Allowing the terrorism risk insurance program to expire could increase federal spending by billions of dollars in the event of a future terrorist attack, according to a new study by RAND Corporation.
RAND reports that for terrorist attacks with losses up to about $50 billion, not having the Terrorism Risk Insurance Act (TRIA) in place would result in higher federal spending.
For terrorist attacks with losses ranging from $14 billion to $26 billion, RAND predicts the federal government would spend $1.5 billion to $7 billion more without TRIA than with the program in place.
The greater federal spending without TRIA would result from less insurance coverage, leading to greater uninsured loss and hence greater demand for federal disaster assistance.
RAND’sÃ‚ analysisÃ‚ comes as a bipartisan agreement was introduced in the Senate last week that would extend TRIA for seven years, with changes in the insurer co-pay and mandatory recoupment threshold.
An excerpt from the RAND report reads:
If allowing TRIA to expire causes terrorism insurance coverage to revert to pre-TRIA levels, a greater fraction of loss in a terrorist attack would go uninsured than would be the case with TRIA in place. More loss going uninsured would increase demand for other forms of compensation, which could, in turn, lead to an increase in other (non-TRIA) forms of federal disaster assistance.Ã¢â‚¬
The study makes the point that the federal government currently makes no net expenditures under TRIA until the commercial insurance industry has paid at least $27.5 billion in claims in TRIA-eligible lines.
As the size of the attack increases and the insured loss increases beyond the $27.5 billion industry retention amount, the federal liability through TRIA kicks in.
Based on current take-up rates, a 9/11 type attack would result in an insured loss of about $33 billion, RAND notes. Therefore, taxpayers would contribute through TRIA only in an attack comparable in magnitude to 9/11, which remains the second most costly insurance event in U.S. history, exceeded only by Hurricane Katrina.
For attacks with greater losses, in excess of $50 billion, the increase in disaster assistance after an attack without TRIA begins to be countered by the elimination of federal payments through the TRIA program, eventually leading to a net decrease in federal spending should TRIA expire.
From the perspective of federal spending, TRIA therefore appears to be a reasonable federal policy: In the absence of a terrorist attack, it costs taxpayers relatively little, and in the event of a terrorist attack comparable to any experienced before, it is expected to save taxpayers money.Ã¢â‚¬
Claims Journal reports on the study findings here.