Terrorism insurance

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The threat of terrorist attacks on the homeland won't go away when democracies areestablishedin Afghanistan and Iraq, or when a Middle East peace accord is signed. Like it or not, the threat of terrorism is with us for the long-term.

The recent attack in London serves as a reminder that our enemies are still cunning, committed and capable of carrying out senseless acts of terrorism at home and abroad. Despite enhanced security measures put in place since September 11, the freedoms we take for granted make America vulnerable to future attacks. The fact remains that such attacks are the biggest threat to our economy and are completely unpredictable — making them virtually impossible to insure.

The federal government has taken several important steps to both prevent future attacks and to mitigate the potential devastating damage such attacks can have on individual businesses and the nation's economy. A new cabinet-level federal agency — the Department of Homeland Security — was formed, intelligence gathering was consolidated and our military attacked the terrorists where they live.

On the economic front, Congress enacted the Terrorism Risk Insurance Act (TRIA) in 2002 to help ensure that terrorism coverage was available to those businesses that want and need it. TRIA put in place a three-year financial backstop that provides a degree of certainty about the maximum losses that any individual insurer would pay as a result of a terrorist attack. This certainty has helped foster what private market there is for terrorism insurance.

TRIA's looming expiration date of Dec. 31 — combined with the recently released Treasury Department report that recommends that the current program not be extended and that the federal government's role in insuring terrorism risks be reduced — puts into focus the options Congress faces on this complex and critical issue. Congress must decide whether to allow TRIA to expire and let the private insurance market assume the entire financial risk of future terrorist attacks or replace TRIA with a long-term program that shifts more responsibility to the private sector.

The Treasury Department report clearly recognizes the need for an ongoing federal role in the terrorism insurance arena and acknowledges the successes of TRIA in ensuring market stability, availability of coverage and economic growth since the September 11 tragedy. More importantly, the Treasury report reinforces the fact that it is impossible for anyone — insurers or government agencies — to predict the size, location or frequency of terrorist attacks. This uncertainty makes terrorism an uninsurable risk.

Eliminating federal participation in the terrorism insurance equation by allowing TRIA to expire will have significant and long-lasting consequences on the economy. Some consumers may find terrorism insurance prohibitively expensive, while others may not be able to secure coverage at any price. Without such coverage in place, businesses will be less likely to embark on new ventures, curtailing job growth, tax revenue and economic expansion.

Financial experts agree that a terrorist attack on the homeland is the biggest threat to the economy. These same experts, including Federal Reserve Board Chairman Alan Greenspan, agree that a private market for insuring terrorist attacks cannot be made to work without some level of federal involvement. In comments to the House Financial Services Committee Mr. Greenspan said, "There are instances in which markets do not or cannot work, and ...I have not been persuaded that this [terrorism insurance] market works terribly well."

So what's the best way to create a terrorism insurance market? In our view, the most effective solution is a long-term approach that utilizes market forces to transfer more responsibility for covering terrorism insurance losses to the private sector, while maintaining high-level federal participation. The federal government would only pay for losses in the event of a catastrophe that results in claims beyond the financial capacity of an individual insurer or the insurance industry.

Such a program would remove the regulatory obstacles that hinder the development of a private market and allow insurers to better manage their increased exposure to terrorism risk through favorable tax treatment of assets, "buy-down" options, use of private reinsurance and other capital market vehicles, such as catastrophe bonds. This will ease the burden on taxpayers and spur the market to develop innovate solutions to finance terrorism risks — exactly the remedy that was anticipated when President Bush signed TRIA in 2002.

Terrorism is a national economic-security problem. It requires a long-term, national response that addresses the needs of all Americans — corporations and individuals. There is no shortage of issues for Congress to address in the final months of this legislative session. Protecting our economy from its greatest threat should take its place atop legislators' list of priorities in 2005.

Ernie Csiszar is president and CEO of Property Casualty Insurers Association of America.