The insurance and real estate industries are warning that Washington’s economy will suffer unless Congress renews the Terrorism Risk Insurance Act (TRIA), which is set to expire Dec. 31.
The Bush administration says allowing TRIA to expire would create incentives for the commercial insurance industry to assume the financial risks.
The Homeland Security Department lists Washington’s government buildings as high-risk targets for terrorists. TRIA provides a government bailout for the insurance industry for any claims greater than $30 billion if a terrorist strike results in policy claims.
“Catastrophic terrorism is potentially so immense that it’s beyond the financial capacity of the insurance industry,” said Dennis Kelly, spokesman for the American Insurance Association.
After the September 11 attacks, which caused $32.5 billion in insured losses, insurance rates skyrocketed, forcing some real estate developers to delay projects and lay off workers because of the increased costs.
Most lenders have required terrorism insurance since the September 11 attacks.
Congress enacted the federal subsidy under TRIA in late 2002 to reduce insurance rates enough for projects to continue.
If TRIA is not renewed, the American Insurance Association has suggested that it be replaced with a “pool” fund financed jointly by government and industry to pay terrorism claims, similar to the one used in Britain.
The insurance industry estimates that claims from another major terrorist attack could cost $50 billion to $100 billion or more — with nuclear or biological attacks representing the greatest risk.
Commercial insurance companies that would cover the claims have access to only $114 billion, said Robert P. Hartwig, chief economist for the Insurance Information Institute, an industry trade group.
He called commercial insurance and reinsurance funds “clearly inadequate.”
Under TRIA, the insurance industry must pay the first $30 billion in insured losses from an attack. For higher amounts up to $100 billion, the government will pay for 90 percent of the losses while insurers pay the rest.
For losses greater than $100 billion, Congress is supposed to reconvene to determine how much the federal government will pay.
“The Washington area is among the most at-risk cities in the United States,” Mr. Hartwig said.
The economic consequences would affect “anybody who either directly or indirectly owns or occupies real estate,” said Matt Klein, president of Akridge, one of the Washington area’s largest real estate developers and property management companies. “Clients in commercial buildings could potentially be affected by an increase in operating expenses.”
So far, the funds from TRIA are untapped because no major terrorist attacks have occurred in the United States since it was enacted.
The funds would be administered by the Treasury Department, which spends about $4 million a year in administrative costs to continue the coverage. The costs include developing regulations and a claims process.
However, last month, a Treasury Department report said a better option than TRIA is to let supply and demand determine terrorism insurance rates to a greater degree.
“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,” Treasury Secretary John W. Snow said in a June 30 letter to the Senate Banking, Housing and Urban Affairs Committee.
He also said the economy is more “robust” now than in 2002, when TRIA was enacted to prevent an economic downturn.
Gross domestic product has risen from 2.3 percent to 3.9 percent by the end of 2004, unemployment has fallen from 6 percent to 5.1 percent by May 2005, and construction jobs are at a record 7.2 million.
“Extending TRIA would have little impact on the economy given its current strength,” Mr. Snow said in his letter.
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