Testimony before Congress: The Future of the $100bn Terrorism Risk Insurance Program

On September 11, 2012, Dr. Erwann Michel-Kerjan testified before the House Committee on Financial Services. “Thank you, Chairman Biggert. Let me open by saying that if our common goal, is to make the Nation more financially resilient to future terrorist attacks, and also to limit the spending of taxpayers’ money, then our debate should not be on whether to let TRIA expire.
Rather, it should be on How we work together to make TRIA more effective.

As it was designed to do, TRIA made the supply of coverage available and affordable. Terrorism insurance cost in the US has been going down continuously, and is among the least expensive in the world. In a recent study, I have also shown that insurers are willing to provide more additional capacity for terrorism than for other catastrophic risks, because they collect all the premiums but are responsible for only a portion of the losses.

On the demand side, take up-rates among firms increased from just 20% in 2003 to 60% since 2006, a figure which combines all types of terrorism coverage used by businesses in the U.S., not just TRIA, by the way. This means that still, about 4 out of 10 large corporations don’t have coverage against terrorism today. Let’s remember that on 9/11, the coverage was verretually 100%, which allowed for a quick economic recovery of the country.

I now turn to challenging the argument that ending TRIA would limit the financial exposure of the federal government.

I think the logic is wrong. A world without TRIA will likely not mean less, but more exposure for all of us as taxpayers.

Let’s say … we are in September 2016. TRIA has expired in 2014. 15 years have passed since 2001. Attention to terrorism has faded on the demand side. On the supply side, the only insurers to offer that coverage will charge a high price to account for the cost of capital needed to underwrite extreme events. Many firms go unprotected.

Terrorists then inflict a large-scale attack with massive economic losses. Uninsured firms call on Congress to rescue them. Not only is it an election year, but the trend towards increasing federal disaster relief and corporate bailouts in the past 10 years has created new expectations (I refer you to figure 1 on page 7 of my written testimony). The cost of government relief in the wake of that new terrorist attack will likely be very expensive to taxpayers. That’s why I think a better option moving forward is to redesign TRIA.

Some of the concepts developed by other OECD countries may be relevant here. I discuss 5 in my written testimony; let me mention three briefly here.

For example, Israel has a 100% government coverage. The U.K has a Public-Private Risk Sharing arrangement, based on pooling, with unlimited government Debt Issuance that the pool can draw from. Germany, the largest economy in Europe, also uses Public-Private Risk Sharing, based on pooling; but with limited government reinsurance. In both cases the government receives a premium to provide that coverage.

To summarize, this is not a question of TRIA versus no-TRIA; it’s about strengthening the current program to make the Nation more resilient financially to future attacks, not less, and doing so by making American taxpayers less exposed, not more.
My colleagues at Wharton and on the OECD Board I’ve had the honor to chair for the past 4 years now look forward to working with you on how we do this.

Before I conclude, I want to congratulate this subcommittee, and especially you Chairman Biggert, for your leadership in successfully introducing and supporting the NFIP reform that was signed by the President early July. I trust, you will do the same, with a successful reform of TRIA. Thank you.”

FULL WRITTEN TESTIMONY IS AVAILABLE HERE.
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