TRIA: Time to End Years of “Temporary” Insurance Subsidies

Twelve years ago, in the aftermath of 9/11, Congress created a “temporary” subsidy program for insuring losses from terrorist attacks. That temporary program, the Terrorism Risk Insurance Act (TRIA), has since been reauthorized twice, and lawmakers are now considering yet another renewal. There is no justification for continuing the program. But if reauthorization is inevitable, the House bill trims the subsidy to a greater extent than the Senate measure does and thus represents better policy.

Insurance companies incurred huge losses as a result of 9/11, and many stopped offering terrorism coverage as a result. To promote insurance options and to stabilize the industry, Congress in 2002 created TRIA as a form of reinsurance for terrorism-related catastrophic losses. The program promoted terrorism coverage by providing risk protection for insurers as well as time to adjust premiums to new realities.

Under current law, TRIA applies once an event is certified by the Secretaries of Treasury and State and the Attorney General as an act of terrorism. The actual cost-sharing provisions kick in after insurers’ aggregate losses exceed $100 million. To collect government payment, insurers must satisfy a deductible equal to 20 percent of the company’s premiums from the previous year. The federal government will then pay 85 percent of insurers’ losses (above the deductible) until such losses reach $100 billion industry-wide.

TRIA was never meant to be permanent. As stated in the original legislation, the program was a stopgap “while the financial services industry develops the systems, mechanisms, products, and programs necessary to create a viable…market for private terrorism risk insurance.”

That market now exists. Indeed, the insurance industry today is well-capitalized and fully equipped with the risk-management resources necessary to provide terrorism coverage without government subsidies. But lawmakers are apparently incapable of dismantling even a temporary government program that has dragged on for a dozen years.

The Senate bill (S. 2244) now awaiting a floor vote would largely leave the current program intact for another seven years. Rather than establish specific criteria for certifying an event as a terrorist attack, the measure largely delegates that authority to the Treasury Department—adding to the excessive powers already wielded by executive branch agencies. The legislation would reduce the proportion of federal cost sharing from 85 percent to 80 percent (after the $100 million threshold is met), but it phases-in the decrease by just 1 percent for each of five years. And it only slightly increases the amount of government outlays recouped from insurers.

In other words, taxpayers would continue to be on the hook for private losses that the insurance industry is well-positioned to manage.

In contrast, the House bill (H.R. 4871) reauthorizes the program for five years—which is also too long but shorter than the Senate proposal. It also tightens the criteria for covered acts to those committed on behalf of a foreign person or foreign interest. Most notably, the measure raises the threshold for federal subsidies over five years from $100 million to $500 million (for attacks that do not involve nuclear, biological, chemical, or radiological weapons). And it caps liability at $75 billion, down from the current limit of $100 billion.

Clearly, the House bill would reduce TRIA subsidies far more than the Senate measure.

Although TRIA may have had a legitimate purpose directly following 9/11, the insurance industry has had more than sufficient time to restructure for new risks. The best course forward would be to allow TRIA to expire. Absent that, the House approach reduces the subsidies to a greater extent than the Senate provisions, bringing us a bit closer to eliminating at least one form of corporate welfare.