Commentary

Don't Let Budget Rules Hide the Fact That TRIA Saves Taxpayers Money

By Lloyd Dixon and Robert Lempert

This commentary was written in November 2007 in response to the scheduled expiration of the Terrorism Risk Insurance Act(TRIA) on Dec. 31st, 2007. TRIA was extended until Dec. 31st, 2014 by the Terrorism Risk Insurance Program Reauthorization Act of 2007, which was signed into law on December 26th, 2007.

The federal government's program for terrorism insurance—the Terrorist Risk Insurance Act, commonly known as TRIA—expands the private-sector's role in providing such insurance and more than likely will save taxpayers money. But as Congress debates how and whether to extend TRIA past its scheduled Dec. 31 sunset, its reauthorization is, ironically, getting caught up in budget rules Congress set up to save taxpayers money in the first place.

Congress established TRIA after the 9/11 attacks, when insurers, faced with large losses, began canceling terrorism coverage for commercial property owners, threatening to slow economic development in America's largest urban areas. TRIA authorizes the federal government to partially reimburse insurers for claims incurred following very large terrorist attacks.

How would TRIA save taxpayers money? While not compelled to do so, the federal government would likely compensate uninsured victims after a terrorist attack, just as it did after 9/11. A recent study we performed shows that by transferring risks for the largest attacks to the government, TRIA lowers the price of privately provided terrorism insurance, increases the proportion of businesses buying this insurance, and, thus, reduces the ranks of the uninsured who would seek compensation from the federal government after any terrorist strike.

Under TRIA, the government only reimburses insurers for the very largest attacks. Thus, for future attacks smaller than those about twice the size of 9/11, the amount the government reimburses insurers is likely to be small compared to what it would save in compensation to uninsured victims. Since attacks twice as large as 9/11 are far less likely than smaller attacks, the net effect is that TRIA can be expected to save taxpayers money.

Unfortunately, TRIA may get caught in a Congressional net designed to catch legislation that that will expand the federal deficit. The Pay-As-You-Go (or PAYGO) rules in the House and the Senate require lawmakers to offset the costs of spending on new entitlement programs with savings elsewhere in the budget.

Following these rules, the Congressional Budget Office concluded the House bill to extend TRIA would increase the federal deficit by $8.4 billion over 10 years, while the less-ambitious Senate bill—before a PAYGO fix was added—was estimated to increase the deficit by $5.1 billion over the same period.

But these estimates do not fully account for TRIA's budgetary effects. TRIA allows the government to recover some or all its outlays through surcharges on commercial insurance premiums over time.

In addition, these cost estimates for TRIA do not consider the budgetary impacts of future discretionary spending on victim compensation on recovery after an attack. Thus, although they account for TRIA's guaranteed payments to insurers, they assume the U.S. government will provide no post-attack compensation to uninsured victims following a terrorist strike.

Given what happened following 9/11, Hurricane Katrina, and many other national disasters, it's safe to assume the government would help compensate uninsured victims of a future terrorist attack. Our analysis shows that expected taxpayer costs are lower with the existing version of TRIA than without the program, as long as the government compensates at least 5 percent of uninsured business losses in future attacks—a very conservative assumption.

Both the House and Senate bills incorporate ad hoc fixes that attempt to satisfy the budgetary issues, but they may diminish the effectiveness of TRIA. The House bill would fund TRIA reimbursements by authorizing a joint congressional resolution after a terrorist attack; insurers' obligation to pay claims would be limited unless such a resolution is passed. But this "fix" may compromise TRIA's effectiveness by making terrorism insurance less attractive to policyholders, who cannot be assured that their policies will fully pay out after an attack. How many individuals would buy life or property insurance if there was no solid guarantee an insurer would pay a valid claim?

Meanwhile, the Senate addressed the budget issue by increasing the funds the government would recover from commercial policyholders and shortening the recovery time. These increased surcharges would reduce taxpayer outlays following the largest terrorist attacks, but place an additional burden on businesses struggling to recover.

Budget rules that attempt to impose fiscal responsibility on Congress and protect taxpayers in the process are admirable. But for terrorism insurance, such rules may have the opposite effect—actually pushing policymakers away from doing what is ultimately in the taxpayers' best interests.

Lloyd Dixon is a senior economist and Robert Lempert is a senior physical scientist at the RAND Corporation, a nonprofit research organization.

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