Report

Government Set to Continue Backing Terrorism Insurance

A post-9/11 program meant to be temporary is likely to be renewed until at least 2019.

In the wake of the September 11, 2001, terrorist attacks, after paying out a record $32 billion in claims, many private insurers decided that terrorism was too costly and unpredictable a risk to cover. So lawmakers stepped in with a temporary solution: The government would share the burden with private insurers for the largest losses after major terrorism events.

Now, after 12 years and no additional attacks, the Terrorism Risk Insurance Act, or TRIA, is on the cusp of its third renewal, raising questions about whether it will ever expire.

TRIA was intended as a short-term solution and carrot to keep private insurers writing policies. In contrast, many other countries went with permanent government programs that collect premiums from private insurers in exchange for a promise that taxpayers will pick up the tab for claims in excess of a fixed amount.

"There is a benefit overall in somebody collecting premiums and banking those premiums for future use to pay for losses or potential future purchases of reinsurance," said Emil Metropoulos, a senior vice president at Guy Carpenter & Co., the reinsurance subsidiary of insurance giant Marsh & McLennan Cos.

In the event of another major terrorist attack in the United States, private insurers would pay the first $100 million before the federal government steps in.

Many Republicans would like to see the program end or at least be dramatically scaled back. House Financial Services Committee Chairman Jeb Hensarling (R-Texas) grudgingly conceded last week that it's "a needed-but-yet-still-temporary program."

Countries from Sri Lanka to Finland have launched national terrorism insurance programs of one sort or another. Germany, France, and Belgium have schemes that share risk among private insurers, creating a communal pool to draw on for big losses. The U.K.'s insurance pool, Pool Reinsurance Company Ltd., uses the government as an insurer of last resort. Pool Re, as it's known, has paid out more than 600 million pounds for 13 different terrorism incidents since it was started in 1993 in response to attacks by the Irish Republican Army. After the two-day attack in Mumbai in 2008 that killed more than 160 people, the Indian Market Terrorism Risk Insurance Pool, which was started in 2002, paid out 3.77 billion Indian rupees (about $63 million today).

Begun in 2002, the United States' Terrorism Risk Insurance Program has never had to pay out a claim. The $32 billion private insurers shelled out after 9/11 still makes those attacks the most expensive globally, according to data collected by Guy Carpenter & Co.

Congress is about to renew TRIA, the law that authorizes the Terrorism Risk Insurance Program and expires at year's end, for the third time. Program supporters argue that when disaster strikes, whether it's a hurricane or a man-made disaster, the government often ends up paying for most of the damage anyhow. And private insurance companies say the market is not yet ready to stand on its own.

"Terrorism is inherently political," said Janice Ochenkowski, managing director at Jones Lang LaSalle, a firm that advises companies on buying insurance. "Terrorism events occur directly because of government action, inaction, positions, or standards. It's not totally unreasonable that the government would be involved in the solution."

Howard Kunreuther, a professor at the University of Pennsylvania's Wharton School of Business and co-director of the Wharton Risk Center, said the government usually has to step in anyway.

"If you have a major terrorist attack that causes a lot of losses, will the federal government come to the rescue and bail these companies out?" he asked. "It's an open question, but we know in the past there has been a tendency for that to happen."

Insurance companies warn that the market would contract if government support ends, which would mean hotels, stadiums, ports, and other businesses would face increased premiums and restricted policies in high-risk areas. Workers' compensation insurance, which is mandatory in most states, could also become more expensive if the program is not renewed, according to a report issued last month by the Rand Corp., a think tank.

Chip Rodgers, senior vice president of the Real Estate Roundtable, a trade group, warns that if TRIA expires, real estate development will freeze up the way it did after 9/11 because developers won't be able to get the insurance they need to secure loans.

"Our 2002 survey revealed that during the months after 9/11 and before TRIA was enacted, over $15.5 billion of projects in 17 states stalled as a result of a lack of coverage," Rodgers said.

Critics argue that insurers have collected billions of dollars in premiums since then and that the program was never intended to be permanent. Housing and Insurance Subcommittee Chairman Randy Neugebauer (R-Texas) introduced a bill last week that would renew TRIA but put it on a "glide path" toward phasing out government support, he said. The House Financial Services Committee passed his bill Friday, clearing the way for a full House vote later this summer.

The bill would raise the trigger for government support in conventional terrorist attacks from $100 million to $500 million in industry-wide losses. Coverage for nuclear, biological, chemical, or radiological attacks would still kick in after losses of $100 million. The Senate Banking Committee passed a bill earlier this month with a few key differences. The Senate version would extend the program for seven years, for instance, while the House version would only give it five.

With each renewal, Congress has raised the amount insurers must pay out before federal assistance kicks in. It started at $5 million in industry-wide losses, which was raised to $50 million in 2006 and then $100 million in 2007. Lawmakers have also increased the amount that individual insurance companies have to first pay. In 2003, each company had to pay out 7 percent of the previous year's premiums before the government paid anything. That percentage has been rising incrementally and now stands at 20 percent. TRIA also requires insurers repay the government, if there's an event, by collecting additional premiums from future policyholders.

J. Robert Hunter, director of insurance for the Consumer Federation of America, has opposed the program from the beginning. He says it should collect premiums.

"It doesn't charge the people that are actually facing the risk, it charges the people that need it later," said Hunter, who has run other government insurance programs such as the National Flood Insurance Program and the Federal Riot Reinsurance Program, which was created in 1968 to cover urban areas after riots caused many companies to drop out of the market. "The whole thing is put together by Rube Goldberg."

Mark Calabria, a former Republican aide on the Senate Banking Committee who is now at the Cato Institute, said the House bill "is a sign that reform will move quickly and that ultimate passage is essentially guaranteed before the end of the year." Neugebauer said he hopes Congress can reconcile the two versions and pass a renewal before the August recess. 

SPENCER PLATT/ GETTY IMAGES

Report

Russia's Quiet War Against European Fracking

Environmentalists trying to block shale gas exploration across Europe are unknowingly helping Putin maintain his energy leverage over the continent.

Russia is trying to maintain its energy stranglehold over Europe by backing movements across the continent to demonize fracking, the head of NATO alleged. It is part of Russia's broader use of soft power and covert means to complement its more overt efforts to reassert influence in Europe and keep countries there from developing alternatives to an energy addiction worth $100 million a day to Moscow.

"I have met allies who can report that Russia, as part of their sophisticated information and disinformation operations, engage actively with so-called non-government organizations -- environmental organizations working against shale gas -- obviously to maintain European dependence on imported Russian gas," NATO chief Anders Fogh Rasmussen said after a Chatham House speech this week.

NATO officials said Rasmussen's remarks were meant to underscore NATO's growing unease with Europe's energy security situation. "Clearly, it is in the interest of all NATO allies to be able to have adequate energy supplies. We share a concern by some allies that Russia could try to obstruct possible projects on shale gas exploration in Europe in order to maintain Europe's reliance on Russian gas," a NATO official told Foreign Policy.

Hydraulic fracturing, or fracking, has unleashed an energy boom in the United States. But the practice, which is designed to tap previously unreachable stores of natural gas by injecting a chemical cocktail at high pressure to break apart shale formations deep underground, also generates plenty of environmental opposition. Critics say fracking can poison underground stores of drinking water.

In Europe, that opposition is particularly fierce, both because environmental groups have more political power than in the United States and because higher population densities magnify the possible damaging effects of the drilling practice. Some countries have banned fracking outright; others, including France and Germany, have imposed onerous regulations that effectively make the practice illegal, though they are reconsidering fracking in light of the standoff with Russia over Ukraine.

Russian energy firms and officials, as well as Kremlin-controlled media, have lambasted fracking on environmental grounds for years. Top Gazprom officials and even Russian President Vladimir Putin have attacked the technology, which, if adopted, could ease Europe's dependence on Russian gas.

But one thing has for years puzzled energy experts: Well-organized and well-funded environmental opposition to fracking in Europe sprang up suddenly in countries such as Bulgaria and Ukraine, which had shown little prior concern for the environment but which are heavily dependent on Russia for energy supplies. Similar movements have also targeted Europe's plans to build pipelines that would offer an alternative to reliance on Moscow.

"It's very concrete; it relates to both opposition to shale and also trying to block any alternative pipelines with environmental challenges," said Brenda Shaffer, an energy expert at Georgetown University. "There is a lot of evidence here; countries like Bulgaria, Romania, Ukraine being at the vanguard of the environmental movement is enough for it to be conspicuous," she said.

Bulgaria's anti-shale movement is particularly telling. The country initially embraced fracking as a way to develop its own energy resources and reduce reliance on Russia, even signing an exploration deal with Chevron in 2011. But then came an eruption of seemingly grassroots environmental protests and a televised blitz against fracking. In early 2012, the government reversed course and banned the practice.

Researchers who've worked on the ground in Central and Eastern Europe say there is plenty of anecdotal evidence, if no smoking guns, of Russian financial support for some environmental groups that have recently mobilized opposition to shale gas development.

In Ukraine, for example, anti-fracking movements became more organized and better funded just as the government worked to finalize shale gas deals with Western energy firms, officials there say. In Lithuania, "exactly the same thing is happening," said a government official, who described the mushrooming of anti-shale billboards and websites there as "an integrated, strategic communications campaign." As in Bulgaria, the well-funded groups organized screenings of Gasland to galvanize opposition to fracking.

"All of a sudden, in societies that never did grassroots organization very well, you saw all these NGOs well-funded, popping up, and causing well-organized protests," said Mihaela Carstei, an energy and environment analyst at the Atlantic Council.

To be sure, much of Europe's anti-fracking movement is motivated by genuine environmental concerns, just as in the United States; much of that opposition was catalyzed by the controversial 2010 anti-shale documentary Gasland. There are fears about fracking's effect on groundwater and the link between fracking and increased seismic activity. France, for instance, banned fracking before Bulgaria. And despite the Ukraine crisis and the rumblings of pro-fracking sentiment from some senior government officials, which could open the door to France rethinking the ban, fracking is still off the table there for now. Environmental groups such as Greenpeace scoff at the NATO chief's allegations, saying that they oppose fracking for sound environmental reasons. What's more, there's little love lost between Greenpeace and Russia, because Moscow detained dozens of the group's green activists last year.

"I wouldn't underestimate the role that Russia plays in shale gas in Europe, but I wouldn't overestimate it, either," said Andreas Goldthau, an energy expert at Harvard University's Belfer Center who has extensively researched shale gas policies in Europe. "Overall, particularly in Bulgaria and Romania, the causes of shale's problems are varied; it's not only the Russians coming in and trying to start protests."

Ultimately, Russia's efforts to derail Europe's alternative pipeline projects, more than its possible support for anti-fracking groups, represent a more immediate threat to Europe's efforts to diversify its energy supplies, Shaffer said.

"These rival projects are even more of a threat than fracking because shale gas will take a long time to develop, but these projects will soon bring gas to Europe; they are practical and concrete," she said.

Daniel Mihailescu - AFP - Getty