The Terrorism Risk Insurance Act (TRIA), which provides a federal backstop for insured terrorism losses, will expire later in 2014.
There’s been plenty of discussion about the disruption to insurance markets that could be created by failure to renew this program.
The lead author of the study, Henry Willis (quite a coincidental name), comments:
There’s no evidence that extending TRIA will prevent terrorists from attacking the United States, but our study finds that if TRIA expires and the take-up rate for terrorism insurance falls, then our country would be less resilient to terrorist attacks.
How TRIA Works
TRIA is not a “bailout” program; it is a legislative partnership between the federal government and the insurance industry to help manage the financial consequences of major terrorist attacks.
As it is currently structured, TRIA creates a balanced framework that requires insurers to make commercial terrorism coverage available to businesses; in return, it provides insurers with the equivalent of short-term financing to manage terrorism losses, with the government assuming potential financial risk only for the largest events.
Once individual company deductibles have been satisfied, TRIA takes the form of 85% quota share up to $100 billion.
The Secretary of the Treasury is required to levy surcharges on property/casualty insurance policies to recoup federal payments for terrorism events with total insured losses below the $27.5B industry aggregate retention threshold. For larger events, the Secretary of the Treasury has the discretion to re-coup additional federal loss payments.
Conventional vs. Unconventional Scenarios
The RAND study of historical events and catastrophe model output suggests that losses in “conventional” scenarios—types of attacks for which losses can be estimated based on historical events—are unlikely to exceed the industry aggregate retention threshold.
“Unconventional” scenarios such as nuclear and biological attacks could well exceed this threshold. Thus, TRIA provides government assistance to the insurance industry that is focused on the catastrophic terrorism risks they are least able to model.
National Security Implications
The national security implications center on the ways in which TRIA enhances national resilience. TRIA’s “make available” provisions facilitate the availability of commercial terrorism insurance coverage.
Without TRIA’s financing provisions, catastrophic terrorism would present a solvency risk to the insurance industry; insurers might not be able or willing to offer terrorism coverage.
Terrorism insurance means that recovery and rebuilding after an attack will be quicker and more efficient.
This promotes economic growth because investors are able to have greater confidence. And better economic growth has the knock-on effect of increasing the resources available to address national security threats or other social problems.
The study, “National Security Perspectives on Terrorism Risk Insurance in the United States,” can be found at here.