Insuring Against Terrorism, Without the Training Wheels

Is government-backed terrorism insurance crucial to the operation of everything from ports to football stadiums? Or is it just a taxpayer-funded subsidy that Big Business can do without? We’re about to find out: The program, which was put in place after the September 11, 2001, terrorist attacks, expires Wednesday.

Lawmakers decided not to renew the federal backing of the terrorism risk insurance market before they left Washington for the holidays, despite a yearlong lobbying campaign from real estate developers, sports teams, and, of course, insurance companies.

The insurance industry warned that policies for terrorism would become much more expensive and harder to find without government support. Some proponents even claimed that the program’s expiration threatened the Super Bowl because the stadium wouldn’t be able to hold the event if it couldn’t insure against the threat that the game would be targeted by terrorists. The NFL quickly dismissed that idea and said the game will go on.

Although lawmakers were close to a compromise last summer, the bill to renew the program became mired in eleventh-hour negotiations as Congress tried to pass a spending bill to keep the government open before closing up business for 2014 in mid-December. House Democrats and Republicans found common ground and passed a bill, but the Senate didn’t, leaving the program to lapse on Dec. 31, 2014.

Outgoing Senate Majority Leader Harry Reid (D-Nev.) has pushed for Congress to pick up the issue again first thing next year, but it’s unclear whether the incoming Republican-dominated Senate will agree.

Many Republicans have argued that the program should end or at least be dramatically scaled back. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) suggested at a hearing last fall that the insurance market could stand on its own.

“There have been times in our nation’s past when other phenomena in American history were deemed unique: airline crashes, oil spills, power outages, criminal riots, data losses,” Hensarling said. “And yet somehow the industry found the incentive and the ability to model and assess this risk.”

At issue is whether the government should share the risk private companies take on when they agree to insure buildings and businesses against the possibility of a future terrorist attack. As of Thursday, the insurance industry will be on its own again, as it was before 9/11.

After paying out a record $32 billion in claims after September 11, many insurers decided that the risk of terrorism was too unpredictable to cover. Congress stepped in and passed the Terrorism Risk Insurance Act, or TRIA, which was meant to provide a temporary government backstop. Lawmakers agreed to renew it twice, in 2005 and 2007, but not when it came up for renewal this third time.

While many countries created permanent government-run schemes to insure against catastrophic terrorist events, the United States opted to create a backstop. Under TRIA, which was never used, the government would have stepped in if losses from a terrorist attack exceeded $100 million. The government would then have recouped the payout by tacking a fee onto future policies. Some critics argue the plan benefits current policyholders at the expense of future ones who will have to pick up the tab. The advantage was that the United States didn’t have to set up and administer another cumbersome federal program like it does for flood insurance.

While the program may not have been perfect, some insurance experts worry its expiration will mean more costly policies and that fewer companies will buy them, which could make it harder for the U.S. economy to rebound from a future terrorist attack.

Erwann Michel-Kerjan, a professor who studies insurance risk at the University of Pennsylvania’s Wharton School of Business, has advocated for extending the program. He said there’s a disconnect between the huge amount of money and effort the United States spends fighting terrorist groups like the Islamic State abroad and the unwillingness to spend money on insuring against a possible attack at home.

“The question is how do we protect our economy in the case of a large-scale terrorist attack?” Michel-Kerjan said.

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