A Trial for TRIA

October’s disgraceful government shutdown foretells dysfunction on multiple fronts that spills over into the insurance space. Perhaps the most challenging is the industry’s effort to extend the Terrorism Risk Insurance Act past 2014. 

It is beyond dispute that the act won’t be extended this year, so provisional exclusions for terrorism coverage will rain down on clients in post-Jan. 1 renewals. The difficulties in getting the act extended can be summed up in two words: Jeb Hensarling.

An acolyte of former Sen. Phil Gramm of Texas, Hensarling is the brilliant, forceful chairman of the House Financial Services Committee. He’s a gifted leader who articulates a purist pursuit of free-market capitalism. Assuming Republicans maintain control of the House of Representatives, he will be the chairman of our key committee of jurisdiction for at least another five years. We like and respect him, and he’s done much to champion our industry.

But he’s skeptical, to say the least, about TRIA. Hear him in his opening statement at a TRIA hearing in September: “As we look at the national debt clock, which I know is inconvenient to some, it principally turns because [of] insurance programs—be they social insurance programs such as Social Security and Medicare or others—the government has not done a particularly good job. That, ladies and gentlemen, represents a man-made disaster. And it will certainly color my opinion on this matter. I have an open mind, but it is not an empty mind. It remains a skeptical mind.”

If he were any rank-and-file member of Congress, those comments would not be a problem. But Hensarling controls his committee, which has sole jurisdiction over the program. Even though many of his own Republican colleagues on the committee strongly support TRIA, they would not cross him or go over his head to the House leadership. The industry is in a pickle.

Hensarling has not closed the door. But he has challenged the industry to advance ideas for restructuring the program to encourage greater private sector participation, less government involvement and a way for the government to transition out of the terrorism insurance marketplace. Indeed, some in the industry have been noodling with different formulations. But since it appears certain that no legislation could conceivably advance until the middle of next year, the industry is loath to negotiate against itself. Unity is prized within the policyholder/insurance coalition, and no one wants to touch the third rail of TRIA—namely the triggers, deductibles and co-pays for insurers.

Marsh and McLennan’s general counsel Peter Beshar, testifying at Hensarling’s hearing, said Congress could rightfully tinker with the numbers based on increased global capacity, but the underlying terrorism risks remain uninsurable. The lapse of the program, Beshar said, would put tens of thousands of policyholders at risk. Bill Henry, CEO of MHBT in Dallas, says the absence of TRIA simply means carriers will reduce their exposure and raise their prices (and diminish competition), and that government will bail out policyholders in any event.

TRIA contains a mandatory repayment provision for the industry up to the scale of the 9/11 attacks. After the mandatory reimbursements are factored in, government is better off with the program because carriers are required to offer the coverage. Most major carriers contend if Congress increases the industry’s obligation by much, they would rather see the program eliminated so they are not forced to offer coverage. Is this a head fake? It doesn’t appear to be.

Eliminating TRIA would mean eliminating broad swaths of coverage. But Chairman Hensarling appears to believe we won’t know what the marketplace will look like until the program goes away. Minority voices in the industry agree—notably Starr International CEO Hank Greenberg (and people pay attention to what he says). Several players in the London market have said privately they would stand to benefit enormously if there is no TRIA. I’m a lobbyist and not an insurance economist, but common sense dictates the prices for policyholders would be exorbitant and full coverage unlikely, particularly in perceived high-risk areas and industries.
The industry has about a year to convince Chairman Hensarling the program is worthwhile or to find alternatives. The industry does not, however, have a strong history of collective agreement on new ideas.

While there is no obvious Senate critic of TRIA, it’s not hard to envision Tea Party conservatives who would oppose extending the program. The bigger challenge on that side of the Capitol: There is no clear industry champion who can match the passion for TRIA the way former Sen. Chris Dodd, as Senate banking chairman, carried the water for the program six years ago during its last extension.

All these factors suggest a TRIA extension is not politically viable. But that view is largely negated by the lobbying clout of the policyholder community. Led by the Real Estate Roundtable, the National Association of Real Estate Investment Trusts, and the International Association of Shopping Centers, the policyholder coalition packs a punch. In the immediate aftermath of 9/11, the insurance industry tried and initially failed to enact TRIA. Only when the policyholder community came to the rescue did the program become established. In both of its reauthorizations, the client community led the charge.

I remain cautiously optimistic that TRIA will be reauthorized, almost certainly in some altered form. How we get from here to there, though, with Jeb Hensarling’s skeptical but open mind, is far from clear.