The rewards of extending the Terrorism Risk Insurance Act of 2002 (TRIA) far outweigh the risks, reports a new study. Entitled "Economic Effects of Federal Participation in Terrorism Risk," the study was co-authored by professor Glenn Hubbard, dean of Columbia University’s Graduate School of Business, and Bruce Deal, managing principal at the Analysis Group. The report was commissioned by the American Insurance Association and five other insurance trade groups that favor a TRIA extension.

"The U.S economy will be stronger with TRIA than without it. Over time, it may be possible to develop alternative approaches to TRIA. However, while several alternatives have been suggested, they are not in place today and we do not believe that any of them is viable in the near term," says the report.

A two-year extension of TRIA would enhance near term U.S. economic performance, according to the report. It also would allow ample time for alternative terrorism risk approaches to be considered.

TRIA currently is scheduled to expire on Dec. 31, 2005. On that date, the federal government may no longer be the insurer of last resort for any insurers with U.S property and casualty policyholders. TRIA forces insurers to offer some form of terrorism insurance to their policyholders. Although 2005 seems a long time from now, policies extending into 2006 will be negotiated as early as this fall.

Even in the absence of another major terrorist attack, U.S. gross domestic product (GDP) may drop 0.4%, or $53 billion due to the lack of a federal terrorism insurance backstop, according to the report. It also would cut into new job creation by 0.2%, or 326,000 jobs.

Without TRIA, an attack roughly the size of the 9/11 attacks would mean the loss of tens of thousands of jobs due to reduced insurance coverage. In addition, thousands of additional commercial bankruptcies could ensue. After 9/11, losses were covered by the private insurance industry.

Critics of TRIA say that it has hindered the development of added private sector insurance and reinsurance coverage by effectively crowding out such capacity. Both Hubbard and Deal disagree with that theory, noting that most participants feel that without TRIA, insurers would be forced to reduce rather than increase their exposure to terrorism risk. That, the authors maintain, would lead to substantial and growing gaps in coverage.