Growing Insurer Surplus Calls into Question Need for Congressional Renewal of Government-Backed Terrorism Insurance

Nearly $750 Billion Surplus of Property/Casualty Insurers Dwarfs $26 Billion Losses from 9/11

Washington, D.C. – As Congress begins to consider the future of the nation’s terrorism insurance program – the Terrorism Risk Insurance Act (TRIA), which expires on December 31, 2020 – the Consumer Federation of America (CFA) urged Members of the Senate Banking, Housing and Urban Affairs Committee, in a letter sent today, to review the extraordinary growth and levels of the property/casualty insurance industry’s surplus capital as they contemplate the next steps for TRIA. The industry has the capacity to insure properties against terrorism losses without continuing the massive taxpayer subsidies it has been provided under TRIA, CFA wrote.

“We beieve the program is no longer needed, and this public subsidy of the overcapitalized insurance industry should be wound down,” said J. Robert Hunter, CFA Director of Insurance and former Texas Insurance Commissioner and Federal Insurance Commissioner. “If Congress wants to extend TRIA, it should no longer be as a corporate welfare program and, instead, it should require insurance companies to pay a fair, actuarially sound premium for any federal backup of private coverages that Congress authorizes.”

By the end of 2018, the surplus of the property/casualty insurance industry (the amount of money backing up the business the insurers write) was $742 billion, according to data released by the Insurance Services Office and American Property Casualty Insurance Association. Prior to the 9/11 attacks, the industry’s surplus was $326 billion, or only 44 percent of the current surplus. TRIA was not, of course, in effect at the time of 9/11 and the industry survived that large claim in 2001 without much difficulty.

In its letter, CFA wrote,

The current industry surplus of $742 billion dwarfs the $27 billion (in 2019 dollars) of insurer losses from 9/11. Even in the extremely unlikely event of a claim or series of claims totaling four times larger than 9/11, the industry is financially positioned to handle the losses. Under the current rules of TRIA, we estimate that insurers would be responsible for about $85 billion of losses before the federal reinsurance kicked in. Without TRIA, industry would be responsible for an additional $23 billion, the full $108 billion of such an extraordinary event or series of events. That is well within the capacity of the insurance industry without any need for a federal bailout.

The key measure of the safety and soundness of the property/casualty industry is its ratio of net written premiums to policyholder surplus. In recent years, because of the increase in weather-related catastrophic events and fear of terrorism, the ratio considered to be safe by experts has been lowered from 2.00 to 1.50. However, at the end of last year, the industry’s ratio stood at an extremely safe level of only 0.82. The after-tax effects of $85 billion of industry losses from a terrorist event equivalent to four 9/11s would only increase this ratio to a still extremely safe level of 0.93. If TRIA expired, the ratio, after paying $108 billion claims from four 9/11 size events would be a mere, and still overcapitalized 0.97, according to CFA’s calculations.

In addition to calling on Congress to end the TRIA program, CFA offered two alternative proposals that would protect taxpayers while also recognizing the potential for a catastrophic series of acts of terror. One proposal is to eliminate TRIA and replace it with a mechanism in FEMA designed to react to the details of any such extreme event and provide taxpayer funded coverage for an act of terror only if and after the industry surplus is diminished by 30%. A second alternative is to renew TRIA’s backstop for insurance companies but require companies to pay an actuarial sound premium for the reinsurance provided by American taxpayers.

“It is not surprising that insurance giants want to keep a free reinsurance program and further expand their profits, but at a time of record-breaking federal budget deficits and near all-time high insurer surpluses, we question the wisdom of providing multi-billion dollar subsides to an industry that can easily afford to insure several terrorist events even larger than 9/11,” said Hunter.  “If there are instances where it has been difficult to obtain insurance coverage, the Federal Insurance Office should work with appropriate state insurance departments to examine and efficiently mitigate these deficiencies. At the very least, the government should charge an actuarial sound premium to insurance companies for the reinsurance that TRIA makes available.”