Terrorism Risk Insurance: An Overview

Terrorism Risk Insurance: An Overview

Order Code RS21979
Updated January 17, 2007
Terrorism Risk Insurance: An Overview
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 program to share future insured terrorism losses with the
property-casualty insurance industry and 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. The three-year program that TRIA created backed
up commercial property and casualty insurance, covering up to $100 billion each year
after set insurer deductibles. The government would have paid 90% of insured losses
over the deductible, with the insurer paying 10%.
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 2005 (TRIEA)2 to extend the program
two years, leaving it essentially intact while increasing the private sector’s exposure to
terrorism risk. With less than one year left in the extended TRIA, concerns are again
being expressed that the private market will be unable to provide terrorism insurance
without a government backstop. Both Chairman Chris Dodd of the Senate Banking,
Housing, and Urban Affairs Committee and Chairman Barney Frank of the House
Financial Services Committee have indicated that addressing terrorism insurance will
be a priority this year. This report provides an overview of related issues, including a
summary of the original TRIA and the TRIA extension legislation. It will be updated
as significant 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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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 considered in writing insurance policies. The events of
September 11, 2001, however, changed this as insurers realized the extent of possible
losses. Current estimates of insured losses from the 9/11 attack, are around $32 billion,
still the largest man-made insurance disaster on record.3
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, so, 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 problem, Congress passed the
Terrorism Risk Insurance Act in November 2002.
TRIA’s Goals and Substance
TRIA’s 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.
To meet the first goal, TRIA began a short-term program for the federal government
to share insured commercial property-casualty losses with the private insurance market.
The program extended from enactment through December 31, 2005. The role of federal
loss sharing depended on the size of the insured loss. For a small loss, there was no
federal sharing. For a medium-sized loss, the federal role was to spread the loss over time
and over the entire insurance industry, paying claims up-front but then recouping the
payments through a broad levy on insurance policies afterwards. For a large loss, the
federal government was to pay most of the losses, although recoupment was possible in
these circumstances as well.
The precise criteria under TRIA were as follows: First, the federal government
would have shared in any insurer’s losses only if the industry’s aggregate insured losses
from an act of terrorism exceeded $5 million. Second, each insurer would have been
responsible for paying out a certain amount in claims — known as its deductible —
before it could call upon federal assistance. Its deductible was directly proportionate to
a particular insurer’s size, rising from 7% of earned premiums in 2003 to 11% in 2004,
3 See “Terrorism Risk and Insurance,” Insurance Information Institute website, available at
[http://www.iii.org/media/hottopics/insurance/terrorism/].

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and 15% in 2005. Once these two thresholds are passed, the federal government would
have paid 90% of each insurer’s losses above its deductible. However, if the aggregate
industry loss was under $10 billion for Program Year 1 (2003), $12.5 billion for Year 2
(2004), or $15 billion for Year 3 (2005), the amount that would have been paid to
individual insurers was required to be recouped through a surcharge added to all
commercial insurance premiums in following years. This surcharge could be a maximum
of 3% of premium and would last until the federal share was repaid. If the aggregate
industry loss was greater than the $10 billion - $15 billion amount, then the law imposed
no mandatory recoupment surcharge, although the Treasury Secretary was given the
authority to impose such a surcharge. The maximum amount that could be paid out under
the program in a given year was $100 billion.
The act covered only U.S. commercial property-casualty insured losses due to acts
of international terrorism certified by the Treasury Secretary. It did not cover losses due
to acts of war declared by Congress, except workers’ compensation losses. Congress also
“carved out” certain lines, disallowing their coverage under TRIA. The carved-out lines
were federal crop insurance, private crop or livestock insurance, private mortgage
insurance, title insurance, financial guaranty insurance of single-line guaranty insurers,
medical malpractice, flood insurance, reinsurance, and all life insurance products.
TRIA addressed the second goal, to protect consumers, by nullifying all commercial
terrorism exclusions in force on TRIA’s date of enactment. TRIA required
property-casualty insurers, as a condition of receiving federal assistance, to make
terrorism insurance available prospectively to their commercial policyholders by February
23, 2003. The coverage could not differ materially from coverage for other types of
losses. Each offer must reveal both the premium charged for terrorism insurance and the
federal share of compensation. The policyholder was not, however, required to purchase
coverage. If the policyholder declined to do so, its insurer could exclude terrorism losses.
TRIA did not limit what insurers could charge for terrorism risk insurance, though it did
give state regulators the authority to modify excessive, inadequate, or unfairly
discriminatory rates. The legislation made this “make available” provision effective until
the end of 2004, with the Treasury Secretary having the option, subsequently exercised,
to continue it until the end of 2005.
TRIA’s third goal was to preserve state regulation of insurance. Section 106 did so
expressly, with some exceptions. One exception was the definition of an “act of
terrorism”: TRIA’s definition applied despite any other definition in state law. A second
exception was TRIA’s limited preemption of state rate and form filing requirements.
TRIA preempted all prior approvals through December 31, 2003, though it did allow any
state to invalidate an excessive or discriminatory rate and any state with prior approval
authority to review policy forms after their use. Thus, states retained considerable
authority over rates and terms for terrorism coverage. A third exception was TRIA’s
requirement that workers’ compensation coverage include not only coverage for terrorism
risk but also for war risk. Finally, TRIA directed the Treasury Secretary to consult with
the state regulators’ group, the National Association of Insurance Commissioners, on
several application issues.
In addition to the determination on the “make available” provisions, Congress
directed the Treasury Secretary to conduct an expedited study of whether the TRIA
program should be extended to group life insurance and allowed the Secretary to extend

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TRIA to group life if the study determined that it should be. The subsequent study
determined that TRIA should not be extended to group life insurance.
2005 TRIA Extension Legislation
On June 30, 2005, the Treasury issued a report on TRIA with Treasury Secretary
Snow’s accompanying letter recommending against continuation of TRIA “in its present
form.”4 The Secretary stressed two factors: the economy had become more robust since
9/11, and extension of TRIA would hinder the development of private insurance solutions
by crowding out innovation and capacity building. To gain support from the
Administration, the letter specifies that any TRIA extension should include an increase
of the event threshold from $5 million to $500 million, increases in deductibles and co-
payments and a reduction in the types of insurance covered by TRIA. These requirements
differ substantially from previously introduced legislation on the topic, particularly the
increase to $500 million and the reduction in the types of insurance.
Two bills, S. 467 and H.R. 4313, were reported out of committee to extend and
revise TRIA. Different versions of S. 467 passed both the Senate and the House by early
December 2005.5
S. 467 was introduced in the 109th Congress by Senator Dodd on February 18, 2005,
prior to the Treasury report. It was marked up in the Senate Banking, Housing, and Urban
Affairs Committee on November 16, 2005. The committee amended the bill substantially
before reporting the bill favorably. S. 467, as reported, extended the program by two
years and left the framework largely intact while further limiting federal government
exposure, as suggested by Treasury Secretary Snow. Specifically, it removed additional
types of insurance (commercial auto, burglary and theft, surety, farm owners multiple
peril, and professional liability, except for directors and officers liability); raised the
insurer deductible to 17.5% in 2006 and 20% in 2007; increased the insurer co-payment
from 10% to 15% for 2007; and raised the event trigger to $50 million in 2006 and $100
million in 2007. After the markup, the bill was brought to the Senate floor and passed by
unanimous consent on November 18.
H.R. 4314 was introduced by Representative Richard Baker on November 14, 2005,
and marked up by the House Financial Services Committee on November 16. Relatively
minor amendments were made in committee, including language prohibiting life insurers
from denying coverage due to lawful travel undertaken by individuals. H.R. 4314, as
reported, extended TRIA and revised the program extensively. It limited the types of
insurance covered by removing commercial auto, but it expanded the program to cover
domestic terrorist events. Also, it increased the types of insurance covered to include
group life and specific coverage for nuclear, biological, chemical, and radiological
(NBCR) events. It raised the event trigger to $50 million in 2006 and an additional $50
million for every future year the program is in effect. It also changed the insurer
4 See [http://www.ustreas.gov/press/releases/js2618.htm].
5 For additional information, see CRS Report RL33177, Terrorism Risk Insurance Legislation
in 2005: Issue Summary and Side-by-Side, by Baird Webel.

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deductible, but did so differently for different lines of insurance, raising the deductible to
as much as 25% for casualty insurance but lowering it to 7.5% for NCBR events. H.R.
4314 would have raised the insurer co-payment to 20% for events under $10 billion while
lowering it gradually to 5% for events over $40 billion. In the event of a terrorist event,
the deductibles and event triggers would reset to lower levels, with deductibles possibly
as low as 5% in the event of a large attack. It removed the cap on the mandatory
recoupment provision so that all money expended under TRIA would be recouped by the
federal government through a surcharge on insurers in the years after the attack. H.R.
4314 also would have created TRIA Capital Reserve Funds (CRF), which would allow
insurers to set aside untaxed reserves to tap in the case of a terrorist event. The majority
of the text of H.R. 4314 was inserted into S. 467, and the House passed this bill on
December 7, 2005.
Although the House called for a conference committee reconciling the differences
between the two bills, the Senate did not. Ultimately, a further amendment to S. 467,
S.Amdt. 2689, passed the Senate on December 16, 2005, and the House followed, passing
S. 467 as amended on December 17, 2005. The President signed the Terrorism Risk
Insurance Extension Act of 2005 into law as P.L. 109-144 on December 22, 2005.
P.L. 109-144 closely tracks the Senate version of S. 467 as amended by the Senate
Banking Committee. The only substantial difference is an increase of the aggregate
industry retention amount from $17.5 billion and $20 billion to $25 billion and $27.5
billion for 2006 and 2007.
Issues and Outlook for the 110th Congress
Passage of TRIEA extended the government backstop for two years until 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 confront 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?