The Terrorism Risk Insurance Act (TRIA) requires insurers to offer commercial insurance that will pay on claims that occur from a terrorist attack.
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- Background on: Terrorism risk and insurance | III
- Afghanistan's Uncertain Transition from Turmoil to Normalcy (2006)
- Background on: Terrorism risk and insurance
- Aging of U.S. Air Force Craft: Final Report (1997)
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Background on: Terrorism risk and insurance | III
English Choose a language for shopping. Amazon Music Stream millions of songs. Amazon Drive Cloud storage from Amazon. Alexa Actionable Analytics for the Web. AmazonGlobal Ship Orders Internationally. According to the modeling firm, AIR Worldwide, the way terrorism risk is measured is not much different from assessments of natural disaster risk, except that the data used for terrorism are more subject to uncertainty. It is easier to project the risk of damage in a particular location from an earthquake of a given intensity or a Category 5 hurricane than a terrorist attack because insurers have had so much more experience with natural disasters than with terrorist attacks and therefore the data to incorporate into models are readily available.
One problem insurers face is the accumulation of risk. They need to know not only the likelihood and extent of damage to a particular building but also the company's accumulated risk from insuring multiple buildings within a given geographical area, including the implications of fire following a terrorist attack. In addition, in the United States, workers compensation insurers face concentrations of risk from injuries to workers caused by terrorism attacks. Workers compensation policies provide coverage for loss of income and medical and rehabilitation treatment from "first dollar," that is without deductibles.
There is general agreement that TRIA has helped insurance companies provide terrorism coverage because the federal government's involvement offers a measure of certainty as to the maximum size of losses insurers would have to pay and allows them to plan for the future.
Afghanistan's Uncertain Transition from Turmoil to Normalcy (2006)
The structure of the program has encouraged the development of reinsurance for the layers of risk that insurers must bear themselves—deductible amounts and coinsurance—which in turn allows primary insurers to provide coverage. Without TRIA, there would be no private market for terrorism insurance. However, some contend that the existence of a federal backstop has retarded the growth of a more extensive private market. The private market is growing under TRIA. Congress passed an extension of the Act at the end of December The legislation extending the Act to December greatly increased the portion of the loss insurers would pay in the event of a terrorist attack.
Another extension was passed by Congress in January The law included a provision that requires the U. The law states that no insurer may be required to make any payment for insured losses in excess of its deductible and its share of insured losses. As outlined above, the extension of the law essentially maintained the prior TRIA structure but made several significant changes. In addition to extending the law for seven years rather than two as in previous renewals, the new law added domestic terrorism to acts defined as terrorism—the original legislation covered only acts committed by foreign terrorists.
The longer renewal period reduced the uncertainty for long-term commercial projects that there would be coverage for damage caused by terrorism. The Terrorism Risk Insurance Act and its extensions authorized the creation of a federal reinsurance plan, which is triggered when insured terrorism losses exceed a predetermined amount.
The program, a sharing of losses between the insurance industry and the federal government according to a preset formula—a type of reinsurance—has enabled the commercial insurance market to function, even though the threat of terrorism remains. Under the amendment, to be covered by the federal program, an act of terrorism must be committed by individuals acting as part of an effort to influence the policy or conduct of the United States.
The law also requires that the act be certified by the Secretary of the Treasury in concurrence with the Secretary of State and the Attorney General. Insurers do not pay the federal government for this reinsurance coverage. Only commercial insurers and causes of losses specified in the underlying policies are covered. Personal lines insurance companies—those that sell auto and home insurance—and reinsurers are not covered. Neither are group life insurance losses.
Most types of commercial insurance losses were covered under the original legislation, except some specialty coverages such as medical malpractice and crop insurance. Additional commercial insurance coverages were deleted under the extension including commercial auto insurance, professional liability except for directors and officers liability, surety, burglary and theft and farmowners multiperil, a coverage similar to homeowners.
Directors and officers liability covers the top management of a company in the event of a lawsuit charging negligence or false statements. In return for the federal backstop, commercial insurers must make terrorism coverage available and conspicuously state the premium charges; policyholders may, of course, reject the offer and choose to mitigate this class of risk in other ways. In offering terrorism coverage to their policyholders, commercial insurers must make it available on the same terms and conditions as they offer in their non-TRIA coverage.
In return, victims' families were required to give up the right to sue those they perceived as responsible parties. This provision is not part of TRIA or its extensions. Insurance in the United States is state regulated. Regulators oversee solvency, market conduct and rates.
Background on: Terrorism risk and insurance
In addition, they can require insurers to cover certain risks, if they perceive it to be in the public interest. For example, on-the-job injuries under workers compensation insurance are covered whatever their cause. No state permits some types or causes of injury to be covered and others excluded.
The only requirement is that they be incurred in the course of employment.
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Thus, injuries in the workplace resulting from terrorist attacks are always covered. Workers compensation insurance is a mandatory coverage in all states but Texas and Oklahoma.
Aging of U.S. Air Force Craft: Final Report (1997)
As with earthquakes where ruptured gas pipes and other similar damage can lead to fires, fire following a terrorist attack could cause huge losses. Following September 11, , states began to review their coverage of fire following terrorism. The standard commercial fire policy SFP does not exclude fire following terrorism and, prior to , the SFP did not permit this exclusion with the result that a policyholder who had rejected terrorism coverage under TRIA would still have coverage for fire following an act of terrorism.
In a handful of states this is still the case: However, since , some states have revised their SFP statutes to permit exclusions of fire following terrorism under certain circumstances. Thus, for a policyholder who has rejected terrorism coverage under TRIA, in these states there might be no coverage or limited coverage for fire resulting from an act of terrorism. Many states do not have a standard fire policy statute or have SFPs that unconditionally exclude fire following terrorism.
In these states there is no stipulated coverage for fire following terrorism. One proposal that has been discussed for a number of years, even before September 11, in conjunction with meganatural disasters like Hurricane Katrina to help insurers better manage risk, is allowing insurers to accumulate tax-deferred catastrophe reserves. Under current tax law, insurers can only put money aside in special funds or "reserves" to pay for claims if an event, such as a terrorist attack, has already occurred. Funds to pay for catastrophic losses come from an insurer's policyholders' surplus, which acts as a financial cushion in such situations.
As a general rule, an insurer must maintain a certain level of capital and surplus to support the insurance policies it has issued. If it allows its surplus to drop significantly below industry standards and claims from a major terrorist attack create a drain on its assets, it may become insolvent.
But if it increases its policyholders' surplus to fund an event that may only happen once in a lifetime, it incurs opportunity costs—the loss of a chance to do something more economically productive with the money, such as generating additional business. Various proposals for tax-deferred catastrophe reserves have been developed by insurers, the National Association of Insurance Commissioners and others.
Some would make it mandatory for insurers to set aside pre-event reserves, while others would not. Some have a specific dollar target for total industry catastrophe reserves. However, each plan would allow tax deductions for amounts contributed to reserve accounts and then tax the funds withdrawn to pay claims. The United States is not the first country to establish a terrorism insurance program.
Some countries created programs to cover terrorism after September 11 or earlier, following a terrorist attack on their own soil. Below are some examples. Legislation was passed in , under which terrorism exclusions in commercial policies are nullified once the government has declared that a terrorist incident has occurred. The legislation also created a reinsurance pool to cover insurance company losses from property, business interruption and third-party liability coverages, subject to a certain insurance company deductible, about 4 percent of property insurance premium.
Insurers pay premiums into the pool which is back-stopped by the government. The program covers chemical and biological attacks but not nuclear attacks. A terrorism pool has been in operation in Austria since The pool provides reinsurance protection against property damage and business interruption up to a certain limit. Participation in the pool is voluntary, but almost all insurers belong. Under a law, coverage is available up to 1 billion euros, an amount that will be adjusted annually to keep pace with inflation. Participants in the Fund will pay the first EUR million with the government paying the remainder up to the limit.
Insurers will retain a part of the EUR million, according to market share, and reinsure the rest.
A committee that includes insurers will decide whether an event meets the definition of terrorism. Under a law passed in , terrorism must be covered. Since , terrorism has been covered by a reinsurance pool to which terrorism risk above a certain retention level is transferred.