Terrorism Risk Insurance Act to Be Extended, Of Course

On December 7, the House of Representatives passed a bill extending the Terrorism Risk Insurance Act (TRIA), a statute enacted on November 26, 2002. The Senate has already approved a similar bill, so, given that President George W. Bush never vetoes anything, resolution of the two chambers’ versions by a conference committee will suffice to permit a law that otherwise would expire on December 31 to remain in effect. Its extension illustrates perfectly how crises operate as ratchets in the growth of government.

In the wake of the 9/11 attacks, commercial property-casualty policyholders complained that terrorism insurance had become difficult to get and extremely expensive when it was available. Naturally, they took their complaints to Congress, where lawmakers fretted that lack of terrorism insurance coverage might cause business activity to suffer – a bad thing in their view because suffering businesses pay smaller amounts in taxes. In response, the government enacted TRIA. After all, an emergency existed, or was said to exist, and the federal government is nothing if not an all-purpose, deep-pockets responder to emergencies great and small.

Under the law, commercial property insurers are required to offer terrorism insurance on the same terms that apply to their coverage of other types of losses. However, the U.S. Treasury stands ready to reimburse 90 percent of certified insured losses (beyond a relatively small deductible amount) from acts of terrorism until total losses reach $100 billion in a year and to take responsibility for the entire amount of losses beyond that threshold. In doing so, the General Accounting Office noted in 2004, the government makes itself “effectively the world’s largest reinsurer.” The same report observed that two years after passage of the act, “industry participants have not developed a mechanism to replace TRIA.”

But why should they, when they can lobby to continue receiving subsidized coverage? As former Texas Insurance Commissioner J. Robert Hunter has pointed out, “TRIA amounts to ‘free reinsurance.'” (Reinsurance is the insurance coverage that insurance companies purchase, mainly to protect themselves from catastrophic losses.) Hunter went on the explain that such free reinsurance crowds out private reinsurance and tempts primary insurers to “take on risks they otherwise wouldn’t at prices they probably shouldn’t.” In short, like every other subsidy, this one creates distortions in the market, sending misleading price signals to market participants, who then proceed to misallocate resources.

Subsidies, however, definitely have their charms for those who are subsidized. Hence, not surprisingly, a variety of private interests that stood to gain – major insurance companies, energy companies, real estate developers, construction companies – have pushed their congressional representatives to extend the act. Very soon these lobbyists will be popping the champagne corks to celebrate the successful culmination of their efforts. As Hunter observed, when insurers stand to lose from certain kinds of government intervention “they jump up and down screaming and saying that’s a subsidy and that you have to have internalization of costs, but here, when the subsidy goes to them, and the costs get spread around, they’re all for it.”

Precisely because the costs are spread thinly across all federal taxpayers, little opposition to the law’s extension has emerged. It’s the oldest trick in the book of special-interest politicking: concentrate the benefits and disperse the costs. Moreover, once a subsidy program has been created, we can be certain that vested interests in its perpetuation also will have been created, even though the crisis conditions originally offered as a justification may have long since disappeared. Although the general public knows nothing about TRIA, commercial property insurance is a big business, and the interested parties are delighted to have the government continue to provide free reinsurance, as their active lobbying for such continuation attests.

The Treasury’s Web site describes TRIA as follows: “the law establishes a temporary federal Terrorism Insurance Program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk.” Lovely rhetoric, all sweetness and light. When I first read this description, however, the part that made me choke the hardest was the word “temporary.” My immediate thought was: not bloody likely. Although the description goes on to promise that the program “will allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses,” its very existence works against such outcomes and encourages the subsidy recipients to pay off members of Congress to keep the program going forever.

TRIA is a paradigm of the crisis/ratchet effect in the growth of government. Countless similar stories might be told about federal intervention in the economy during the past century. In my book Crisis and Leviathan and dozens of other publications over the past twenty years, I myself have told many of these stories in regard to everything from credit subsidies to monetary controls to labor-market meddling to government engagement in the ocean shipping industry. Sad to say, for the general public, as distinct from the opportunistic special interests with political clout, the lesson to be learned from crisis policymaking is always the same: immediate action, prolonged regret.