June 30, 2005

Terror insurance needs change if extended

By Kristin Roberts

WASHINGTON (Reuters) - A program of U.S. governmentguarantees to cover high-priced terrorism insurance served itspurpose after the Sept. 11, 2001 attacks, but should not beextended in its current form, the Treasury Department said onThursday in a long-awaited report.

The Treasury said extending the Terrorism Risk InsuranceAct, or TRIA, in its current form would hinder the furtherdevelopment of the insurance market by crowding out innovation.

The Bush administration would only support extending TRIAbeyond its Dec. 31 expiration, it said, if changes were made tothe law to boost the event size that triggers coverage,increase deductibles and co-payments and eliminate some linesof insurance from the program.

"While TRIA has been effective in achieving its temporaryobjectives, the economy is more robust today than when TRIA wasenacted," Treasury Secretary John Snow said in a letter to Sen.Richard Shelby, an Alabama Republican and chairman of theSenate Banking Committee. "Extending TRIA would have littleimpact on the economy given its current strength."

The Treasury's findings are expected to drive debate inCongress on whether to extend TRIA.

The law, enacted after the Sept. 11 attacks, created atemporary federal program of shared compensation for lossesfrom terrorist events. It was seen as critical to sustainingconstruction and the economy at a time when insurers werereluctant to offer coverage.

Under the program, insurers must make terrorism insuranceavailable. In return, the government guarantees it willreimburse insurers for 90 percent of losses above certainthresholds.

The property and insurance industries have been on anaggressive push to get TRIA either extended or made permanent,arguing that terrorism is an uninsurable, war-related risk.

They say that without it, construction could still grind toa halt because the insurance industry remains unable to offerterrorism insurance on its own. They also argue the governmentneeds to play a long-term role in the market because insurancecompanies cannot judge the likelihood of a terrorist attack,and therefore cannot price the risk.

But a senior Bush administration official, speaking oncondition of anonymity, said the U.S. government does not havea long-term role in the terrorism insurance market, adding thatthe insurance market could be ready for the expiration of thefederal terrorism insurance program.

In Congress, the TRIA debate came to a halt earlier thisyear, pending Treasury's report. Some Democrats have called forextending TRIA for at least two years, while many Republicanssay a permanent market-driven solution must be found.