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By Rep. Jeb Hensarling
The threat posed by radical Islam once again commands the nation's attention at the same time Congress debates whether to re-extend a never-used terrorism-risk insurance program that was supposed to expire nine years ago.
The 2002 Terrorism Risk Insurance Act (TRIA) subsidizes insurance companies as an incentive to sell insurance against the losses caused by acts of terrorism.
Whether to extend the act beyond its original purpose will be debated in Congress' lame-duck session.
TRIA supporters often suggest the program is a vital part in the war on terrorism, but nothing in the act prevents an attack. Nothing in it saves lives or property.
Instead, the Terrorism Risk Insurance Act concerns just one issue: Who should pay for the property damage caused by terrorists — commercial property owners, the insurance companies that took on the risk, or taxpayers?
This is an important question, and it is one reason why there was enormous uncertainly in our economy in the wake of Sept. 11, 2001. At that time, the act helped stabilize the private market and provide for the widespread availability of terrorism insurance, which are the program's original purposes.
The Terrorism Risk Insurance Act was designed to be temporary and transitional so, over time, insurance companies could resume pricing terrorism insurance and develop better forecasting models to absorb any future losses. The law initially accomplished this by gradually increasing TRIA's thresholds, and each year insurance companies covered a little more of their own risks so taxpayers were responsible for covering a little less.
Yet that successful framework was abandoned in 2007 when Congress passed an ill-advised extension that froze the act's thresholds. This removed the requirement of transitioning back to a private market, contrary to TRIA's original goal.
Instead of building more accurate loss models, insurers have grown increasingly reliant on the program. Instead of taking on more of their own risk, they have become more resistant to resuming the act's transitional reforms.
This intense desire to maintain the status quo resulted in the Senate's passage of a bill in July to extend the Terrorism Risk Insurance Act for seven more years "as is" — without any meaningful reforms to protect hardworking taxpayers and to jump-start private market development, as the act was originally intended to do.
If the Senate bill becomes law, what was supposed to be a temporary and transitional program will be in existence for nearly 20 years but without making any new progress toward reform.
This would be a step backward. It would make TRIA a de facto permanent obligation of the taxpayers who are already burdened with unsustainable levels of debt owing to other Washington policies and programs.
Also, instead of creating economic certainty, merely extending the act without reinstating reforms would actually increase uncertainty and market instability because the insurance industry would remain entirely dependent on government to manage its risks.
Reforming the Terrorism Risk Insurance Act now is the only way to protect taxpayers, promote stable markets and enhance economic certainty.
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. However, today there is more capacity within insurance and reinsurance industries to cover far greater portions of this risk. There will be even more tomorrow, provided we put the act back on its transitional reform path.
That's why the House Financial Services Committee, which I chair, approved legislation that maintains the essential TRIA framework but gradually asks insurers to be responsible for privately funding more of the risks they underwrite. This bill also refocuses the act on only those catastrophic risks for which risk models are currently vague.
The House bill puts the Terrorism Risk Insurance Act back on track as a federal backstop against the most damaging acts of terrorism, while restoring the market discipline to adapt, properly price, or innovate in the delivery of private terrorism insurance.
Some say there is no need to reform the act. I respectfully disagree. By the insurance industry's own admission, taxpayers are currently forced to bear incalculable amounts of risk, but we know that there is untapped capacity in the private reinsurance markets to handle more risk. That is the only way to move more and more of the risk from the taxpayers' balance sheet and put it back on that of insurance companies.
Critics have and will likely continue to contend that such reforms are somehow unfair or unpatriotic. Nothing could be less true.
The federal government, free from competition and unable to make hard choices, has a long and ugly history of insurance schemes that underestimate and misprice risk. Each time the purported beneficiaries end up more at risk while taxpayers end up footing the bill.
Passing a Terrorism Risk Insurance Act reform bill now is the only way to stop that vicious circle and help prepare insurers and commercial property owners for a less risky future.
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