Order Code RS22671
May 31, 2007
The Terrorism Risk Insurance Program:
Current Issues and Background
Baird Webel
Analyst in Economics
Government and Finance Division
Summary
After September 11, 2001, many businesses were no longer able to purchase
insurance protecting against property losses that might occur in future terrorist attacks.
Addressing this problem, Congress passed the Terrorism Risk Insurance Act of 20021
(TRIA), creating a temporary three-year program to share future insured terrorism losses
with the property-casualty insurance industry and commercial policyholders. The act
required insurers to offer terrorism insurance to their commercial policyholders,
preserved state regulation of this type of insurance, and directed the Secretary of the
Treasury to administer a program for sharing terrorism losses. Once certain conditions
were met, the initial program covered 90% of insurer losses up to $100 billion each year.
Responding to concerns that the three-year program was too limited to allow the
private sector to develop the capacity to insure terrorism risk, the 109th Congress passed
the Terrorism Risk Insurance Extension Act of 20052 (TRIEA) to extend the program
two years. TREIA left the program essentially intact while increasing the private
sector’s exposure to terrorism risk through a higher trigger, higher deductibles, greater
industry loss sharing and exclusion of certain lines of insurance. With less than one year
left in the extended program, concerns are again being expressed that the private market
will be unable to provide terrorism insurance without a government backstop. Chairman
Christopher Dodd of the Senate Banking, Housing, and Urban Affairs Committee and
Chairman Barney Frank of the House Financial Services Committee have both indicated
that addressing terrorism insurance will be a priority this year.
This report provides an overview of the current TRIA program, how the program
has changed over time, and general background on the issue. It will be updated as
legislation is introduced, hearings are held, or other legislative events occur.
1 P.L. 107-297, 116 Stat. 2322. See CRS Report RS21444, The Terrorism Risk Insurance Act of
2002: A Summary of Provisions
, by Baird Webel.
2 P.L. 109-144, 119 Stat. 2660. See CRS Report RL33177, Terrorism Risk Insurance Legislation
in 2005: Issue Summary and Side-by-Side
, by Baird Webel.

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Current Terrorism Risk Insurance Program
The current Terrorism Risk Insurance Program, as created by Terrorism Risk
Insurance Act of 2002 (TRIA) and modified by Terrorism Risk Insurance Extension Act
of 2005 (TRIEA), “provides for a transparent system of shared public and private
compensation for insured losses resulting from acts of terrorism.”3 The TRIA program
is often described as a reinsurance backstop. It does not offer policies directly to
insurance consumers, but operates by sharing losses due to a terrorist attack with the
insurance companies which have sold policies to businesses. After certain thresholds, it
steps in and pays insurers for a portion of covered losses due to a terrorist act. Depending
on the total size of the losses, the federal payments made to individual insurers may or
may not be recouped through assessments on all those covered by TRIA in the years
following the attack. TRIA is limited to covering $100 billion in insured losses and
relieves insurers of liability for losses over this amount. What, if anything, to do to
address losses exceeding $100 billion is a question that remains unanswered.
TRIA Thresholds
! TRIA applies only to an act of foreign terrorism (as certified by the
Secretary of Treasury in concurrence with the Secretary of State
and the Attorney General).
! TRIA applies only to commercial property/casualty insurance,
excluding federal crop insurance, private mortgage insurance, title
insurance, financial guaranty insurance, medical malpractice
insurance, health or life insurance, flood insurance, reinsurance,
commercial automobile insurance, burglary and theft insurance,
surety insurance, professional liability insurance (except for
directors and officers liability), and farm owners multiple peril
insurance.
! Aggregate industry insured losses in a given year must exceed
$100 million (the “Program Trigger”).
! Before payments are made to an individual insurer, that entity’s
losses must exceed 20% of the value of its direct earned premiums
from the previous year (the “Insurer Deductible”).
Once these thresholds are met, TRIA covers 85% of the insured losses due to a
terrorist attack. If the total insured losses are under $27.5 billion (the “Aggregate
Retention Amount”), then all of the insurers covered by TRIA would be assessed a
recoupment fee, not to exceed 3% of premium, until the federal share of the losses has
been repaid. The Secretary of the Treasury has the authority to set the exact recoupment
percentage, as well as the authority to extend the recoupment fee and require payment to
the government beyond the $27.5 billion amount required by law.
Unlike private reinsurance, the TRIA program charges no premiums for the
reinsurance coverage provided by the program. The law, however, does place
3 U.S. Treasury Department, Treasury Terrorism Risk Insurance Program, Overview, available
at [http://www.ustreas.gov/offices/domestic-finance/financial-institution/terrorism-insurance].

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requirements on insurers. Specifically, all insurers are required to offer coverage for
terrorism risk “that does not differ materially from the terms, amounts, and other coverage
limitations applicable to losses arising from events other than acts of terrorism.”4 The
policyholders, however, are not required to purchase this offered terrorism coverage.
Background on Terrorism Insurance and TRIA
Prior to the September 2001 attacks on the United States, insurers generally did not
exclude or separately charge for terrorism risks. The risk of terrorism was seen as so
remote that it generally was not specifically considered in writing insurance policies. The
events of September 11, 2001, however, changed this, as insurers realized the extent of
possible losses. Estimates of insured losses from the 9/11 attacks are around $35 billion
in current dollars, the largest man-made insurance disaster on record.5
The heaviest insured losses were absorbed by foreign and domestic reinsurers — the
insurers of insurance companies. Due to the lack of data on or modeling of terrorism risk,
reinsurers felt unable to price for such risks, and they largely withdrew from the market
for terrorism risk insurance. Once reinsurers stopped offering coverage for terrorism risk,
primary insurers, who also suffered from a lack of data and models, also withdrew or tried
to withdraw from the market. In most states, state regulators must approve policy form
changes, and state regulators generally agreed to insurer requests to exclude terrorism
risks from their commercial policies, just as they had long excluded war risks. Terrorism
risk insurance was soon unavailable or extremely expensive, and many businesses were
no longer able to purchase insurance that would protect them in future terrorist attacks.
Although most data were anecdotal, this problem was widely thought to pose a threat of
serious harm to the real estate, transportation, construction, energy, and utility sectors, in
turn threatening the broader economy.
Responding to the perceived problem, Congress passed TRIA in November 2002.
TRIA’s stated goals were to (1) create a temporary federal program of shared public and
private compensation for insured losses to allow the private market to stabilize; (2) protect
consumers by ensuring the availability and affordability of insurance for terrorism risks;
and (3) preserve state regulation of insurance. The initial act’s structure was essentially
that currently in place as described above. The federal government’s liability in the event
of a terrorist attack, however, was higher in the beginning of the program, and it has
decreased through the life of the program. This decrease in the federal liability, and
resulting increase in private liability, was intentional; it was hoped that this would spur
the private market to develop the financial capacity and other infrastructure necessary to
begin insuring terrorism risk without a government program.
The development of a private market for terrorism risk did not proceed with the
speed hoped for when TRIA was passed. Soon after enactment, the insurance industry
and others worried about a possible absence of terrorism insurance began calling for an
4 15 U.S.C. § 103(c).
5 See “Terrorism Risk and Insurance,” Insurance Information Institute website, available at
[http://www.iii.org/media/hottopics/insurance/terrorism/].

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extension of the program, or some other longer-term solution as they saw terrorism risk
as essentially uninsurable. Responding to concerns about a continuing lack of private
market in terrorism risk insurance, Congress passed a two-year extension bill, TRIEA,
near the end of 2005. This act continued the first act’s trend of decreasing the federal
government’s liability in the case of a terrorist attack. Not only were the thresholds
increased, but also additional lines of insurance were excluded. Table 1 details the
evolution of the various aspects of the TRIA program through the five program years to
date.
The passage of TREIA exposed significant differences of approach between the
House and the Senate on how to deal with terrorism risk insurance. The Senate’s
approach, which was backed by the President and eventually prevailed, was to keep the
same TRIA structure while further scaling back federal involvement. The House
approach, embodied in the 109th Congress’ H.R. 4314,6 was more varied. H.R. 4314
would have extended TRIA and also would have revised the program extensively.
Changes that H.R. 4313 would have implemented included expanding the program to
cover domestic terrorist events; increasing the types of insurance covered to include group
life and specific coverage for nuclear, biological, chemical, and radiological (NBCR)
events; implementing a different insurer deductible for different lines of insurance; and
creating TRIA Capital Reserve Funds (CRF), which would allow insurers to set aside
untaxed reserves to tap in the case of a terrorist event.
Table 1. TRIA Program from 2002-2007
2003
2004
2005
2006
2007
Program
$5 million
$5 million
$5 million
$50 million
$100 million
Trigger
Insurer
7%
10%
15%
17.5%
20%
Deductible
Industry
$10 billion
$12.5 billion
$15 billion
$25 billion
$27.5 billion
Retention
Federal
90%
90%
90%
90%
85%
Share
Excluded
federal crop insurance, private mortgage
As before plus: commercial
Insurance
insurance, title insurance, financial
automobile insurance,
Lines
guaranty insurance, medical malpractice
burglary and theft insurance,
insurance, health or life insurance, flood
surety insurance, professional
insurance, reinsurance
liability insurance (except for
directors and officers
liability), and farm owners
multiple peril insurance
6 H.R. 4314 was marked up by the House Financial Services Committee on November 16, 2006.
The large majority of the language from H.R. 4314 was then inserted in the S. 467 before this bill
was passed by the House on December 7, 2006.

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Issues and Outlook for the 110th Congress
Passage of TRIEA extended the government backstop for two years, through the end
of 2007. This extension, however, did relatively little to answer some of the fundamental
questions surrounding terrorism insurance and federal involvement in this insurance. It
seems likely that this Congress will need to address many of the same questions that have
marked TRIA debates in the past. Such questions may include the following:
! Should there be a government terrorism insurance program at all?
! Should group life insurance be covered in such a program?
! How should the possibility of nuclear, biological, chemical, or
radiological terrorism be treated?
! How should terrorism risk be shared between the government and private
insurers?
! Should insurer reserves for future terrorism losses enjoy tax-preferred
status?
Both the House and the Senate have held hearings in the 110th Congress on the future
of TRIA. The Senate Banking Committee acted first with a hearing on February 28, 2007,
entitled “Examining the Terrorism Risk Insurance Program,” and the House Financial
Services Committee’s Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises held a hearing entitled “Policy Options for Extending the
Terrorism Risk Insurance Act” on April 24, 2007. At the time of this writing, no TRIA
legislation had been introduced in either the House or the Senate.