Tom Coburn kills obscure terrorism insurance subsidy program at the last minute

In a statement following the news, Senator Chuck Schumer explained that TRIA expiration is a potential economic disaster because “billions of dollars of projects and hundreds of thousands of jobs are at risk.” How does that work?

Well, the 9/11 terrorist attacks ended up costing insurance companies a bundle. Many of those costs were passed on to reinsurance companies — companies that insure insurance companies. Once the money was out the door, reinsurers decided they had no sound basis on which to model terrorism risk and would start refusing to write reinsurance for terrorist attacks. That led insurance companies to only offer policies that excluded coverage for damage caused by terrorism. That got Congress worried, so in 2002 they passed TRIA.

TRIA promises insurance companies that in the event of massive terrorism-related losses there will be a giant federal bailout of the insurance industry. It stipulates that once the bailing-out is done, a special tax of up to 3 percent will be levied on the industry to recoup the losses.

Schumer’s argument is that without TRIA there would be no insurance coverage for terrorism and, without the ability to obtain insurance, many projects will be imperiled.

Coburn’s view, and that of other TRIA skeptics, is that even if the private market was not prepared to develop a terrorism risk model in early 2002, there’s no reason in principle that such models can’t be developed and private sector insurance offered. On this view, the real appeal of TRIA to the insurance industry and its clients is that it’s a massive subsidy.

TRIA guarantees that the bailout will happen, if needed, but the Treasury Department has a lot of discretion over the recouping part. It’d be relatively easy for industry lobbyists to make the case for leniency in the wake of an attack, setting up a classic case of privatized profits and socialized losses.

Most likely the House passes TRIA again next year and the Senate acts with more speed. But it is possible that with more attention being paid to the issue, opposition will grow and Coburn’s cause will find more support. TRIA has a lot of structural similarities with things like the Export-Import Bank and other traditionally bipartisan business subsidies that have been attracting more scrutiny from conservatives over the past few years.