In search of a TRIA solution

Risk & Insurance, June, 2005 by Christopher Kende

The clock is ticking on TRIA, and the insurance industry still does not know what is going to happen to terrorism coverage should the law be allowed to expire at the end of 2005. If the Terrorism Risk Insurance Act--passed in 2002 as a federal backstop to provide capacity for insuring losses from future terrorist attacks--is not extended in its current form, Congress should at least fashion a long-term private/public partnership replacement plan.

Without a long-term solution, the private sector will be unable to cope with a loss like the Sept. 11 tragedy.

Although bills to extend the law have been introduced in Congress, there is much controversy regarding its renewal. Some politicians have proposed a "free-market solution," which would presumably expect the current insurance markets to absorb most long-term terrorism risks. Unfortunately, insurers do not have the capacity to cover a major catastrophe exposure should, for example, a "dirty" bomb go off in New York's Grand Central Station.

Among other suggestions are:

* Loosen some of the regulatory. constraints that now govern insurance markets, giving insurers more freedom to negotiate terms and conditions. However, because states traditionally regulate insurance, this would involve the federal government telling the states what to do--a dicey situation at best.

* Raise retention levels, requiring private insurers to absorb a higher portion of the risk. But what would be a fair compromise? It is uncertain whether the market could cover even 50 percent of the risk of a significant catastrophe.

* Allow tax-driven solutions, where a company could either set up a tax-exempt entity or establish tax-deferred reserves. However, the average business may not have the wherewithal to finance adequate reserves for a catastrophic event.

In addition, the industry has discussed adopting a shared set of national standards for evaluating potential insureds on disaster preparedness. Advocates say that widespread distribution of national standards would give insurers a comfort level through aggressive risk reduction programs and risk modeling systems.

However, what role these standards might play and who might develop them remains unclear. Plus, how insurers could be expected to adopt underwriting policies and rate the risks to establish the premiums still remains cloudy.

The private sector simply does not have the resources to weather a catastrophic terrorist attack involving nuclear, chemical, biological or radiological agents. Moreover, no amount of preparedness could significantly reduce the odds of a catastrophic attack involving radiological or biological agents.

There is a point at which the government must step up and accept its role as the only entity with the means to provide ultimate protection for the catastrophic, economic and human losses that could result from a terrorist attack.

We have reached that point. Much like in the areas of nuclear risk and oil pollution where the Oil Pollution Act of 1990 compensates victims when private compensation is inadequate or unavailable, a solution involving a partnership between the private market and the government is the only long-term option.

Hopefully, it will not take another tragedy like Sept. 11 for the government to understand the importance of standing behind the private market in the event of a national terrorist disaster.

CHRISTOPHER KENDE, a member of the law firm of Cozen O'Connor, practices in the areas of maritime, insurance and reinsurance law, and advises insurers and international corporations on political risk insurance, including terrorism-related matters.