Terrorism Insurance: A Post 9/11 Fact of Life

The cowardly actions of a handful of radicals on the morning of September 11, 2001, spurred the collective realization that, as a nation, we were not fully prepared to deal with the threat of terrorism at home. One area in which this was acutely felt was the economics of insuring property against terrorism.

Insurance companies had previously offered the coverage, but it had been akin to insuring your automobile against an asteroid strike. Coverage was affordable because the insurance company risk model pointed to “never” on the likelihood of payout chart. But after 9/11, terrorist attacks were a real thing in America and the devastation at Ground Zero and the Pentagon highlighted just how vast the damage could be.

Beyond the physical damage of 9/11, two contradictory reactions began causing significant economic damage. Just as banks and investors were realizing that terrorism insurance was a necessity for projects, insurers were realizing that they had no clue how to offer real terrorism insurance without risking bankruptcy in the event of an attack. Insurance companies found it impossible to predict the frequency, scale and economic cost of another attack, and stopped offering the coverage. This had a poisonous impact on the economy in general and on the construction industry in particular.

So, in 2002 Congress passed the Terrorism Risk Insurance Act which provided a financial backstop for insurers in the event of a catastrophic attack. The bill essentially provides loans that would have to be paid back to the government, but would also protect companies from financial disintegration.

I’m no fan of government butting into the marketplace. I’ve railed against such actions for my entire career. But like many conservatives in Congress, I recognize that this particular program is the government stepping in to do what the private sector can’t do--at least can’t do yet.

The current TRIA legislation expires at the end of this year. Unfortunately, a private marketplace still has not been developed for terrorism insurance. Conservative Chairman of the House Financial Services Committee Jeb Hensarling has focused on including a series of reforms in TRIA reauthorization legislation aimed at pushing the creation of a market solution. The Senate-passed legislation contains some of his desired reforms, but not all.

Hensarling recognizes the need to reauthorize TRIA, but seems inclined to hold out for more reforms. He recently penned an op-ed saying, “There remains a need for a federal backstop against those catastrophic acts of terrorism that cannot be reasonably modeled or mitigated and whose size truly impacts our economy.” But he goes on to minimize the pre-attack benefits of the legislation saying, “TRIA supporters often suggest that the program is a vital part of the war on terrorism, but nothing in the act prevents an attack. Nothing in it saves lives or property.”

While Hensarling's statement is true in literal terms, it obscures the role that the program plays in combatting the economic effects of terrorism. By design, terrorism is intended to impact its targets long after the smoke of a physical attack has cleared.

The economic slowdown that occurred when insurers stopped writing terrorism policies highlights the damage that even the specter of terrorism can do. So, while TRIA doesn’t prevent actual terrorism, it does combat the crippling effects that the threat of terrorism can have. That may not save lives, but it certainly impacts them.

Undoubtedly the marketplace should develop a solution that eventually lets the taxpayers off the hook. Hensarling is right to emphasize that goal during this reauthorization process. The question isn’t “if” but “how” and “when.” The answers to those questions can be complex. Until they become clear, TRIA is crucial to sustaining America’s economic growth during a period in which the threat level of terrorism is at historic highs.

So while I support Chairman Hensarling’s efforts to find a long-term solution, it is important that Congress keep sight of what is at stake in the near term. The economic consequences of allowing the program to lapse would be immediate and vast. Conversely, under TRIA the liability to taxpayers exists only on paper unless a catastrophic event happens, and even then only if insurers fail to repay the money as required.

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