Kudos to the President for proposing to scale back terrorism reinsurance
20 June
Kudos to the President for his proposal to scale back the subsidy for terrorism reinsurance. I wish he had gone all the way to eliminate this program during this term, but I’ll take the partial win.
After the 9/11 attacks, parts of the market for insurance against terrorist attacks evaporated. Insurers rely on statistical data to determine the chance of a future terrorist attack, and therefore the chance that they will have to pay a claim. Insurers were no longer able to estimate the chance that the Empire State Building, or a new stadium, would be attacked, and so they were unwilling to sell terrorism insurance for these kinds of high-value terrorist targets.
This caused further problems, because some real estate developers could not get bank loans without insurance against a terrorist attack.
In 2002 President Bush proposed, and the Congress created (on a strong bipartisan vote) a terrorism reinsurance program, known as the Terrorism ReInsurance Act (TRIA). The government acted as insurer to insurance companies against the risk of an attack on property by foreign terrorists. This was supposed to be a temporary program to fill the gap and allow real estate construction to proceed, while the insurance industry had time to recoup its losses from 9/11 and redevelop new estimates that would allow it to reenter this market.
The program contained an implicit taxpayer subsidy. Since we have not had a terrorist attack since 9/11, there have been no actual government outlays, but the subsidy exists nonetheless. Insurers had higher profits because they don’t have to buy reinsurance on the private market. They relied on the government program instead.
The insurance industry built a bipartisan coalition of Members to extend TRIA and maintain the implicit taxpayer subsidy. The industry has now had more than seven years to re-estimate probabilities and rebuild their financial cushions. There is no longer a need for TRIA, but the insurance industry is extending the subsidy because it can.
The original TRIA law created a two-year program. We tried to eliminate it at the end of 2004, but an overwhelming bipartisan majority decided to extend the program for three more years, until the end of 2007. In 2007 we again tried to eliminate TRIA, and an even stronger bipartisan coalition extended TRIA for seven more years. It is now scheduled to expire at the end of 2014, although I won’t hold my breath.
Each time we were able to scale back the subsidy by raising the deductibles and charging the companies (effectively) higher premiums. In 2007, however, the industry was able to expand the program’s scope to include domestic terrorist attacks. They failed (thankfully) to expand the program to cover life insurance policies.
The market for terrorism insurance and reinsurance would function properly if the government were no longer involved in it. The President deserves kudos for proposing to further increase the deductibles and thereby scale back the implicit taxpayer subsidy, and for proposing that the program sunset after 2014. I wish he had proposed to eliminate it immediately — we certainly could use the scorable savings.
In the grand scheme of things, $300M — $400M per year is small compared to a $2+ trillion annual budget, and as I noted, that’s an implicit subsidy that has so far involved no actual government outlays. We should eliminate this program because we can — the need for this program no longer exists, the market can function without it, and taxpayers should not be subsidizing the insurance industry.
There is an opportunity here for a conservative Member of Congress or think tank to work with the President on a good (if small) free-market policy reform. It will be you and the President against corporate welfare for the insurance industry and an overwhelming bipartisan majority of Congress. Sounds like a fun fight.
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Could you make the argument that the government is the ideal terrorism insurance provider, as they control the best actuarial information regarding terrorism? Additionally, the government has the best terrorism claims management through intelligence and law enforcement. To some degree, selling terrorism insurance would be an effective method of funding anti-terrorism efforts.
No, no, no Mike D. Government should never subsidize terrorism insurance because investors then “slack off” in their demands for effective national security – a terrible moral hazard. We don’t want the largest commercial landlords, banks, etc. to say to themselves: “Who cares about terrorism? We’re insured.” You want them to lobby for good national security.
Even if your model worked efficiently (in the actuarial sense), it would require the government to signal to the markets what it thinks the risk of terrorism is – a terrible idea!
How about insurance coverage for the damage Obama has done to the country and plans to accelerate in the future?
Sam: We are paying for that already, and paying and paying and paying………………………………
These kinds of programs (flood insurance is another one) have some logic to them, but there is a clear moral hazard, as well as the perpetuality pressure that Keith discusses. Sunset it! The US reinsurance industry could use the business.
No program like this should ever be in place unless it is a doughnut policy- that is, a meaningful gap between reserves and government back-up, so that there is a clear point where it comes out of your hide and extracts pain before you can tap the Uncle to avoid insolvency. Whenever coverage starts at too low a level, it is an invitsation to shift claims costs.