Insurance and Unexpected Risks: COVID-19 in 2020 and Terrorism in 2001

Insurance and Unexpected Risks: COVID-19 in 2020 and Terrorism in 2001

INSIGHTi

Insurance and Unexpected Risks: COVID-19
in 2020 and Terrorism in 2001
September 24, 2020
The Coronavirus Disease 2019 (COVID-19) pandemic has disrupted the economy across the United
States and the world, due to both the direct effects of the virus and the various public health measures
imposed to address the disease. Many affected businesses have looked to their insurance policies to
recoup some of their losses. The final extent of insurance coverage is unclear, particularly due to
uncertainty around insurance policy language that may exclude virus-related losses. (For more
information, see CRS Insights IN11295, IN11382, and IN11383.) Even if such exclusions are upheld,
insured losses are estimated to be in the tens of billions of dollars, likely outstripping the insured losses
from the September 11, 2001 terrorist attacks.
The unexpected losses from the 2001 attacks caused significant disruptions in terrorism insurance
markets, leading Congress to step in with the Terrorism Risk Insurance Act (TRIA; 15 U.S.C. 6701 Note).
With COVID-19 also likely causing disruptions in insurance coverage, some in Congress are considering
terrorism insurance as a potential model. Representative Carolyn Maloney has introduced the Pandemic
Risk Insurance Act of 2020 (PRIA; H.R. 7011), modeled on TRIA. This Insight compares the primary
features of TRIA with PRIA.
Comparing Terrorism Risk with Pandemic Risk
As Congress considers responding to the COVID-19 pandemic, similarities in the COVID-19 pandemic
and the 2001 attacks may make TRIA a natural model. However, there are differences that may inform
legislation, including the following:
 Size and scope of losses. Total losses from the 2001 attacks were unexpectedly large, at
approximately $47 billion in current dollars, but they were concentrated in a particular
area and were generally manageable within the capital structure of the insurance industry.
Total policyholder surplus for the U.S. insurance industry at the time was approximately
$425 billion in current dollars, and much of the terrorism exposure was spread around the
world through foreign reinsurance.
The financial impact of the COVID-19 pandemic is expected to be larger than that of the
9/11 attacks. Insured loss estimates are still uncertain, but some have been quite large, as
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much as $81 billion for U.S. workers compensation insurance and in the hundreds of
billions per month if virus-related exclusions in various policies are not upheld in the
courts. The U.S. insurance industry total policyholder surplus was approximately $847.8
billion at the end of 2019, comparatively larger than in 2001. However, since pandemic
losses are worldwide, there are, effectively, no safe havens from which billions of dollars
of capital can flow to help pay for losses. In addition, catastrophe losses from hurricanes
and wildfires seem likely to stress the insurance industry’s finances in 2020.
 Insurer response. Prior to the 2001 attacks, insurers generally did not exclude terrorism
from policies despite, for example, previous attacks on the World Trade Center in New
York. Thus, insurers generally paid out claims from the attacks, resulting in billions of
dollars flowing to quickly provide relief. In the case of pandemics, insurers introduced
exclusionary language following the 2002-2004 SARS outbreak. Thus, relatively fewer
claims have been paid out to this point, as court cases to adjudicate insurer responsibility
for COVID-19 claims are ongoing.
 Outlook for future losses. The 2001 attacks were generally expected to presage further
terrorist attacks, inducing lenders, for example, to require terrorism insurance for large
projects. Without this insurance, broader damage to the economy was feared. This
concern has not appeared to subside, as Congress has renewed TRIA four times since its
initial passage. COVID-19 appears likely to disrupt financial markets until more effective
treatments or vaccines are developed. It is unclear, however, if this pandemic presages
future pandemics, thus requiring a longer term response, or whether it might be a once in
a century event that recedes in market importance once it subsides.
The Terrorism Risk Insurance Act
TRIA created a government backstop for commercial terrorism insurance. Although amended over the
years, TRIA is still in place and requires all insurers offering most property/casualty insurance to
participate in the program and to offer coverage for terrorist attacks. Businesses purchasing insurance,
however, are not required to purchase terrorism coverage. After a terrorist attack, insurers would pay
claims to policyholders up front, and then the TRIA program would step in and reimburse insurers for
some of the insured losses due to the attack. Depending on the exact extent and distribution of losses, the
government would then recoup the assistance after the fact through surcharges placed on
property/casualty insurance policies. (For more detail on TRIA, see CRS Report R45707, Terrorism Risk
Insurance: Overview and Issue Analysis for the 116th Congress, by Baird Webel.)
Pandemic Risk Insurance Legislation
Absent policy intervention, businesses wanting to insure against pandemic losses are likely to find such
insurance exceedingly expensive, if it is available at all. With TRIA generally perceived as a success, it
was viewed as a possible model for addressing the insurance market disruptions from COVID-19. H.R.
7011 would create a similar structure to TRIA for pandemic business interruption insurance with insurers
paying claims up front and the government reimbursing some portion of the losses after the fact. Two
notable differences, however, are (1) the PRIA program would be voluntary, insurers would not be
required to participate and offer coverage for pandemic-related losses, and (2) there would be no after-
the-fact recoupment mechanisms to reimburse the government for coverage.

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Table 1. Comparison of Selected TRIA and PRIA provisions
Terrorism Risk Insurance Act
Pandemic Risk Reinsurance Act
(15 U.S.C. 6701 Note,
(H.R. 7011,

as amended)
as introduced)
Insurer Participation
Mandatory
Voluntary
Policyholder Participation
Voluntary
Voluntary
Program trigger
$200 mil ion aggregate annual insured
$250 mil ion aggregate annual insured
losses
losses
Individual Insurer Deductiblea
20% of premiums
5% of premiums
Government Share
80%
95%
Overall Limitb
$100 bil ion in insured losses
$750 bil ion in insured losses
Recoupment of Government
Would occur in some cases, depending
No recoupment provisions
Payments?
on insured loss amount and
distribution
Source: Congressional Research Service from http://www.congress.gov.
a. Deductibles based on direct earned premiums for property/casualty insurance lines eligible for coverage under the
respective programs.
b. If losses approach the limit, the U.S. Treasury would determine a process for pro rata payments.

Author Information

Baird Webel

Acting Section Research Manager

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