When Congress headed home for the year last week without renewing the Terrorism Risk Insurance Act (TRIA) many in the real estate, tourism, and insurance business predicted disaster. The Coalition to Insure Against Terrorism—a broad grouping representing everyone from real estate investors to sports leagues—blasted the inaction. “Congress has let down American workers, American businesses and jeopardized US economic and national security,” it said in a released statement. Given the apparently high stakes, indeed, one might have expected a market panic.
So far that hasn’t happened. As my colleague at R Street, R.J. Lehmann, discusses in the trade publication Insurance Journal, even the parties complaining most loudly about the dangers of allowing coverage to lapse have seen only modest downward blips in their stock prices. Rating agencies haven’t even seen fit to downgrade the insurers that rely on the program. There are no reports of a building project or major event being canceled because TRIA has lapsed.
The market, for its part, has responded with a flood of new capital. The major rating agency, S&P, says that there’s “no shortage” of capital to underwrite the risk. At least one company, furthermore, has announced new types of terrorism insurance that covers just the types of risks from chemical, biological, nuclear and radiological weapons that many once claimed were impossible for the private sector to cover. In short, government has stepped away and there hasn’t even been a hiccough. The costs, to date, have all been borne by the stakeholders of companies that benefited from the program.
All that said, it isn’t quite time to break out the champagne and declare a laissez-faire victory. Ending a longstanding government program that many rely on simply by letting it expire rather than working out an orderly phase-out is almost certainly a bad way to run a government. And there’s likely some modest long-term role for the government in providing terrorism insurance anyway. There are certain potential mega attacks—a nuclear explosion in the center of a major city for example—which the private sector just can’t handle. The problem here isn’t market failure, it’s more of a lack of money: the world just doesn’t have enough capital to pay the largest conceivable claims. Certain other types of coverage, particularly workers compensation--which is, by definition, open-ended and not allowed to exclude anything—may actually be impossible to price at all in a free market if it must include terrorism risk. If there’s no government role defined in advance at all, furthermore, there’s a good chance that Congress will follow historical precedent and put taxpayers on the hook for almost every penny of losses.
Congress is almost certainly going to pass some sort of terrorism insurance program once it returns. It should. But recent events show that a loss of one government subsidy doesn’t mean the end of the world.