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TRIA Backgrounder  

Created in the wake of the terrorist attack of September 11, 2001, the Terrorism Risk Insurance Act (TRIA) filled a critical financial void at a time of great national uncertainty and helped ensure an orderly financial recovery in the event of future attacks.

•         Prior to the 9/11 attack, insurance coverage for terrorist attacks and the losses sustained from them were available through general coverage without specific costs to policyholders. [1]

•         Because of the nature and scale of the 9/11 attack, terrorism coverage became more difficult to find and was priced separately where it was available. This disruption in coverage, particularly for construction projects in major U.S. business centers, continued throughout 2002, which contributed to the economic slowdown that the U.S. was already facing in the wake of the attack. 

•         The first version of TRIA was approved late in 2002. It created a temporary, three-year partnership in which private insurers and the federal government shared financial responsibility for insured losses should another attack occur.

•         TRIA has been extended twice (in 2005 and 2007) because, unfortunately, the threat of terrorism has not gone away and the risk remains difficult to underwrite because the frequency of terrorism, an intentional act, defies predictability. The current law is set to expire at the end of 2014.

Continuation of TRIA is essential because terrorism remains an uninsurable risk.

  • Terrorism risk presents unique insurance challenges for businesses of all sizes across the U.S. Despite the passage of time since 9/11 and the advancement of tools and technology employed by the government to fight terrorism, the threat of terrorist acts remains a largely un-writable risk for insurers. Insurers need national security information that only the government appropriately possesses. And even then, as the government stresses, the information needs to be correct 100% of the time to avoid a future attack.  Unlike natural disasters, there is no data on the frequency of likely terror attacks. While the severity of truck bombs or other types of “conventional” terrorist attacks can be modeled for the severity of resulting damage, there is no way to gauge the frequency of man-made terrorist disasters, which are intentional events controlled by the terrorists themselves.
  • Although there have been improvements in insurers’ ability to model terrorism risks at specific locations, these improvements do not materially increase insurers’ capacity to bear terrorism risk. In fact, insurers increasingly may feel overexposed in certain locations when using the metrics they have.

•         Moreover, the improvements have been largely limited to “deterministic modeling” (i.e., estimating the total insured losses from a hypothetical terrorist attack), but have not been matched by improvements in “probabilistic modeling” (i.e., estimating the likelihood of a terrorist attack).  Understanding both frequency and severity is crucial to insurers’ ability to manage terrorism risk in the absence of the TRIA program.

•         The April 15, 2013, bombings in Boston clearly demonstrate that the risk of terrorism on U.S. soil remains for the general public and businesses of all sizes.

TRIA is a public-private partnership that provides for shared responsibility with the federal government while protecting taxpayers at the same time.

•         According to a recent CRS report[2], the current structure of the program creates a shared risk for the federal government and taxpayers.

o   A single terrorist act must cause at least $5 million in insured losses to be certified as an eligible “act of terrorism” under TRIA.

o   The aggregate insured losses from certified acts of terrorism must be at least $100 million in a year for the TRIA program even to be triggered.

o   An individual insurance company must meet a deductible of 20% of its annual premiums for covered commercial insurance lines before any government financial responsibility begins.

o   Once those individual insurer thresholds are passed (e.g. $ 2 billion for some major insurers), insurers would continue to absorb 15 cents of every additional dollar of insured loss up to $100 billion. The government would cover the balance. If the aggregate insured losses paid by insurers do not exceed $27.5 billion and any federal money is paid out, the Secretary of the Treasury is required to recoup those federal dollars through surcharges on covered commercial property-casualty insurance policies. If the losses exceed $27.5 billion and federal money is paid out, the Secretary has the discretion to recoup those taxpayer dollars through additional surcharges.

  • Under this structure, if all insurers were to meet their insured loss deductibles, approximately $30 billion in losses – roughly the same amount paid after the September 11, 2001 attack – would have to be sustained before the federal government would have to pay anything under the program.

•         TRIA includes a “make-available” provision that requires insurers to offer terrorism coverage on the same terms and conditions as other types of covered loss, but does not require policy holders to purchase it.

•         Thankfully, there has not been a need to invoke the TRIA program in the decade since it was created. Therefore, the cost has been slight for taxpayers – administrative staffing only.

The public-private partnership behind TRIA has worked and participation has been extensive.

•         According to a new report from Marsh Risk Management Research[3], the percentage of companies buying property terrorism insurance – also known as the take-up rate – has remained fairly constant since 2005. The report states: “In 2003, the first full year TRIA was in effect, the take-up rate was 27% but has since increased steadily, remaining in the 60% range since 2009.” 

  • Marsh also reports that all regions of the country have experienced consistent take-up rates, but that the rates are highest in the Northeast and lowest in the West.

Given continued economic security uncertainty, failure to renew TRIA could have significant financial impacts.

•         Even if a terrorist attack does not occur, terrorism risk insurance is necessary for all kinds of financial transactions to go forward. If it is no longer available, many transactions would take longer to complete, if they could be completed at all.  At best, this would slow economic activity at a time when the economy is finally beginning to pick up. At worst, the situation could cause massive economic disruptions at a time when we can least afford them.

•         Just like the 22 other countries with terrorism risk insurance programs, we have no choice but to plan for the possibility of a large-scale terrorist attack. Without a public-private partnership for terrorism risk insurance, the magnitude of potential losses from an extreme or unconventional terrorist attack (like detonation of a nuclear device in a major business center) would threaten insurer solvency and significantly weaken our entire economy. Insurers would be left with difficult individual choices about who and where to write in order to manage their terrorism exposure in a way that preserves their financial viability.

Multiple pieces of legislation have been introduced to extend TRIA before it expires in 2014.

•         There are currently three bipartisan proposals to extend TRIA for an additional period of time. We believe this indicates a widespread appreciation for the value of the program and the desire for it to continue.  We expect to work with members of Congress from both sides of the aisle to ensure that it does.

•         While the private insurance industry’s willingness to cover terrorism risk has increased over the past decade, it has done so with the confidence provided by the public-private partnership established under TRIA.  According to industry experts, there is only about $6-8 billion in available private sector terrorism reinsurance capacity, an amount that has not risen appreciably over the past five years.  This compares to industry-wide aggregate loss deductibles under TRIA (which have risen from 7.5% to 20% since 2002) totaling approximately $30 billion.

•         A continued federal shared loss program would not “crowd out” future development of reinsurance or capital markets. To the contrary, it would provide ample opportunity for private reinsurance capacity to grow and assist primary insurers to manage the substantial portion of terrorism losses they are responsible for under TRIA. This, in turn, would facilitate the functioning of private insurance markets to the benefit of policyholders and the economy.



 

 

[1] Terrorism Risk Insurance: Issue Analysis and Overview of Current Program, Congressional Research Service, April 26, 2013

[2] Terrorism Risk Insurance: Issue Analysis and Overview of Current Program, Congressional Research Service, April 26, 2013

[3] Marsh, Inc, Research Report, “Market Update: 2013 Terrorism Risk Insurance Report, May 2013”