Among the several legislative issues remaining on the plate of the 113th Congress before it ends on December 31 are several high-profile items such as the tax extenders package, renewal of the moratorium against discriminatory Internet taxes, and even continued funding for the federal government itself. But one important issue that has been under the radar is reauthorization of the Terrorism Risk Insurance Act (TRIA), which backstops private insurance companies in case of catastrophic terrorist attack.
TRIA was put in place a few months after the 9/11 attack on the World Trade Center—an attack that caused an enormous $23 billion in insurable losses. As you might imagine, private insurers immediately stopped writing terrorism risk insurance after such losses, but because such insurance coverage is necessary to secure financing for major construction projects, the gap in terrorism risk insurance threatened to throttle investment in commercial construction and further add to the economic damage after 9/11.
So Congress stepped in and passed TRIA. Instead of several much worse ideas, Congress agreed that, in case of a catastrophic terrorist attack, the federal government would backstop private terrorism risk insurance.
Since it became law, TRIA has been extended several times, and has never cost taxpayers a dime. Currently, TRIA only kicks in if losses from a certified terrorist attack exceed $100 million, but because of other provisions of the law requiring that private insurers reimburse the taxpayers on the first $27.5 billion of terrorism losses, damage from another catastrophic attack would have to actually exceed the costs of the 9/11 attack before the federal government would have to pay a cent.
But beyond the fact that TRIA is structured in a way to significantly limit taxpayer liability, why should the federal government be involved at all in terrorism risk insurance?
Well, for one thing, terrorism is an attack on the federal government, though often executed against private property. A building owner is entirely unable to limit or quantify the risk of a terrorist attack, and might have completely different foreign policy opinions than those held by decision makers in Washington, D.C. Terrorism is at least in part an attack on decisions made by federal policy makers, so it is not inappropriate for the federal government to be involved in the cost of terrorism mitigation.
And TRIA is a far better solution than other, more likely outcomes. Every time we have a hurricane or a tornado strikes the U.S., the first thing that happens is that the federal government starts spending money on assistance. Unfortunately, the usual result of disasters is huge and often wasteful federal relief spending. Frankly, from the taxpayers’ perspective, TRIA is a superior model for federal involvement in disaster recovery and could be a model for reform of the usual federal approach to disasters. Were TRIA in place before 9/11, the costs of the attack to taxpayers, private insurers and the overall economy would almost certainly have been less.
Because many existing commercial real estate financing deals require TRIA to be in place, allowing TRIA to expire would not only be the wrong policy—it would cause immediate chaos. That’s because many existing terrorism risk policies require TRIA protections to be in place. Additionally, investment and employment in commercial construction would likely grind to a halt.
That’s not to say that TRIA reauthorization should not include reforms—it almost certainly should. It is right and appropriate for Congress to continually update TRIA for maximum taxpayer protection and to encourage private insurers to accept a greater share of the risk of a massive terrorist attack. Right now House Financial Services Committee Chairman Jeb Hensarling (R-TX) is in negotiations with Senator Charles Schumer (D-NY) over duration of the reauthorization, moving the trigger from $100 million to $250 million, and other details.
TRIA can and likely will be improved, but because in this post-9/11 era our economy faces increased risk from terrorism, TRIA reauthorization should be a priority for action before close of Congress.
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