There remain critical issues to be addressed regarding the extension of the Terrorism Risk Insurance Act (TRIA), which is due to expire on December 31, 2007. Unless the discrepancies between the US House of Representatives bill and the US Senate bill can be resolved, policy holders, the insurance industry, and tax payers could lose out on crucial benefits, according to Risk Management Solutions (RMS).

The RMS US Probabilistic Terrorism Model has recently been used to help evaluate the impacts of modifying and extending TRIA, both by the Congressional Budget Office (CBO) and the RAND Corporation. Contrary to criticisms about TRIA being used as a government hand-out to the insurance industry at the expense of taxpayers, a RAND study showed that TRIA reduces taxpayer costs for certified attacks that cause losses of less than $40 billion. Based on the RMS model, the likelihood of exceeding this amount in a given year is just 0.2 percent. Government outlays through the program are more than offset by reductions in government compensation for uninsured losses after an attack; the large deductibles ensure that TRIA provides coverage for only the most extreme events, leaving insurers with a significant share of the costs.

“Catastrophe risk modeling plays an important role in public policy by providing unique insight into the probability of major events like the occurrence of terrorist attacks and their potential financial impact,” commented Derek Blum, vice president of emerging risk models at RMS. “By having this crucial information, the federal government can evaluate different options that will help the insurance industry create a market for terrorism risk coverage.”

Elements of the Proposed TRIA Extension

RMS has taken a position on various elements still to be resolved in the bills:

Duration – The Senate has proposed a seven-year extension, while the House has pushed for fifteen years. RMS believes that an extension for seven years or more is appropriate to provide greater certainty in the government’s commitment and also allow adequate time for the industry to continue to develop appropriate products and the risk appetite for terrorism insurance.

Coverage for CBRN Attacks – The House bill mandates that coverage for chemical, biological, radiological, or nuclear (CBRN) attacks should be made available. However, RMS believes an insurance market covering losses from CBRN attacks is unlikely to develop independently. With these risks remaining uninsured, the Federal government may be left to decide what level of support to provide in the unfortunate event of such an attack.

Annual Program Cap – Both the House and Senate have proposed a hard cap on the annual amount covered by TRIA. RMS thinks that hardening this cap will remove the ambiguity about how excess losses are covered and will encourage industry participation. Based on the RMS model, there is only about a 0.05 percent chance that commercial property and workers compensation losses will exceed a $100 billion cap, so insurers are still likely to share the loss for all but the most extreme cases.

Domestic Terrorism – TRIA currently excludes losses from domestic terrorist attacks, which could create complications if the source of a terrorist attack cannot be clearly defined. The House and Senate would like to eliminate this exclusion going forward. RMS estimates that only around 7.6 percent of the average annual loss is due to domestic terrorism, and thus including domestic terrorism would only minimally increase the assumed risk while greatly simplifying the terms of TRIA coverage.

Group Life Insurance – The inclusion of group life insurance in TRIA has been the source of significant government opposition, and debates on this matter could further complicate the extension of TRIA. In fact, terrorism is not one of the largest threats to life insurers, so it is not vital that TRIA provide coverage to this market.

TRIA provides the insurance industry with solvency, not subsidy. This would continue to be the case under either version of the TRIA extension. The growth and availability of terrorism coverage will only continue with assurance that the Federal government will support this process in the medium-term by guaranteeing TRIA for a number of years. Without this backstop, policy-holders may be left without coverage in the face of devastating losses.

“TRIA has provided protection to policy-holders by ensuring a viable commercial insurance market for terrorism coverage,” said Mr. Blum. “We have started to see a stand-alone market develop, which may signal the entrance of new capital into the industry. The economic impacts of TRIA are also evident in the strength of real-estate development and commercial lending in higher-risk areas like New York and Chicago, as well as general availability of commercial terrorism insurance.”

•Date: 14th Dec 2007• Region: US •Type: Article •Topic: Terrorism
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