Does the Treasury report spell the end for TRIA?
US Treasury Secretary John W Snow in a June 30th letter accompanying a 142-page report to Congress stated: "It is our view that continuation of the program (Terrorism Risk Insurance Act of 2002), in its current form is likely to hinder the further development of the insurance market by crowding out innovation and capacity building. The administration opposes extension of TRIA in its current form."
Many insurance, government, real estate and business organisations have been strongly lobbying for the extension of the act. Most arguments for continuing TRIA centre on the near impossibility of meaningfully underwriting terrorism risk and thus being unable to price the risk appropriately.
Most unsettling but true to its mandate, that militant advocate for free enterprise, The Wall Street Journal, in an editorial said enactment of TRIA was "a hasty response" and should be allowed to expire at the end of the year. The editorial noted that the insurance industry has had high profits the last two years which enable the industry to handle terrorism insurance on its own. In a Catch 22, the P/C US insurance industry in 2004, for the first time since 1978, produced an underwriting profit.
This unusual event was encouraging for investors, but may have provided the Administration an easy out for denying an extension of TRIA.
Many groups seized on a key phrase in the Secretary's letter - "in its current form" - as a means of saving TRIA. Mr Snow said the administration would accept an extension only if it includes more market-oriented features, mainly an increase to $500m of the event size that triggers coverage and increases of the dollar deductibles and percentage co-payments.
The resolution to ending or extending TRIA will occur in Congress. Sen Charles Schumer, D-NY, said the administration "can't expect to warn of terrorist attacks and not provide the critical insurance programs necessary to rebuild in case of another successful terrorist attack."
House Majority Leader Tom DeLay, R-Texas, declared any solution must depend on the "ingenuity of the private insurance markets and not the involvement of the federal government as a reinsurer or permanent backstop." Let the debate begin!