Terrorism Abroad Elevates Case for TRIA

Ripple effects from the terrorist attacks in London last month have bolstered the case for extending government-backed terrorism insurance in the United States, say industry sources. With less than five months left before the 2002 Terrorism Risk Insurance Act (TRIA) expires, business groups are lobbying hard for the Treasury Department to renew the act.

The fear is that private insurers would either drop terror coverage or raise premiums to astronomical levels without TRIA's support. That could, in turn, destabilize the commercial real estate market by halting major developments and deals in which lenders require terror coverage.

Bob Hartwig, chief economist at the Insurance Information Institute, believes that the London events, plus steady pressure from TRIA supporters, may have led the Treasury Department to rethink its approach on a TRIA expiration. Under TRIA, the federal government is required to cover 90% of insurers' losses from an attack by foreign terrorists, provided the losses range from $10 billion to $100 billion.

“It's become far more likely that TRIA will be renewed. The dynamic of this issue has changed markedly over the past few weeks based on these events,” says Hartwig, whose group represents the interests of major U.S. insurers.

Proponents of government-backed terrorism insurance have had a tense summer. First, the Treasury Department unveiled a June 30 report applauding TRIA for a job well done. The study read more like a grateful send-off than an affirmation of TRIA's importance, however. The study also suggested that private insurers, rather than the government, should be saddled with the cost of future terror attacks.

While difficult to say whether lobbying efforts or the London attacks — or both — were responsible for the change of heart, Treasury Secretary John Snow backpedaled in mid-July from his anti-extension stance.

Surveys of both insurers and policyholders find that TRIA has met many of its goals. Between 2002 and 2003, for example, the Treasury Department reports that the take-up rate for terrorism insurance increased from 27% to 39.5% of all policyholders. By 2004, 54% of policyholders reported having terrorism insurance coverage.

The cost of terror insurance premiums also dropped as a result of TRIA, the Treasury study concludes. Among policyholders who paid for terror coverage, the average cost fell from 4% of their total property and casualty premium in 2002 to 2.7% of their premium in 2004.

Loan servicer Bob Vestewig is pushing hard for TRIA's renewal. Vestewig, COO for Houston-based GEMSA Loan Services, is convinced that the Treasury Department will renew TRIA for a specific period of time under slightly different terms.

Vestewig recalls how chaotic it was in 2002 before TRIA was passed. “We were pulling our hair out back then. The lenders were demanding the coverage, but many borrowers either couldn't afford it, or just didn't want to buy it.”

As a loan servicer, GEMSA enforces the loan documents — which often means playing the bad cop when a borrower runs afoul of the contract. Vestewig is hopeful that he won't be back in that position in 2006 with regard to terror coverage, but he doesn't rule it out either.

GEMSA is a big player in this multi-trillion dollar business, servicing $65 billion in commercial loans for 90 different life insurance companies last year.

“We just don't know the answer to the question of TRIA going away. But I'd like to think that this renewal fight is a wake-up call,” he says. “We just can't afford to get complacent on this issue.”

(Ranked by Insured Property Losses)

Over the past 13 years, New York City and London have sustained $37.8 billion in insured property losses. The 9/11 attacks dwarfed all previous terror-related losses.

Location Method Insured Losses Killed/Injured
New York/D.C. 2001 planes $34.6 billion 2,995/2,250
London 1993 bomb $967 million 1/54
Manchester, UK 1996 bomb $794 million 0/228
Manhattan 1993 bomb $773 million 6/725
London 1991 bomb $716 million 3/91
Source: Swiss RE, Insurance Information Institute

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