Study evaluates extension of Terrorism Risk Insurance Act
A two-year extension of the Terrorism Risk Insurance Act of 2002 (TRIA) would enhance U.S. economic performance, strengthen the nation's economy, and allow time to evaluate alternative approaches to terrorism risk, according to a new study by economists R. Glenn Hubbard and Bruce Deal.
'There are fundamental issues specific to terrorism that make these risks very difficult for private insurers to fully absorb. Put simply, insurers' financial resources, known as capacity or surplus, to cover catastrophic terrorism events are limited, and estimating the likelihood and location of such extreme events is virtually impossible,' the survey said.
'In the light of these realities, the authors do not believe that TRIA has prevented the development of additional private sector insurance or reinsurance coverage by 'crowding out' such capacity. In fact, most participants in the system feel that without TRIA, insurers would be forced to reduce — rather than increase — their exposure to terrorism risk, thus leaving substantial and growing gaps in coverage,' the survey said.
TRIA is scheduled to expire Dec. 31, 2005, but the drag from its cessation would be felt before that date because insurance policies that extend into 2006 will be negotiated as early as this fall. With each passing month, as annual policies come up for renewal, market dysfunction would increase if TRIA is not extended, the report asserted.
The survey is called 'The Economic Effects of Federation Participation in Terrorism Risk.' Hubbard is head of the graduate school of business at Columbia University, and Deal is managing principal of the Analysis Group. Their work was commissioned by the American Insurance Association and five other insurance groups. For more information, see http://www.analysisgroup.com.