effect of extreme losses. The particular flood insurance model, however, is unlikely to be feasible in the context of protection against terrorism. In the case of flood insurance, the population that needs to purchase coverage lives and works in fairly well defined areas at risk for flooding. The majority in these defined areas must purchase flood insurance to obtain financing for property purchases, and the risk is well known to those exposed to loss from flooding. In contrast, the uncertainty about the location or form of a terrorist attack means that the risk of terrorism cannot be so localized, and virtually every individual and business could be required to purchase coverage, which could be prohibitively complicated. We also have to recognize that in dealing with forces of nature, the decisions we make on how to address future losses do not change the risk of a storm or earthquake or flood. We can define flood plains and flood zones and buy flood insurance, and nature does not change its behavior in response to our financial actions. Terrorism, on the other hand, involves human actors who can evaluate the consequences of their attacks. Some commentators have noted that the risk of terrorism may be greater in major economic centers, such as New York, Chicago, or Washington. But that could change as these large cities adopt more security precautions, placing other, less-insured locations at greater risk. We already know that terrorists can choose a range of targets. The Sept. 11 attacks were launched against business and government structures. The Madrid and London incidents attacked transportation facilities. And the bombings in Sharm el-Sheikh, Egypt, targeted a tourist resort. So whatever solution to TRIA is agreed upon, it must treat terrorism as a national problem that requires a national solution in which we all participate. Any terrorism attack on New York or Washington is really an attack on the United States and each of its citizens, and the entire nation should bear the economic risk. LOOK TO THE UK For guidance on how to deal with this problem of terrorism insurance, Congress should also look to the rest of the world — in particular, the United Kingdom. The British have far more experience in dealing with terror on their home ground, and their insurance system has adapted. In addressing bombings by the Provisional Irish Republican Army and other Irish terrorists, the United Kingdom created Pool Re, a reinsurer of last resort. Pool Re is a public-private partnership. Insurers purchase reinsurance coverage from the pool, and the premiums paid create a pool of funds to cover losses. An insurer that pays for coverage has its losses capped at a maximum of $130 million for one incident and $150 million for two incidents within the same year. If Pool Re runs out of funds, then the state treasury reimburses any further losses. When created, Pool Re covered only damage from explosion and fire, but after Sept. 11 it has been expanded to an all-risk form to cover additional perils. At a congressional hearing on July 26, several U.S. insurance industry representatives and state regulators advocated a pooling approach and used Pool Re to illustrate a workable solution. It is certainly a method that deserves close examination and serious consideration. Nevertheless, merely transferring Pool Re across the Atlantic may be insufficient without also examining and dealing with some important issues. For instance, the potential ambiguity over what constitutes an “incident” of terrorism could lead to complications. One need only look to the litigation that followed the destruction of the World Trade Center. The property lessee argued that there were two insured “occurrences” that day: two planes, two towers. Under this interpretation the insurers could have paid an additional $3.55 billion above the amount owed if the actions on Sept. 11 were deemed a single attack. In arguing for this interpretation of two occurrences at trial, the leaseholder/insured was in part successful and in part not. If Congress doesn’t clarify the definition of a terrorist attack, similar litigation is likely to occur again, to no one’s benefit. In addition, any debate should recognize that the United Kingdom presents a different historical situation from the United States. In bringing this model to the United States, a key issue will be how to integrate our state-based system of insurance regulation with this national solution. INTO THE FUTURE In addressing the issue of public coverage for terrorism losses, Congress could act simply to extend TRIA to Dec. 31, 2007. This is certainly better than allowing TRIA to lapse, but it merely postpones the task of finding a long-term solution for the underlying issue. More helpfully, Congress could establish a special committee to examine options for a long-term solution. The panel should be instructed to encourage participation by all interested parties and then to give Congress and the president a concrete proposal by next summer. The overall goal should be to develop the details of a public-private partnership that could be implemented by the start of 2008. In the end, terrorism is a public issue affecting every one of us. Congress should recognize that it requires a carefully considered solution and more than a private response.
Joseph A. Carabillo, a former executive in the insurance industry, teaches insurance law at Georgetown University Law Center.

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