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US says terror insurance needs change if extended

June 30, 2005

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 development ofthe 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 lessen taxpayers’ potential liability.

“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.

The Treasury’s findings will drive debate in Congress onwhether to keep TRIA alive. In fact, battle lines were beingdrawn within hours of the report’s release.

Top Republicans in the House and Senate committees thatwill be first to consider TRIA jumped on the report as evidencethat government intervention in insurance actually created”market dysfunction” and dependency on Washington.

“Ironically, because of these deficiencies, it is possiblethat Congress will need to craft a temporary extension of theprogram to provide time to address this dysfunction and easethe sunsetting of the program,” Shelby said.

But New York Democrat Sen. Charles Schumer called theTreasury’s report flawed. He said large projects cannot getfinancing without terrorism insurance, regardless of how theeconomy may be faring.

“The administration can’t have their cake and eat it too,”Schumer said. “They can’t expect to warn of terrorist attacksand not provide the critical insurance programs necessary torebuild in case of another successful terrorist attack.”

TEMPORARY FIX

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 TRIA, 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 for TRIA to either be extended or madepermanent, arguing that terrorism is an uninsurable,war-related risk.

The Coalition to Insure Against Terrorism, a grouprepresenting business insurance policy-holders, said terrorismis an unknowable risk and that the Treasury’s report ignoresrealities in the marketplace.

Another group pushing for extension, the Property CasualtyInsurers Association of America, said the report indicated arecognition by the Bush administration of the need for anongoing federal role in the terrorism insurance market.

But a senior Bush administration official, speaking oncondition of anonymity, said that role, if needed at all, isnot a long-term one.

“We are very emphatic that we do not believe that there isa necessity for a long-term government involvement,” theofficial said.

The Treasury said the law, if extended, must boost theevent size that triggers coverage, increase deductibles andco-payments and eliminate some lines of insurance from theprogram.

The senior administration official also said the insurancemarket could be ready for the program’s expiration on Dec. 31.

The head of Morgan Stanley’s real estate group, OwenThomas, agreed the market might be ready, but said anotherterrorist attack “would again send the whole market ingyrations.”

“I think the market might be able to deal with this, but Ithink the issue is ‘What’s going to happen in the future?”‘Thomas said at a Reuters Summit on real estate in New York.




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