- Introduction to the Issue
The Terrorism Risk Insurance Act (TRIA) was established for the primary purpose of ensuring “the continued financial capacity of insurers to provide coverage for risks from terrorism” . The Act was originally passed on January 23, 2002 after the destructive effects of the September 11, 2001 terrorist attack on the Twin Towers. The gigantic losses sustained by the US economy necessitated urgent measures to mitigate terrorism risks and to spread the potential losses in future events of similar nature. The TRIA, which had stipulated initial termination date of December 31, 2005 was extended initially for two years. By 2007, another seven-year extension was granted and to finally expire on December 2014. As such, the current discourse hereby aims to explore evaluating the stance regarding the US government’s continued support for the TRIA.
- Introduction of the Problem
In expounding on the root of the issues, the TRIA would be examined in terms of the rationale for its establishment. After the terrorist attack of the Twin Towers in 2001, there were private insurance companies which sustained significant losses. According to Jaffee & Russell (2005), “three foreign reinsurers, Lloyds, Munich Re, and Swiss Re, suffered combined losses of approximately $8b, and the largest single group loss (2.4b) was incurred by the domestic reinsurer Berkshire Hathaway” (p. 2). As such, there were apparently no domestic private insurance companies that expressed willingness to cover risks for terrorist attacks . For high risk industries, the problem provided the impetus for elevating the concern to Congress through highlighting the need for government to support covering losses from acts of terrorism . Without government’s intervention, the private insurance industry would fail to cover terrorist risks and businesses would perceive immense exposure to these risks without the possibility of being remunerated for damages, in cases of terrorist attacks. The potential costs in damages and losses would apparently cause a stream of chaotic economic and financial downfall.
- Supporting Information Highlighting the Problem
Jaffee & Russell (2005) provided a clear discussion of the costs of non-government intervention. Accordingly, “if the government subsidy is removed, terrorism insurance will continue to be offered, but the premium rate will double. This doubling of the rate leads to: (a) a reduction in consumer wealth and hence a reduction in consumption; (b) an increase in the cost of capital and hence a reduction in investment; and (c) an increase in the cost of labor and hence a reduction in employment” . Thus, the impact of non-intervention is deemed excessive and could potentially burden the economy with restricted opportunities for optimistic growth. The assertions were corroborated by Marks (2012) who insinuated that the apprehension to cover terrorist risks ensue from the extensive and confined damage that such attacks could sustain for the affected insurers. As noted, “the damage caused by a terrorist attack with a weapon of mass destruction - nuclear, biological, chemical, or radiological (known together as NBCR in insurance jargon) - would be so great it would bankrupt the insurance industry, and thus such risks are uninsurable” .
With the near expiration of the TRIA in December 2014, the controversial debate remains, to wit: should the US government continue supporting the Terrorism Risk Insurance Act (TRIA)? Would it be beneficial for the insurance sector and the economy to expect a permanent support by the government of the TRIA? Experts from the insurance industry have acknowledged the benefits gained from the TRIA; yet some policy makers, particularly, Senator Roger Wicker of Massachussetts, viewed that the private insurance sector would be better off finding a more permanent solution to addressing terrorism risk in the country in the long run.
- A Justification of the Importance of the Issue
The issue is important since the decision to support or continue intervention through the extension of the TRIA would tantamount to the aversion of the costs associated with non-intervention. Concurrently, beyond these costs, the decision to support the TRIA on a permanent basis was deemed to create relevant repercussions to the private insurers. As emphasized, “the provision of permanent government subsidized reinsurance removes all incentives for the private sector to develop alternative risk transfer mechanisms13 and all but guarantees that the private sector will never be able to handle mega catastrophes. What are needed are measures designed to encourage financial innovation by the private sector, and this requires sunset provisions on subsidies” .
- Indication of Factors that Caused the Issue to Surface
Based on the issues that surfaced, there is an impending action that must be decided on by the Congress as the expiration period nears. Therefore, the factors that are crucial to be integrated in the decision-making process are as follows: (1) should the TRIA be extended? (2) If yes, what would be the time frame of the extension? (3) Would the extension period be on a temporary time frame or be made on a permanent basis? (4) Would the private insurance industry be better off without government intervention? (5) How would the private insurance sector affirm preparedness to address terrorism risks without government intervention? (6) Could TRIA provisions be revised to cater to the demands of contemporary times in addressing the more permanent global terrorism that is being faced?
- Significant and Relevant Background Information
The factors that emerged and which should be considered in the decision-making process regarding continued support of the federal government to the TRIA provisions have been discussed in various settings, groups, and avenues. The experts from the insurance industry have expressed initial support to the TRIA through recognition of the benefits that the act has provided. As emphasized by Leigh Ann Pusey, president and CEO of the American Insurance Association, TRIA enabled the provision of effective protection in mitigating terrorism risks (Postal, 2011). Likewise, it was deemed as a crucial risk management tool “to better shield businesses and their infrastructure from the devastation of an unpredictable, man-made event” . However, despite these advantages, these experts have recognized the need for relieving the government from continued intervention and support to allow the private insurance sector to design innovative strategies in addressing terrorism risks.
Concurrently, Jaffee & Russell (2005) recognized that “the provision of permanent government subsidized reinsurance removes all incentives for the private sector to develop alternative risk transfer mechanisms and all but guarantees that the private sector will never be able to handle mega catastrophes” (p. 13). The alternative solution which was proposed by Jafee & Russell (2005) to non-governmental intervention was to ensure that in cases of terrorist attacks of catastrophic magnitude, the government would be prepared to provide financial support to private insurers who could be adversely affected by terrorist attacks.
- A Presentation of Alternative Perspective
The issue on extending the TRIA and continued support by the government has been reviewed in various authoritative discourses. The TRIA was comprehensively presented in the One Hundred Seventh Congress of the United States of America at the Second Session (US Congress, 2002). Other sections of the Act included the terrorism insurance program, the treatment of terrorist assets, as well as provisions of the Federal Reserve’s Board. A brief review of related literature is hereby presented to provide relevant points on the impending issue.
- Review of Related Literature
The issue being discussed focus on understanding whether it would be more beneficial for the US government to support the TRIA as it is bound to expire on December 2014. The actual provisions of the TRIA are accessible through the comprehensive discourse published by the US Congress. The discussion of the support of governments for private terrorism insurance market was expounded by Jaffee & Russell (2005). The authors presented details on the rationales for the failure of private terrorism markets. Two of the reasons were noted as follows: the probabilities for terrorist attacks are virtually inaccurate and losses attributed to these attacks, though concentrated and confined in a particular location, are massively destructive . The discourse was effective in disclosing pertinent information relative to the costs of non-intervention, as well as an intensive discussion of a financial framework for analyzing the TRIA subsidy.
Concurrently, the impact of the TRIA in terms of the decision to be evaluated upon the expiration period was disclosed in the article written by . Various experts in the private insurance industry provided balanced arguments that illumined the benefits that the TRIA has provided as well as counterarguments from advocates of private insurers. The author’s final contention still assert the support of the government in renewing the TRIA to serve the purpose it was originally established for.
A host of concerns and issues were presented in the articles written by Chalk (2007) and Charron (2003) regarding the background information surrounding the impetus of the TRIA’s establishment. Likewise, information from the Congressional Budget Office (2005) expounded on TRIA’s provisions and its effects on the insurance market. Likewise, the economic effects and costs of TRIA, including policy implications were appropriatly discussed. Explicit discussions on the advantages and disadvantages of allowing TRIA to expire were also presented.
Recent reviews written by Rhee (2013) and Webel (2014) traced the evolutionary developments of the TRIA from inception to contemporary times. The article published by Mondaq Ltd. (2013) presented pertinent issues relevant to garnishment litigation. The contents focused on discussing the actions imposed on banks where accounts could be linked to terrorism.
- Critical Analysis of the Literature
Most of the reviews acknowledged the benefits that TRIA has generated for the economy of the United States, as well as in regaining confidence in the insurance market (Postal, 2011; Jaffee & Russell, 2005). Advocates coming from private insurance groups contend that TRIA should not be extended for reasons which focused on providing private insurers with the opportunities to design alternative risk transfer approaches that would address and mitigate terrorism risks. Accordingly, the studies which were evaluated indicated that an extension would mean undermining the private insurance industry since the prices of insurance coverage would be significantly less with the government subsidy. The supporters of non-governmental support disclosed that the purpose within which TRIA was initially enacted has already been served. In addition, since more than 13 years have transpired since the September 11 attack, experience on handling terrorism risks have already been apparently appropriately addressed.
- Position on the issue:
- Comprehensive Personal Position
One asserts that extending the TRIA through the US government’s support would be more beneficial to various stakeholders. The enactment of the TRIA enabled spreading the risk of terrorist attacks to a wider range of clientele, which was the ultimate purpose for its inception and enactment. The fact that the TRIA had been successful and effective in mitigating and addressing terrorism risks through averting any potential exposure of public and private organizations to terrorist attacks indicate that supporting its continued applicability in the future is justified.
Specifically, reports have disclosed that the TRIA protects taxpayers and high-risk businesses of potential losses ensuing from terrorism attacks. The factors that provided the impetus for the TRIA’s creation remain the same; meaning, that the probabilities for terrorist attacks are still virtually inaccurate and significant losses perceived to be attributed to these attacks, though concentrated and confined in a particular location, are still massively destructive in nature (Jaffee & Russell, 2005). As such, without changes in these mitigating factors, the validity of continuing the TRIA is supported.
In addition, coverage in terrorism insurance allegedly enables greater resilience of communities and the entire nation to terrorism risks. Concurrently, the expiration of the TRIA was noted to have potential disturbing consequences in workers’ compensation through restricting providing workers’ compensation coverage to high terrorism-risk employers. Finally, the TRIA would protect the federal treasury from significant recovery losses which would be sustained in the event of a major terrorist attack.
- Defense of the Position
Advocates coming from private insurance groups contend that TRIA should not be extended. Accordingly, an extension would mean undermining the private insurance industry since the prices of insurance coverage would be significantly less with the government subsidy. The supporters of non-governmental support disclosed that the purpose within which TRIA was initially enacted has already been served. In addition, since more than 13 years have transpired since the September 11 attack, experience on handling terrorism risks have already been apparently appropriately addressed.
A non-governmental intervention reported greater costs to the insurance market and the declining economic condition of the country justified the TRIA’s enactment and continued extension in coverage. Even experts in the insurance industry, those who are expected to support non-intervention of the federal government to give way to discovering innovative ways for risk transfer approaches have conceded to the extension of the TRIA. At the rate that premium costs of other types of insurance consistently increase and hamper current policyholders to sustain and maintain continued payment, allowing terrorism risk insurance to return under the jurisdiction of private insurers could expect similar trends. As such, not only would high-risk sectors be left with high rates of terrorism insurance coverages which could not be afforded; but more so, the issues pervading the inability of the private terrorism insurance market to survive, at the onset, would not have been corrected with the removal of the TRIA. The expiration of the TRIA was affirmed to potentially hurt efforts of the federal government to sustain intensified national security (Expiration of terrorism risk insurance act could hurt national security, Rand study finds, 2014).
Overall, after weighing the costs and benefits of supporting the extension of the TRIA, it is evident that there are greater advantages to its continued support. The magnanimity of stakeholders who would benefit from the continued application of the TRIA far exceeds the limited few private companies which signified contest to the program. In addition, since terrorism continues to pose significant risks to the nation, the TRIA remains the most plausible and viable recourse that would help spread the risk to a wider range of stakeholders and protects taxpayers in an eventual major terrorist attack. The factors that were noted to instrumentally contribute to the failure of the private terrorism insurance market remains the same; with or without the extension of the TRIA. Allowing non-governmental intervention would leave the US government in a more disadvantageous position by exposing the country to greater potentials for global terrorist risks where the country, nor private terrorism insurance market, are not yet prepared to face.
- Implications for Public Policy, Private and or Public Practice and Legislative Initiatives regarding the Identified Issue
- Thorough Understanding of Implications
An evaluation of sides to the argument could include seeing the issue from a third party perspective – even from the point of view of terrorist plotters. The objective of terrorist groups remains to be the instigation of havoc to communities through maximizing destruction of lives and properties. The TRIA enabled leveraging the terrorism risk and minimizing costs of the potential destruction. As such, since the act was established in 2002, there were apparently no significant incidences of terrorist attacks with a magnitude similar to the destruction of the Twin Towers. The reason which could partially prevent plotting future terrorist attacks is the safety net provided by the TRIA. Policymakers and other insurance experts could aver that the TRIA has already served its purpose. However, policymakers should not sacrifice non-renewal of the extension to allow private insurers to design alternative risk transfer methods that have not yet been tested. Another global terrorist attack might not survive the perceived destruction without the provisions offered by the TRIA. The federal government should always remain vigilant and expect that non-support for the extension of the TRIA would place the country and the citizens in similar magnitude of risks that the terrorist attack of the Twin Towers had perpetuated in the lives of the American people.
References
Expiration of terrorism risk insurance act could hurt national security, Rand study finds. (2014, March). Bioterrorism Week.
Chalk, P. (2007). Trends in Transnational Terrorism and Implications for U.S. National Security and U.S. Terrorism RiskInsurance Act. Studies in Conflict & Terrorism, Vol. 30, 767–776.
Charron, M. (2003). Much Needed Relief. Journal of Property Management, Vol. 68, No. 2, 20.
Congressional Budget Office. (2005). Federal Terrorism Reinsurance: An Update. The Congress of the United States.
Jaffee, D., & Russell, T. (2005). Should governments Support the Private Terrorism Insurance Market? . Salt Lake City: The World Risk and Insurance Economics Conference .
Marks, A. (2012, September 27). Who should insure against terrorism? ; Terrorism insurance promotes economic stability. But some disagree on the government's role. The Christian Science Monitor, p. 3.
Mondaq Ltd. (2013). Recent TRIA Decision Could Ease Garnishment Burden. Mondaq Business Briefing, pp. 1-2.
Postal, A. (2011, September). Industry Experts Assess Impact of TRIA. Washington Watch, pp. 24-25.
Rhee, R. (2013). The Terrorism Risk Insurance Act Time to End the Corporate Welfare. Policy Analysis, No. 736, 1-20.
Sinder, S., & DeSantis, C. (2003). What the Terrorism Risk insurance Act means for property owners. Real Estate Finance, 27-31.
US Congress. (2002). One Hundred Seventh Congress of the United States of America: Terrorism Insurance Program.
Webel, B. (2014). Terrorism Risk Insurance: Issue Analysis and Overview of Current Program . Congressional Research Service.
