Congress should act this year to extend the Terrorism Risk Insurance Act (TRIA) for two years beyond its Dec. 31, 2005, expiration date because the private market alone cannot deal with further catastrophic terrorist attacks, a united insurance industry told the Senate Banking Committee.
The aim of a terrorist is not to hurt a particular business or organization, but rather to attack the entire United States of America, John Degnan, vice chairman of The Chubb Corp., testified on behalf of the insurance community. “Without a risk-spreading mechanism, the right attack could very well bring the insurance industry to its knees, and significantly destabilize our economic infrastructure, achieving a primary aim of the terrorist. We simply cannot afford to let TRIA expire and leave this important matter to chance.”
Degnan testified on behalf of the American Insurance Association, the Council of Insurance Agents and Brokers, the Independent Insurance Agents and Brokers of America, the National Association of Professional Insurance Agents, the Property Casualty Insurers Association of America, the Reinsurance Association of America, the Surety Association of America, the National Association of Mutual Insurance companies, UWC-Strategic Services on Unemployment and Workers Compensation, and the Financial Services Roundtable.
Equally important, insurers pointed out, failure to extend the program in 2004 will create tremendous uncertainty and potential market upheaval for both commercial policyholders and insurers this fall. Beginning in September, annual policies for coverage starting after January 1, 2005, are considered and negotiated. The policy period for such annual insurance contracts would run beyond the hard sunset date of TRIA; as a result, part of the coverage term would be in effect without the protections of the federal backstop.
TRIA created a temporary public-private risk sharing mechanism that has enabled the commercial insurance marketplace to function even though the very real threat of further catastrophic terrorism remains. The market was in turmoil following the Sept. 11, 2001, attack when it became apparent that terrorism had evolved into a risk very similar to war – a peril that property-casualty insurers have never covered (with the exception of workers’ compensation, which allows no exclusions).
“While TRIA was designed to be a three-year bridge to development of what was envisioned as a functional, wholly private sector terrorism insurance market, TRIA has not – and indeed cannot – change the underlying characteristics of terrorism risk in the United States,” Degnan testified. The facts which “weigh heavily in favor of a continued federal terrorism insurance backstop” include:
* “The commercial property-casualty insurance sector continues to lack the financial capacity to handle catastrophic terrorism losses on its own. Certain plausible event scenarios estimate insured losses from another catastrophic terrorist attack on U.S. soil could exceed $250 billion, far exceeding the entire commercial property-casualty industry’s estimated capacity.
* “Because the United States remains under a constant, real threat of further attacks, catastrophic terrorism remains an uninsurable risk in the traditional insurance marketplace. Both National Security Advisor Condoleezza Rice and Department of Homeland Security Secretary Tom Ridge have alerted Americans to the possibility of terrorist attacks, and the United States remains on a high state of alert for terrorist activity in this country.
* “Terrorism risk cannot be modeled or predicted. Because terrorism defies the normal underwriting and rating principles, that limits the ability of property-casualty insurers to advance a private mechanism for that risk. For example, the complex and deliberate nature of terrorism prevents insurers and policyholders from using loss control as an effective tool to minimize the risk.
* “TRIA’s “hard” end date of December 31, 2005, is inconsistent with rolling expiration dates provided by underlying insurance policies. This mismatch will confuse policyholders and create uncertainty for insurers, because policies written after January 1, 2005 (and sometimes earlier) will have a coverage term that extends beyond the backstop.”
In conclusion, the insurance trade groups called on Congress to take action during 2004 to extend TRIA, because insurance remains a key component of the critical infrastructure of the United States economy.
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