Industry optimistic about new terror insurance plan.

With the Terrorism Risk Insurance Act scheduled to expire by the end of the year, supporters of the legislation are optimistic that Congress can draft a modified version of the act that will continue to provide some kind of continued government backstop.

A week after the worst terrorist attack to hit the UK since WWII, Martin L. DePoy, a spokesman for the Coalition to Insure Against Terrorism, a pro-TRIA group whose members include REBNY and BOMA, said, "We remain optimistic that a program will be in place."

TRIA provides, as its main feature, government backing for insurers who supply terrorism coverage in the event they are subject to claims of over $5 million, and up to $100 billion, stemming from a terrorist attack. Following 9/11, terrorism insurance became unavailable or unaffordable until the TRIA backstop was introduced in 2002 and effectively took the role of the re-insurers, who were and still remain unwilling to significantly back insurers for their terrorism coverage. "The re-insurers allocate something like $4-$6 billion a year for terrorist coverage, which is a fraction of what's needed," DePoy said.

Currently, TRIA is scheduled to expire on December 31, 2005. When it does, many fear that terrorism insurance will vanish or become prohibitively expensive like it did in the wake of 9/11 when legislation was not yet in place. Insurers as well as their re-insurers suffered financial turmoil when the Twin Towers were destroyed in the attacks of September 11, 2001.

Echoing the opinion of the Bush Administration, the Treasury Department expressed in a statement that the economy and the insurance industry have recovered considerably since 9/11 and that taxpayers should no longer be saddled with the liability. In a letter to Ohio Congressman Michael Oxley, who serves as the chairman of the House Financial Services Committee and has indicated support for revising TRIA, Treasury Secretary John Snow stated that TRIA "has achieved its goals of supporting the industry during a transitional period and stabilizing the private insurance market."

"Extending TRIA would have little impact on the economy given its strength," Snow said in the statement after citing that GDP growth is up and unemployment is down. "It is our view that continuation of the program in its current form is likely to hinder the further development of the insurance market by crowding out innovation and capacity building."

DePoy doesn't agree that the private sector is ready to provide terrorism insurance without government backing.

"Frankly, we don't share the Administration's outlook that the re-insurers will reappear and insurance will become available," DePoy said.

Snow's statement did leave the door open for continued government support however, stating that the "Administration would accept an extension only if it includes a significant increase to $500 million of the event size that triggers coverage" as well as various other revisions. DePoy believes that one way Congress can draft legislation that will still provide government backing is to make its coverage applicable only in the event of a specific type of terrorist attack, such as a car bomb.

Catastrophe bonds, while inline with the type of innovative, capacity building solution the Treasury Department called for, are a less realistic and unproven solution DePoy said. The bonds, which have been touted as a potential solution for privatizing terrorism insurance, essentially securitizes coverage and has been employed to insure against natural disasters.

"The real problem with something like catastrophe bonds is that investors are still going to want to know what kind of risk they are going to be subject to," DePoy said. "That's the essential problem, and why insurers can't really provide coverage in the first place, the risk is incalculable."

The Rand Corporation, which conducts research on science, technology, national security, and public policy, has been working to quantify the risk that terrorism poses and issued a preliminary study entitled "Issues and Options for Government Intervention in the Terrorism Marketplace."

Eventually Rand is aiming to publish a report that examines predictive indicators for terrorism, the kind that would allow the insurance industry to quantify the threat, as it would a hurricane or natural disaster.