Editorial:  Continue -- but gradually reduce -- federal risk in terrorism insurance

The terrorists who turned the World Trade Center into rubble struck a devastating blow to the U.S. economy too, and few sectors felt it as acutely as the insurance industry. Afterward, insurers balked at providing any coverage for damage caused by further acts of terrorism, making it harder — if not impossible — for some developers to obtain loans. That led Congress to adopt the Terrorism Risk Insurance Act a little more than a year later, capping insurers’ losses in the event of a major attack and promising that the U.S. government would take on some of the risk.

In a story all too typical of the current Congress, the program is due to expire at the end of this year, despite broad bipartisan support for a renewal. Lawmakers are expected to try again to extend the measure early in January, as well they should. U.S. insurers don’t have enough experience with catastrophic terrorist acts — thankfully — to gauge the risk accurately and set reasonable premiums. And it makes sense for the taxpayers at large to shoulder some of the costs of an attack of the magnitude of the one launched Sept. 11, 2001, just as they do for titanic hurricanes and earthquakes.

Nevertheless, private insurers and their customers should foot the bill for incidents that don’t play out on a grand scale. The federal program is essentially an insurance policy for insurers that kicks in after a certain amount of damage is sustained, with insurers covering a portion of the losses and Washington the rest. As Congress has renewed the program, it has gradually reduced the government’s exposure by raising the damage trigger, the insurers’ deductible, their co-payment and the cap on total industry losses. The extension approved by the House in December would have doubled the damage trigger over six years to $200 million, the co-pay to 20% and the industry’s total responsibility to $37.5 billion, all sensible steps that would force insurers and their customers to take on more of the risk. But the measure died in the Senate because it was combined with a controversial and unrelated change in states’ power to license insurance agents that retiring Sen. Tom Coburn (R-Okla.) couldn’t accept.

Insurance regulators and analysts warn that if Congress doesn’t act soon, small insurers will stop offering terrorism coverage, and large ones will begin charging prohibitive premiums. The change would act like a brake on the economy, given that terrorism policies are a prerequisite for obtaining or keeping financing for large commercial buildings, major new projects and large-scale special events such as the Super Bowl. Rather than cutting off the program and hoping that doing so won’t disrupt the recovering economy, lawmakers should continue gradually reducing the federal risk shield and prodding the industry to develop a better one of its own for less-than-catastrophic attacks.

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