August 4, 2004—The Federal Terrorism Risk Insurance Act (TRIA) is an essential component of the nation’s financial recovery system in the event of catastrophic terror attacks on American civilian targets, says the American Insurance Association. Bipartisan legislation is pending in the Senate, and two bills are pending in the House; nearly 200 representatives have signed a letter in favor of extension. TRIA protects virtually every sector of our economy. Transportation, energy, real estate, construction, lodging, health care, hospitality, education, sports/entertainment, financial institutions, public entities, and manufacturing are among the industries and entities relying on TRIA.
TRIA was enacted with bipartisan support in 2002 because hundreds of thousands of jobs and billions of dollars in transactions were at stake. The private insurance industry paid nearly $35 billion in 9/11-related losses, without a single dollar of federal funding. But the September 11 attacks fundamentally altered the way insurers look at terrorism; it now looks like war—an uninsurable risk. The terrorism insurance market dried up. Many types of financial transactions could not proceed; construction workers and other Americans suddenly became secondary economic victims of terrorism.
TRIA has stabilized the commercial insurance marketplace, says AIA. In exchange for the federal government sharing the financial risk of future attacks, insurers must offer terrorism coverage on commercial policies written during the program, and must retain a large, escalating amount of losses from future attacks.
Because the Treasury Department decided recently that insurers must make terrorism coverage available during the final year of the three-year program, there is a mismatch between TRIA’s expiration date (12/31/05) and commercial insurance policies written in the next few months. Annual policies written after January 1, 2005, extend beyond the life of TRIA. Insurers and policyholders already are starting to negotiate policies that will begin January 2005 and extend into 2006. Insurers will have no choice but to evaluate every policyholder considered for coverage during this period as if TRIA does not exist for part of the policy period.
The American Academy of Actuaries has released a monograph examining the impact of terrorism on property and casualty insurers. This analysis is designed to help evaluate the merits of legislation to extend the Terrorism Risk Insurance Act of 2002.
The Academys Extreme Events Committee monograph analyzes four major points about the need for a federal backstop program: the difficulty of quantifying the losses from an extreme terrorist attack, making it difficiult to understand and pool the risk, 2) the perceived concentration of terrorism targets in major urban areas, m aking it difficult for an insurer to diversify the risk, 3) the threat of insurer insolvency(ies) from an extreme terrorist attactk, and 4) the legal, regulatory, financial, and actuarial hurdles the industry will have to overcome in finding a new way to manage the risk. Copies of the momograph can be found the American Academy of Actuaries.
