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Obama Proposes Scaling Back TRIA Subsidy in 2011 Budget

Source: IFA

Posted on 02 Feb 2010

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President Barack Obama has proposed cutting the federal subsidy to insurance companies providing terrorism insurance, starting in 2011.

The president proposed cutting the Terrorism Risk Insurance Program funding, meaning higher deductibles and co-payments for terrorism insurance companies. Obama wants to kill the subsidy entirely in 2014, according to a statement in the budget explaining the cut.

The Obama Administration said reducing funding approved as part of the Terrorism Risk Insurance Act (TRIA) in 2007, reflects its belief that the industry has bankrolled enough surplus since the Sept. 11, 2001, attacks. Government subsidies for private insurers willing to cover terrorism risk were reauthorized in 2007, through 2014.

The American Insurance Association, which worked on the compromise, quickly announced its opposition to the cuts.

“TRIA was reauthorized for a period of seven years as the result of a carefully negotiated compromise,” Blain Rethmeier, an AIA spokesman, said in a statement. “Any attempt to modify this reauthorization would have a detrimental impact on the availability and affordability of terrorism risk insurance.”

Obama announced the TRIA cuts today on Monday in his $3.8 trillion budget proposal for fiscal 2011, which begins Oct. 1. The TRIA funding reduction is among $20 billion in presidential budget cuts, part of his announced freeze on government spending for three years. Congress must approve the president’s budget.

“As of the third quarter of 2009, the property and casualty insurance market has improved its ability to absorb losses from a terrorist attack,” the budget statement said. It notes that the “availability and affordability improved,” even as the private sector’s share of losses under TRIA increased between 2002 and 2007. With TRIA policyholder surpluses up to $491 billion, from $287.5 billion in 2002, the industry can better manage the risk, the statement said. Insurers to seek ‘other means’

For comparison, the budget statement points out that the Sept. 11, 2001, attacks on the World Trade Center in New York City and the Pentagon outside Washington, D.C., which ultimately led to the establishment of TRIA, caused $1.6 billion in losses.

“The [president’s budget] proposal encourages the private sector to better mitigate terrorism risk through other means, such as developing alternative reinsurance options and building safer buildings,” the budget statement said.

Citing the 2006 President’s Working Group on Financial Markets’ report on terrorism insurance, the budget statement notes that even before TRIA’s passage, private insurance coverage for domestic terrorism “was widely available without government support.”

The 2010 federal budget proposed phasing out the reduced federal subsidy over two years. “The 2010 Budget put those parties on notice that this change was coming,” the budget statement said.

In 2006, the work group also found that as private insurers’ share of the coverage increased, premiums for coverage “decreased or remained relatively stable,” the budget statement notes.