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Should Washington backstop terror insurance?

CNBC’s Diana Olick reports on an intense debate now raging in Washington over how much money the government should pay to backstop terrorism insurance.
/ Source: CNBC

Should the government backstop terror insurance? That’s the crux of a debate now raging in Washington.

The Sept. 11, 2001, terrorism attacks in Washington, New York and Pennsylvania cost the insurance industry an estimated $32 billion in damage claims, and thanks to the Terrorism Risk Insurance Act, or TRIA, the insurance industry stayed afloat.

But TRIA expires at the end of 2005 and the risk of terrorism in the U.S. remains high. Treasury Secretary John Snow wants to shift more of the burden of insurance from taxpayers to insurers, but insurers say they won’t be able to offer effective insurance without Washington’s help. Many are wondering how they’ll be covered if there’s another attack.

Federal Reserve Chairman Alan Greenspan weighed in on TRIA during his testimony to Congress this week on the U.S. economy. The Federal Reserve chairman said the U.S. government should be careful about how it structures a federal program as it considers whether to extend TRIA.

“We have to be very careful about what type of things we’re trying to insure against,” Greenspan told lawmakers. “It should be very succinctly limited to very large type of events.”

That’s one of many opinions now circulating around Capitol Hill, where the insurance industry is lobbying hard to get at least some part of TRIA extended.

From major insurers to companies like Simon Property Group, one of the biggest publicly traded real estate investment trusts, proposals for an extended TRIA range from the current $5 million threshold for claims to $25 million.

“If TRIA goes away and Congress doesn’t act, we’re going to see tremendous spikes in the cost of terrorism insurance ... and a tremendous reduction in availability,” noted Jeff Deboer, president and CEO Real Estate Round Table.

A new study from the Rand Center for Terrorism Risk Management Policy and financed by the commercial real estate industry finds that attacks by foreign terrorists against commercial targets remain a significant risk, and that even in its present state TRIA does not provide adequate financial protection.

The study’s recommendations: Increase the take-up of terrorism insurance and lower its price, while a long-term solution must address chemical, biological, radiological and nuclear attacks.

One particular area of concern, according to the report, is workers’ compensation insurance. If TRIA disappears, providers of compensation for workers, who are required to cover workers in the event of terrorism, will have to re-evaluate those high-risk areas.

Trouble is, worker compensation represents one of the biggest revenue areas for some top insurers. In 2003, for example, it brought in $4.3 billion for American International Group, and $3.2 billion for Liberty Mutual — that’s a lot to lose.

“It’s the largest line of business within the insurance industry — roughly 20 percent,” said Mark Lane, an analyst at investment banking firm William Blair & Company, adding that in certain circumstances for certain companies, they may be required to pull back somewhat from the workers’ compensation market.

Insurers are lobbying hard for TRIA, and next week there’s a hearing on the issue at the House Financial Services Committee. It’s expected to kick off congressional action to extend TRIA.