Federal Regulation

Huge Insurance Industry Surplus Eliminates Need for Renewal of Taxpayer-Backed Terrorism Insurance Program Originally Created As Temporary Response to 9/11

$780 Billion Surplus of Property/Casualty Insurers Dwarfs $32.5 Billion in 9/11 Claims; Congress Should End Free Reinsurance for Insurance Companies

Washington, D.C. – As Congress considers 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 House Financial Services Committee, in a letter sent Monday, 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terrorism losses without continuing the massive taxpayer subsidies it has been provided under the program that was originally enacted as a temporary response to 9/11, CFA wrote.

On Wednesday, the House Financial Services Subcommittee on Housing, Community Development, and Insurance and the Subcommittee on National Security, International Development, and Monetary Policy will hold a hearing on the question of reauthorizing TRIA.

“We believe the program is no longer needed, and this public subsidy of the overcapitalized insurance industry should be wound down,” said J. Robert Hunter, CFA’s 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, 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. That surplus rose to $780 billion by the end of the first quarter of 2019, according to industry reports. Prior to the 9/11 attacks, the industry’s surplus was $326 billion, or only 44 percent of the 2018 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 [2018] industry surplus of $742 billion dwarfs the $21 billion of [after-tax] insurer losses from 9/11. In 2019 dollars, the amount a 9/11 event would cost insurers would be $30.6 billion [after taxes].  Even in the extremely unlikely event of a claim or series of claims totaling three 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, the industry would be responsible for an additional $7 billion, the full $92 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 only 0.82. The after-tax effects of $85 billion of industry losses from a terrorist event equivalent to three 9/11s would only increase this ratio to a still extremely safe level of 0.93. If TRIA expired, the ratio, after paying $92 billion claims from three 9/11 size events would be a mere, and still overcapitalized, 0.94. Indeed, the industry could sustain a series of claims 10 times the size of 9/11 and still maintain a safe premium to surplus ratio of 1.40.

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 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,” wrote CFA.  “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.”

CFA concluded that “the December 31, 2020 expiration of TRIA allows ample time to craft a more taxpayer- and public-interest approach to terrorism insurance than merely extending this massive giveaway to an industry that is flush with surplus.”


J. Robert Hunter, 703-528-0062

Doug Heller, 310-480-4170