NCPA - National Center for Policy Analysis

TERRORIZING CONGRESS

October 27, 2006

The United States hasn't been hit by a terror attack in five years, but that hasn't stopped the insurance industry from hitting up Congress again and again for more terror insurance subsidies, says the Wall Street Journal.

Congress passed the Terrorism Risk Insurance Act (TRIA) ostensibly to assist the insurance industry through a "transitional period" by agreeing to cover the bulk of any losses from future terror attacks. The problem is that this federal backstop is no longer needed, if it ever was. By the time Congress passed TRIA in November 2002, premium rates were falling.

For further evidence that TRIA deserves a proper burial, a recent U.S. Treasury report on the terrorism risk insurance market shows the lack of need for federal help, says the Journal:

  • The percentage of companies buying terrorism coverage has climbed to 58 percent in 2005 from 27 percent in 2003.
  • At the same time, the cost of coverage has fallen to roughly 3 to 5 percent of total property insurance coverage.

Insurance industry officials claim that the private market for terrorism risk insurance cannot operate without some form of public-private partnership.  But that gets it exactly backward, says the Journal.  As the Treasury report explains, TRIA appears to negatively affect the emergence of private sector reinsurance capacity because it dilutes demand for private sector reinsurance.

We'll never know what the private sector reinsurance market is capable of so long as Uncle Sam is providing the service for free, says the Journal.  TRIA also creates a moral hazard. By shifting coverage costs from property owners to taxpayers, the program potentially creates higher overall costs by reducing incentives for property owners to invest in risk mitigation efforts.

Source: Editorial, "Terrorizing Congress," Wall Street Journal, October 27, 2006.

For text (subscription required):

http://online.wsj.com/article/SB116191400456905578.html

 

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