Prior to the terrorist attacks of Sept. 11, 2001, insurance companies in the United States routinely provided coverage for losses caused by acts of terror. However, after the devastating losses suffered from the events of 9/11, including several hotels in New York City that were severely damaged or destroyed, insurance carriers were forced to totally reevaluate the risks associated with insuring against acts of terror and the availability of terrorism insurance all but vanished. This created a situation that left commercial policyholders, as well as lenders, carrying the risk of future terrorist acts on their own, which resulted in stalled commercial property projects and developers and lenders unwilling to move forward without terrorism insurance coverage.
To address this problem, Congress passed the Terrorism Risk Insurance Act (TRIA) of 2002, which was reauthorized in 2005 and 2007. If Congress does not take action soon, this act will expire on Dec. 31, 2014, bringing possibly severe effects to our economic recovery. There are billions of dollars in commercial loans outstanding that require borrowers to carry terrorism insurance. If such coverage were not available, these loans would be in technical default and could be called in, causing a serious financial and economic disruption at a time when our country is still struggling to recover from the worst economic crisis since the Great Depression.
In order to prevent the negative economic effects that would occur should TRIA expire and eliminate an important federal backstop for lodging and other industries, I have introduced H.R. 508, the Terrorism Risk Insurance Act of 2002 Reauthorization Act of 2013, which would reauthorize TRIA, in its current form, through 2019.
Reauthorizing TRIA would continue the cost-sharing program whereby the federal government covers up to 85 percent of terrorism-related losses up to $100 billion of total losses after certain criteria are met. First, the Secretary of the Treasury, Secretary of State, and Attorney General must jointly certify an individual act of terrorism. Additionally, losses must exceed $5 million from the event. Next, the total losses for the entire insurance industry must exceed $100 million before the government backstop can begin sharing in losses. Finally, individual insurers must meet a deductible of 20 percent of their earned premiums from insurance lines covered by TRIA before they can receive any federal assistance. This system ensures that a substantial amount of private capital is used to cover losses before any government assistance kicks in.
It’s important to recognize that TRIA is not a taxpayer bailout of the insurance industry in case of a major terrorist attack. TRIA is, in fact, the most taxpayer-friendly approach to the costs associated with acts of terror. TRIA requires that the Secretary of the Treasury recoup 133 percent of taxpayer assistance by imposing surcharges on future commercial insurance policies for terrorist events where insurance industry losses, not including government assistance, are less than $27.5 billion. In the event that insured losses exceed $27.5 billion, the Secretary of the Treasury has the ability, but is not required, to impose surcharges. This is designed to ensure that the surcharges needed to recoup losses after such a large terrorist attack would not exacerbate possible economic challenges resulting from the attack. Without TRIA, private insurance would not provide coverage for acts of terror and all recovery and redevelopment costs would ultimately be borne by the taxpayer without the ability to be paid back over time.
Opponents of TRIA will argue that in the 12 years since the attacks of 9/11, it has become unnecessary and the private insurance market is willing and able to once again bear the risk of terrorism on its own. Nothing could be further from the truth. The fact remains that the key reasons that caused the industry to retreat from offering terrorism insurance prior to the passage of TRIA still exist. Insurers cannot accurately model the risks associated with acts of terror and their potential cost. When insuring other risks, such as property damage due to fire for standard casualty coverage or premature death for life insurance, insurance companies have long-term data that allows them to accurately model their loss exposure and price policies accordingly. Losses caused by acts of terror, on the other hand, are intentional, malicious, man-made events that cannot be easily modeled by insurance actuaries. Furthermore, any attempt to improve insurance actuaries’ ability to model terrorism risk would pose an enormous national security threat. Such an effort would require these actuaries be given access to top-secret national security information regarding the current terrorist threats facing the United States by organizations worldwide.
The risks posed by potential terrorist attacks are not simply confined to major cities like New York, Boston, and Washington, D.C. Our energy infrastructure, amusement parks, and sports stadiums are some of the many at-risk targets across the country. All of these facilities that have to carry terrorism insurance would be just as exposed as a skyscraper or hotel in New York City if TRIA were not reauthorized. It is for these very important reasons that I urge my colleagues in Congress to take action and reauthorize this critical program for an additional five years.
Congressman Michael Grimm represents New York’s 11th Congressional District, encompassing Staten Island and Brooklyn. Now in his second term, he serves on the House Financial Services Committee.