Industry-Backed Study Claims TRIA Extension Would Strengthen U.S. Economy

September 15, 2004

A study, commissioned by the American Insurance Association, Financial Services Roundtable, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, Property Casualty Insurers Association of America and the Reinsurance Association of America, has conclded that a two-year extension of the Terrorism Risk Insurance Act of 2002 (TRIA) would “enhance U.S. economic performance in the near term, strengthen the nation’s overall economy, and allow time to evaluate alternative approaches to terrorism risk.”

The report, “The Economic Effects of Federal Participation in Terrorism Risk” authored by Professor R. Glenn Hubbard, Dean of the Graduate School of Business, Columbia University and former Chairman, Council of Economic Advisers, and Bruce Deal, Managing Principal, Analysis Group, Inc., indicates: “The U.S. economy will be stronger with TRIA than without it. Over time, it may be possible to develop alternative approaches to TRIA. However, while several alternatives have been suggested, they are not in place today and we do not believe that any of them is viable in the near term.”

The report points out: “There are fundamental issues specific to terrorism that make these risks very difficult for private insurers to fully absorb. Put simply, insurers’ financial resources (known as capacity or surplus) to cover catastrophic terrorism events are limited, and estimating the likelihood and location of such extreme events is virtually impossible. In light of these realities, the authors do not believe that TRIA has prevented the development of additional private sector insurance or reinsurance coverage by ‘crowding out’ such capacity. In fact, most participants in the system feel that without TRIA, insurers would be forced to reduce – rather than increase – their exposure to terrorism risk, thus leaving substantial and growing gaps in coverage.”

“Those gaps in coverage would provide a very real drag on the U.S. economy,” the report continued. It states that the “drag will be felt before TRIA’s scheduled December 31, 2005, expiration because insurance policies that extend into 2006 will be negotiated as early as this fall. With each passing month, as annual policies come up for renewal, market dysfunction would increase if TRIA is not extended”.

The report concludes that, “even absent another major terrorist attack, U.S. gross domestic product (GDP) may be $53 billion (0.4 percent) lower, household net worth may be $512 billion (0.9 percent) lower, and roughly 326,000 (0.2 percent) fewer jobs may be created because of the drag produced by the lack of a federal terrorism insurance backstop.

“Were another catastrophic terrorism attack to occur (e.g., an attack approximately the size of the one that occurred on September 11, 2001) in the absence of TRIA, tens of thousands more jobs would be lost due to lack of insurance coverage and thousands of additional commercial bankruptcies could occur when compared to the fallout from the 9/11 event, because 9/11 losses were covered by the private insurance industry.”

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