Terrorism Risk Insurance Act: Time to Renew . . . or Rethink?

Abstract

This paper summarizes the U.S. program for terrorism insurance, outlines its advantages and disadvantages, and describes the current proposals for extension of the program. The program, generally referred to as a “Federal Backstop,” functions in some ways that are similar to reinsurance, but it does not require participants to pay premiums ex ante. Instead uses an ex post recoupment mechanism to recover some or all of the Federal payments made under the program. This approach has the advantage of reducing the cost and increasing the availability of terrorism insurance. Some have criticized the program for its interference in market mechanisms, but the program facilitated the development of the market underneath the backstop. The program does not cover NBCR risk, and some types of insurance are excluded. In addition, the program does not preempt state price regulation or the mandated use of the standard fire insurance policy, which provides coverage for ensuing fires after terrorism events. These weaknesses are not addressed by current proposed legislation to extend the program for seven years without any changes. The strong, bipartisan support for the proposed legislation suggests that it is likely to pass.