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Tuesday, April 30, 2013

Terrorism Risk Insurance: Issue Analysis and Overview of Current Program

Baird Webel Specialist in Financial Economics

Prior to the September 11, 2001, terrorist attacks, insurance coverage for losses from such attacks was normally included in general insurance policies without specific cost to the policyholders. Following the attacks, such coverage became very expensive if insurers offered it at all. Because insurance is required for a variety of economic transactions, it was feared that the absence of insurance against terrorism loss would have a wider economic impact. Private terrorism insurance was largely unavailable for most of 2002, and some have argued that this adversely affected parts of the economy.

Congress responded to the disruption in the terrorism insurance market by passing the Terrorism Risk Insurance Act of 2002 (TRIA; P.L. 107-297, 116 Stat. 2322). TRIA created a temporary three-year Terrorism Insurance Program in which the government would share some of the losses with private insurers should a foreign terrorist attack occur. This program was extended in 2005 (P.L. 109-144, 119 Stat. 2660) and 2007 (P.L. 110-160, 121 Stat. 1839). The amount of government loss sharing depends on the size of the insured loss. In general terms, for a relatively small loss, private industry covers the entire loss. For a medium-sized loss, the federal role is to spread the loss over time and over the entire insurance industry; the government assists insurers initially but then recoups the payments through a broad levy on insurers afterwards. For a large loss, the federal government would cover most of the losses, although recoupment is possible in these circumstances as well. Insurers are required to make terrorism coverage available to commercial policyholders, but TRIA does not require policyholders to purchase terrorism coverage. The prospective government share of losses has been reduced over time compared with the initial act, but the 2007 reauthorization expanded the program to cover losses stemming from acts of domestic terrorism. The TRIA program is currently slated to expire at the end of 2014.

The specifics of the current program are as follows: (1) a single terrorist act must cause $5 million in damage to be certified for TRIA coverage; (2) the aggregate insured loss from certified acts of terrorism must be $100 million in a year for the government coverage to begin; and (3) an individual company must meet a deductible of 20% of its annual premiums for the government coverage to begin. Once these thresholds are passed, the government covers 85% of insured losses due to terrorism. If aggregate insured losses due to terrorism do not exceed $27.5 billion, the Secretary of the Treasury is required to recoup 133% of the government coverage by the end of 2017 through surcharges on property/casualty insurance policies. If the losses exceed $27.5 billion, the Secretary has discretion to apply recoupment surcharges, but is not required to do so.

Since TRIA’s passage, the private industry’s willingness and ability to cover terrorism risk have increased. According to industry surveys, prices for terrorism coverage have generally trended downward, and approximately 60% of commercial policyholders have purchased coverage over the past few years. This relative market calm has been under the umbrella of TRIA coverage, and it is unclear how the insurance market would react to the expiration of the federal program.

In the 113
th Congress, Representative Michael Grimm has introduced H.R. 508 to extend the TRIA program’s expiration date five years until the end of 2019. The bill has been referred to the House Committee on Financial Services, who has yet to take further action in this Congress. The committee’s Subcommittee on Insurance, Housing, and Community Opportunity held a hearing on TRIA during the 112th Congress. .

Date of Report: April 26, 2013
Number of Pages: 15
Order Number: R42716
Price: $29.95

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