Statement of
Baird Webel
Specialist in Financial Economics
Before
Committee on Banking, Housing, and Urban Affairs
U.S. Senate
Hearing on
“The Reauthorization of the Terrorism Risk
Insurance Program”
June 18, 2019
Congressional Research Service
https://crsreports.congress.gov
TE10035
Congressional Research Service
1
Mr. Chairman, Ranking Member, and Members of the Committee, thank you for the opportunity to testify
before you today. My name is Baird Webel, a specialist in Financial Economics at the Congressional
Research Service (CRS) focusing on nonhealth insurance issues including terrorism risk insurance. I have
been in this role at CRS since 2003 and have covered the previous reauthorizations of the Terrorism Risk
Insurance Act (TRIA). CRS’s role is to provide objective, nonpartisan research and analysis to Congress.
CRS takes no position on the desirability of any specific policy. Any arguments presented in my written
and oral testimony are for the purposes of informing Congress, not to advocate for a particular policy
outcome.
My testimony today will begin with a brief introduction and overview of TRIA and a discussion of
significant policy concerns from past reauthorizations that may inform the current debate. I will then
provide a general background on terrorism insurance and the terrorism insurance market pre- and post-
TRIA, and conclude with a side-by-side comparison of previously enacted terrorism insurance laws,
based on my previous work at CRS.1
Introduction
Prior to the September 11, 2001, terrorist attacks, insurance covering terrorism losses was normally
included in commercial insurance policies without additional cost to the policyholders. The insured losses
on all insurance lines from the September 11 attacks exceeded $45 billion in inflation-adjusted dollars, an
amount well above other insurance industry experiences with terrorism losses. Following September
2001, insurers and reinsurers pulled back from offering terrorism coverage. Some observers feared that a
lack of insurance against terrorism loss would have a wide economic impact, particularly because
insurance coverage can be a significant factor in lending decisions.
Congress responded to the disruption in the insurance market by passing the Terrorism Risk Insurance Act
of 2002 (P.L. 107-297). TRIA created a temporary three-year program to calm markets through a
government reinsurance program sharing in terrorism losses. This program was intended to give the
insurance industry time to gather the data and create the structures and capacity necessary for private
insurance to cover terrorism risk.
TRIA did (and does) not cover terrorism losses directly but instead reimburses private insurers for a
portion of their losses. The act does not require private insurers to pay premiums for the government
coverage. However, it does require private insurers to offer commercial insurance for terrorism risk,
which private insurers were not willingly offering prior to TRIA’s enactment. In addition, TRIA provides
that the government recoups some or all federal payments under the act from insurers in the years
following government coverage of insurer losses. TRIA is limited to commercial property and casualty
insurance. It does not cover losses in health or life insurance, nor does it cover losses in personal property
lines, such as homeowners insurance.
The original TRIA legislation’s stated goals were to (1) create a temporary federal program of shared
public and private compensation for insured terrorism 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, the TRIA program created a mechanism through which the federal government
could share insured commercial property and casualty losses with the private insurance market. 2 The role
1 These sections adapted from CRS Report R45707,
Terrorism Risk Insurance: Overview and Issue Analysis for the 116th
Congress, by Baird Webel.
2 Commercial insurance is generally insurance purchased by businesses, in contrast to personal lines of insurance, which are
purchased by individuals. This means damage to individual homes and autos, for example, would not be covered under the TRIA
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of federal loss sharing depends on the size of the insured loss. For a relatively small loss, there is no
federal sharing. For a medium-sized loss, the federal role is to spread the loss over time and over the
entire insurance industry. The federal government provides assistance up front but then recoups the
payments it made through a broad levy on insurance policies afterward. For a large loss, the federal
government is to pay most of the losses, although recoupment is possible (but not mandatory) in these
circumstances as well. The precise dollar values where losses cross these small, medium, and large
thresholds are uncertain and will depend on how the losses are distributed among insurers.3
TRIA addresses the
second goal—to protect consumers—by requiring insurers that offer TRIA-covered
lines of insurance to make terrorism insurance available prospectively to their commercial policyholders.4
This coverage may not differ materially from coverage for other types of losses.
TRIA’s
third goal—to preserve state regulation of insurance—is expressly accomplished in Section
106(a), which provides that “Nothing in this title shall affect the jurisdiction or regulatory authority of the
insurance commissioner [of a state].” The Section 106(a) provision has two exceptions, one permanent
and one temporary (and expired): (1) the federal statute preempts any state definition of an “act of
terrorism” in favor of the federal definition and (2) the statute briefly preempted state rate and form
approval laws for terrorism insurance from enactment to the end of 2003. In addition to these exceptions,
Section 105 of the law also preempts state laws with respect to insurance policy exclusions for acts of
terrorism.
In the years following 2002, terrorism insurance became widely available and largely affordable, and the
insurance industry greatly expanded its financial capacity. There has been, however, little apparent
success in developing a longer-term private solution, and fears have persisted about the economic
consequences if terrorism insurance were not available. Thus, although explicitly designed as a three-year
program, TRIA has been extended three times—in 2005 (P.L. 109-144), in 2007 (P.L. 110-160), and in
2015 (P.L. 114-1). TRIA is currently set to expire at the end of 2020.
Congress has gradually adjusted the precise program details under TRIA, including the following:
the program trigger, an aggregate minimum loss threshold below which no government
loss-sharing occurs;
the federal share of insured losses;
the insurer deductible, an amount based on each insurer’s premium volume; and
program. Property and casualty insurance generally includes most lines of insurance except for life insurance and health
insurance. The TRIA statutory definition in §102(11) specifically excludes “(i) federal or private crop insurance; (ii) private
mortgage insurance or title insurance; (iii) financial guaranty insurance issued by monoline insurers; (iv) medical malpractice
insurance; (v) health or life insurance, including group life insurance; (vi) federal flood insurance; (vii) reinsurance or
retrocessional reinsurance; (vii) commercial automobile insurance; (ix) burglary and theft insurance; (x) surety insurance; (xi)
professional liability insurance; or (xii) farm owners multiple peril insurance.”
3 For example, for loss sharing to occur, an attack must meet a certain aggregate dollar value and each insurer must pay out a
certain amount in claims—known as its deductible. For some large insurers, this individual deductible might be higher than the
aggregate threshold set in statute, meaning that loss sharing might not actually occur until a higher level than the figure set in
statute.
4 Each terrorism insurance offer must reveal both the premium charged for terrorism insurance and the possible federal share of
compensation. Policyholders are not, however, required to purchase coverage under TRIA. If a policyholder declines to purchase
terrorism coverage, the insurer may exclude terrorism losses. Federal law does not limit what insurers can charge for terrorism
risk insurance, although state regulators typically have the authority under state law to modify excessive, inadequate, or unfairly
discriminatory rates. Although the purchase of terrorism coverage is not required under federal law, the interaction of TRIA and
state laws on workers’ compensation insurance results in most businesses being required to purchase terrorism coverage in
workers’ compensation policies.
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the insurer aggregate retention amount, the total losses to be retained by the insurers if
there is postevent recoupment.
In most cases, the congressional changes have been designed to reduce the federal share of potential
losses and increase private-sector contributions, with the exception of a change in 2007 that removed a
requirement that covered terrorist events must be foreign in origin. In addition to these thresholds that
have changed, the act’s requirement that a single attack must cause a minimum of $5 million in insured
damages to be certified under TRIA has remained unchanged.
The United States has suffered terrorist attacks since the passage of TRIA, but no acts of terrorism have
been certified and no federal payments to insurers have occurred under TRIA. For example, although the
April 2013 bombing in Boston was termed an “act of terror” by President Obama,5 the insured losses in
TRIA-eligible insurance from that bombing did not cross the $5 million statutory threshold to be certified
under TRIA.
The administration of the TRIA program was originally left generally to the Treasury Secretary. The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 20106 created a new Federal Insurance
Office (FIO) to be located within the Department of the Treasury. Among the FIO duties specified in the
legislation was to assist the Secretary in administering the Terrorism Insurance Program.7
The criteria under the TRIA program in 2019 are as follows:
1. An individual act of terrorism must be certified by the Secretary of the Treasury, in
consultation with the Secretary of Homeland Security and Attorney General; losses must
exceed $5 million in the United States or to U.S. air carriers or sea vessels for an act of
terrorism to be certified.
2. The federal government shares in an insurer’s losses due to a certified act of terrorism
only if “the aggregate industry insured losses resulting from such certified act of
terrorism” exceed $180 million (increasing to $200 million in 2020).8
3. The federal program covers only commercial property and casualty insurance, and it
excludes by statute several specific lines of insurance.9
4. Each insurer is responsible for paying a deductible before receiving federal coverage. An
insurer’s deductible is proportionate to its size, equaling 20% of an insurer’s annual direct
earned premiums for the commercial property and casualty lines of insurance specified in
TRIA.
5. Once the $180 million aggregate loss threshold and 20% deductible are met, the federal
government would cover 81% of each insurer’s losses above its deductible until the
amount of losses totals $100 billion.
6. After $100 billion in aggregate losses, there is no federal government coverage and no
requirement that insurers provide coverage.
7. In the years following the federal sharing of insurer losses, but prior to September 30,
2024, the Secretary of the Treasury is required to establish surcharges on TRIA-eligible
property and casualty insurance policies to recoup 140% of some or all of the outlays to
5 The White House, “Statement by the President,” press release, April 16, 2013, at http://www.whitehouse.gov/the-press-office/
2013/04/16/statement-president.
6 P.L. 111-203, 124 Stat. 1376.
7 §502 of P.L. 111-203, codified at 31 U.S.C. §313(c)(1)(D).
8 15 U.S.C. §6701 note, §103(e)(1)(B).
9 15 U.S.C. §6701 note, §102(11).
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insurers under the program. If losses are high, the Secretary has the authority to assess
surcharges, but is not required to do so.
Possible Issues for TRIA Reauthorization
Although nearly two decades have passed since Congress considered terrorism insurance in the aftermath
of September 11, 2001, the fundamental policy issues grappled with by Congress have remained largely
the same: (1) Is a federal terrorism insurance program needed or can the private market adequately
address terrorism risk? (2) If a federal program is needed, how should insurers share in funding terrorism
risk? and (3) What should the program cover? Are there specific risks that need particular treatment under
the program?
Is a Federal Terrorism Insurance Program Needed?
In the original act, the 107th Congress was quite clear that TRIA not be considered a permanent program,
specifically describing it as “temporary” twice and terming its three-year span as a “transitional period for
the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future
losses….”10 Even the codification of P.L. 107-297 could be seen as reflecting this temporary nature; TRIA
was added as a note to a code section relating to state insurance regulation, not as a separate section of its
own.11
The market experience in the years since TRIA’s initial passage has been much calmer than the year
following September 11, 2001. Terrorism insurance coverage has been available at pricing sufficiently
reasonable that take-up rates approach 80% in the latest Treasury data collections. This relative calm has
extended into markets beyond terrorism insurance. Property and casualty insurers as a whole have
increased their combined surplus from $408.6 billion (inflation adjusted) at the start of 2002 to $686.9
billion at the end of 2017.12 On the whole, insurance and reinsurance pricing has been surprisingly stable
despite two extraordinary years for hurricane losses (2005 and 2017) and a global financial crisis in 2008.
The relative market calm has, however, been underpinned by the existence of TRIA. Insurers are required
to offer terrorism coverage under the act and it seems possible that insurers would again seek to exclude
terrorism losses if this requirement were to be removed. For example, when TRIA briefly lapsed at the
end of 2014, conditional terrorism exclusions that had been included in insurance filings with state
insurance regulators were activated.13 Exactly how widespread these exclusions would be applied if TRIA
were completely removed, however, is unclear. It is possible that competitive pressure might cause
insurers to cover terrorism risk even without TRIA. The latest Treasury report found that 30% of terrorism
coverage that is provided in conjunction with other property and casualty insurance is offered without
specific premiums being charged, which suggests that the perceived terrorism risk is low for some of the
insureds.14
10 P.L. 107-297, §101.
11 TRIA is codified at 15 U.S.C. §6701 note.
12 AM Best,
Best’s Aggregates & Averages, Property-Casualty, 2002 Edition, p. 2; and AM Best,
Best’s Aggregates & Averages,
Property-Casualty, 2018 Edition, p. 2. Inflation adjustment from the Bureau of Labor Statistics’ CPI inflation calculator at
https://data.bls.gov/cgi-bin/cpicalc.pl. Actual 2002 figure is $293.5 billion.
13 See, for example, Verisk, “ISO Conditional Terrorism Endorsements to Come into Play with TRIA’s Lapse,” press release,
December 18, 2014, at https://www.verisk.com/archived/2014/december/iso-conditional-terrorism-endorsements-to-come-into-
play-with-tria-s-lapse/.
14 Department of the Treasury, Federal Insurance Office (FIO),
Report on the Effectiveness of the Terrorism Risk Insurance
Program, June 2018, p. 19.
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The insurance industry uses tools to model and mitigate catastrophe risks, such as hurricanes. Many
analysts argue, however, that the tools to address terrorism risk have not been developed as successfully
as was hoped when TRIA was initially enacted. Insurance works best with a large amount of data to
develop estimates for the likelihood and size of future losses. However, terrorist attacks are relatively rare
and much of the data about various terrorist threats may be closely held by the government due to national
security concerns, thus further reducing data available for private firms. Furthermore, the fact that
terrorism is carried out by purposeful actors who shift strategies and tactics adds another layer of
complication to modeling techniques that are used with phenomena such as hurricanes. The purposeful
nature of the actors also increases potential damage from terrorist attacks because it reduces the
effectiveness of mitigation techniques.
How Should Insurers Share in Funding Terrorism Risk?
Insurance contracts in the private sector typically have three mechanisms by which insurers and insureds
share the risk of loss. Premiums paid by insureds provide capital to prefund part of the loss, and after a
loss, insureds will often pay deductibles (a set amount paid prior to insurance coverage) and copayments
(a percentage of the losses). The TRIA program uses somewhat similar concepts, which have been
adjusted in different ways over the program’s life. The three mechanisms TRIA uses to share the risk are
as follows:
Deductible. In an unusual structure, TRIA essentially has a two-stage deductible. TRIA
provides directly for an “insurer deductible” that is equal to 20% of each company’s
direct earned premiums for TRIA-eligible lines of insurance. In addition, TRIA includes a
“program trigger,” the amount aggregate insured losses must clear before any funding
flows out of the Treasury. The program trigger is $180 million in 2019 and increases to
$200 million in 2020. If the program trigger is not cleared, an insurer would receive no
federal funding even if its individual deductible is exceeded. For approximately the
largest 40-50 insurers, the 20% deductible is larger than the program trigger, so for these
companies the trigger is essentially irrelevant.15 For the rest of the companies, depending
on the distribution of the losses, it is possible that they might have to bear losses larger
than their deductible prior to receiving funds under TRIA.
Insured Loss Share Compensation. This is essentially equivalent to a copayment. Above
the program trigger or deductible, private insurers cover 19% of the losses covered under
TRIA, rising to 20% in 2020. (The statute is actually written in the inverse, defining the
term as the amount paid by the federal government.)
Terrorism Loss Risk-Spreading Premiums. These risk-spreading premiums, used to fund
the losses, are similar in concept to premiums paid by normal insureds to private insurers,
but in operation, they are quite different. Unlike premiums in most insurance, the TRIA
premiums are only paid after the losses, not before. Thus, there are no funds built up to
pay future losses, as there are in almost all other types of insurance. These postevent
premiums are to be either mandatory or discretionary based on the size of the insured
losses compared with the insurer aggregate retention amount set in the statute ($37.5
billion in 2019). If recoupment is mandatory, the amount to be recouped is to be 140% of
the federal outlays actually made and the recoupment must occur prior to September 30,
15 Based on 2017 data provided to CRS by the Treasury, the top 52 insurers would have had deductibles clearing the $140 million
program trigger in place at the time, and 42 insurers would have had deductibles clearing the $200 million figure that will be in
place in 2020. Of course, by 2020, inflation will likely have increased the total premiums amounts, and there may have been
mergers by insurers that would alter the exact premiums amounts.
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2024, which coincides with the 10-year window used by the Congressional Budget Office
(CBO) for scoring the last reauthorization legislation.
The initial loss sharing under TRIA can be seen in
Figure 1, adapted from the Congressional Budget
Office. The exact amount of the 20% deductible at which TRIA coverage would begin depends on how
the losses are distributed among insurance companies. In the aggregate, 20% of the direct-earned
premiums for all of the property and casualty lines specified in TRIA totaled approximately $42 billion in
2017, according to the latest data collected by the Treasury Department. TRIA coverage is likely,
however, to begin well under this amount, as the losses from an attack are unlikely to be equally
distributed among insurance companies.
Figure 1. Initial Loss Sharing Under Current TRIA Program
Source: Congressional Research Service (CRS), adapted from Congressional Budget Office,
Federal Reinsurance for
Terrorism Risks: Issues in Reauthorization, August 1, 2007, p. 12.
Note: According to Department of the Treasury data and CRS calculations, the aggregate of all individual insurer
deductibles totaled approximately $42 bil ion in 2017. Loss sharing is likely to begin well under this amount, as the
distribution of terrorism losses is unlikely to be equally spread among insurers.
Since its enactment, amendments to TRIA have changed all three of these mechanisms so that increasing
amounts of losses are to be borne by private insurers. The individual insurer deductibles have increased
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from 7% of premiums in 2003 to 20% in 2007 and thereafter. The program trigger did not exist until
2006, started at $50 million, and will be $200 million in 2020. The private insurer share of losses was
originally 10% and will be 20% in 2020. The recoupment premiums were originally set at 100% of losses,
with the aggregate retention amount set at $10 billion. The 100% recoupment was increased to 133% in
2007 and 140% in 2015,16 whereas the aggregate retention amount was increased gradually through most
of the program’s life. In addition to other changes in the levels of the various mechanisms within the
TRIA program to share terrorism risk among the government and private insurers, Congress also might
consider employing different mechanisms to share such risk. For example, in past reauthorizations of
TRIA, some have proposed that Congress create specific reserves to fund future terrorism claims.17 These
reserves might be within the insurance companies’ capital structures or might be held in a sort of separate
account and would have been funded by policyholder premiums paid to the insurance companies. It
would also be possible to fund some sort of terrorism reserve fund in the Treasury through up-front
premiums charged by the government to private insurers rather than relying on postevent recoupment
premiums.18
What Should a Federal Terrorism Insurance Program Cover?
From the original statute’s enactment, the TRIA program has been designed to work in the background
through the private insurance system. Congress defined certain commercial insurance lines as within the
TRIA program and excluded others. For these TRIA-eligible lines, insurers must offer coverage for
terrorism damage claims that “does not differ materially” from the terms and conditions applied to claims
made due to other causes of damage. This greatly simplified the program’s creation and has allowed the
Treasury Department to administer the program with only a handful of people for the past 17 years. Some
property and casualty lines were removed from the program in the 2005 reauthorization, and some
legislation in the past would have added some lines to TRIA, but the basic principle of working through
private policies has remained constant.
The requirement that terrorism coverage be offered under the same terms and conditions as coverage for
damage from other sources means that, for example, if an insurer offers a policy covering a commercial
building for fire damage due to some accidental cause, it must also offer a policy covering that building
for fire damage due to terrorism. However, if the insurer decided to exclude coverage from fire damage
altogether, regardless of the source, the insurer could also do so with regard to fire damage from
terrorism. This may seem on first glance to be a relatively minor legalistic point of insurance policy
language, but it could have an important impact on the potentially most damaging form of terrorist
attacks.
Some observers consider a terrorist attack with some form of a nuclear, chemical, biological, or
radiological (NCBR) weapon to be the most likely type of attack causing large-scale losses. 19 The current
16 According to a Congressional Budget Office (CBO) working paper, the amount was set to 133% to offset the corporate tax
reduction occurring as policyholders deducted the recoupment charges. The 140% amount “provides some additional
compensation to the government for bearing risk.” David Torregrosa et al,
Federal Reinsurance for Terrorism Risk in 2015 and
Beyond, CBO, Working Paper no. 2015-04, June 2015, at http://www.cbo.gov/sites/default/files/114th-congress-2015-
2016/workingpaper/50171-TRIA_Working_Paper_1.pdf.
17 See, for example, H.R. 4314 in the 109th Congress or H.R. 2167 in the 110th Congress.
18 This structure was used in, for example, the Federal Aviation Administration’s Aviation War Risk Program, which was
expanded following September 11, 2001. This program was eventually allowed to expire with a substantial positive balance for
the Treasury.
19 There is some variance in the acronym used for such attacks. The U.S. Department of Defense, for example, uses “CBRN,”
rather than NCBR, in its
Dictionary of Military and Associated Terms; see p. 34 at https://www.jcs.mil/Portals/36/Documents/
Doctrine/pubs/dictionary.pdf.
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TRIA statute does not specifically include or exclude NBCR events; thus, the TRIA program in general
would cover insured losses from terrorist actions due to NCBR as it would for an attack by conventional
means. However, most of the commercial policies that TRIA covers would
exclude damage from an
NBCR cause regardless of whether it is accidental or due to terrorism.20 Thus, despite the TRIA
requirement to offer terrorism coverage (and the 70%-80% reported take-up rate of this coverage), most
purchasers of terrorism insurance may not be covered for damage from a terrorist attack using chemical
gas, a radiological “dirty” bomb, or any of dozens of other similar scenarios that could result in extremely
large losses.
Congress addressed the issue of NCBR coverage in the 2005 reauthorization, which called on the
President’s Working Group on Financial Markets to study the question, and the 2007 reauthorization,
which called for a Government Accountability Office (GAO) study. The GAO report was issued in 2008,
finding that “insurers generally remain unwilling to offer NBCR coverage because of uncertainties about
the risk and the potential for catastrophic losses.”21 In the past, legislation would have provided for
differential treatment of NBCR attacks under TRIA, but such legislation has not been enacted (see, e.g.,
H.R. 4134 in the 109th Congress, H.R. 2761 in the 110th Congress, and H.R. 4871 in the 110th Congress).
In 2016, state insurance regulators introduced a new
Cyber Liability line of insurance, raising questions as
to whether coverage under this line would be covered under TRIA, or whether it would not be covered
under the law’s exclusion of “professional liability” insurance. The Treasury Department released
guidance in December 2016 clarifying that “stand-alone cyber insurance policies reported under the
‘Cyber Liability’ line are included in the definition of ‘property and casualty insurance’ under TRIA.”22
Despite Treasury’s guidance, cyberterrorism coverage remains a particular concern among certain
stakeholders. The Treasury Department devoted a specific section of the latest report on TRIA to cyber
coverage, reporting that 50% of standalone cyberinsurance policies (based on premium value) included
terrorism coverage. The take-up rate for those choosing cyber coverage that is embedded in policies
covering additional perils was 54%. These rates are similar to, but slightly lower than, the 62% take-up
rate for general terrorism coverage found across all TRIA-eligible lines.23
Background on Terrorism Insurance
Insurability of Terrorism Risk
Stripped to its most basic elements, insurance is a fairly straightforward operation. An insurer agrees to
assume an indefinite future risk in exchange for a definite current premium. The insurer pools a large
number of risks such that, at any given point in time, the ongoing losses will not be larger than the current
premiums being paid, plus the residual amount of past premiums that the insurer retains and invests, plus,
in a last resort, any borrowing against future profits if this is possible. For the insurer to operate
successfully and avoid failure, it is critical to accurately estimate the probability of a loss and the severity
of that loss so that a sufficient premium can be charged. Insurers generally depend upon huge databases of
20 The primary exception to this is workers’ compensation insurance, which is required by most state laws to cover all sources of
injury to workers.
21 U.S. Government Accountability Office (GAO),
TERRORISM INSURANCE: Status of Coverage Availability for Attacks
Involving Nuclear, Biological, Chemical, or Radiological Weapons, GAO-09-39, December 12, 2008, at http://gao.gov/products/
GAO-09-39.
22 Department of the Treasury, “Guidance Concerning Stand-Alone Cyber Liability Insurance Policies Under the Terrorism Risk
Insurance Program,” 81
Federal Register 95313, December 27, 2016.
23 Department of the Treasury, Federal Insurance Office (FIO),
Report on the Effectiveness of the Terrorism Risk Insurance
Program, June 2018, p. 55.
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past loss information in setting these rates. Everyday occurrences, such as automobile accidents or natural
deaths, can be estimated with great accuracy. Extraordinary events, such as large hurricanes, are more
difficult, but insurers have many years of weather data, coupled with sophisticated computer models, with
which to make predictions.
Many see terrorism risk as fundamentally different from other risks, and thus it is often perceived as
uninsurable by the private insurance market without government support for the most catastrophic risk.
The argument that catastrophic terrorism risk is uninsurable typically focuses on lack of public data about
both the probability and severity of terrorist acts. The reason for the lack of historical data is generally
seen as a good thing—few terrorist attacks are attempted and fewer have succeeded. Nevertheless, the
insurer needs some type of measurable data to determine which terrorism risks it can take on without
putting the company at risk of failure. As a replacement for large amounts of historical data, insurers turn
to various forms of terrorism models similar to those used to assess future hurricane losses. Even the best
model, however, can only partly replace good data, and terrorism models are still relatively new
compared with hurricane models.
One prominent insurance textbook identifies four ideal elements of an insurable risk: (1) a sufficiently
large number of insureds to make losses reasonably predictable; (2) losses must be definite and
measurable; (3) losses must be fortuitous or accidental; and (4) losses must not be catastrophic (i.e., it
must be unlikely to produce losses to a large percentage of the risks at the same time).24 Terrorism risk in
the United States would appear to not meet the first criterion, as terrorism losses have not proved
predictable over time.25 Losses to terrorism, when they occur, are generally definite and measurable, so
terrorism risk could pass under criterion two. Such risk, however, also likely does not meet the third
criterion due to the malevolent human actors behind terrorist attacks, whose motives, means, and targets
of attack are constantly in flux. Whether it meets the fourth criterion is largely decided by the
underwriting actions of insurers themselves (i.e., whether the insurers insure a large number of risks in a
single geographic area that would be affected by a terrorist strike). Insurers generally have sought to limit
their exposures in particular geographic locations with a conceptually higher risk for terrorist attacks,
making terrorism insurance more difficult to find in those areas.
Terrorism risk post-2001 is not the first time the United States has faced a risk perceived as uninsurable in
private markets that Congress chooses to address through government action. During World War II, for
example, Congress created a “war damage” insurance program, and it expanded a program insuring
against aviation war risk following September 11, 2001. Since 1968, the National Flood Insurance
Program has covered most of the insured flooding losses in the United States.26
The closest previous analog to the situation with terrorism risk may be the federal riot reinsurance
program created as part of the Housing and Urban Development Act of 1968.27 Following large-scale riots
24 Emmett J. Vaughan and Therese Vaughan,
Fundamentals of Risk and Insurance (Hoboken, NJ: John Wiley & Sons, 2003), p.
41.
25 Although the U.S. experience with terrorism is relatively limited, other countries have dealt with the issue more extensively
and have developed their own responses to the challenges presented by terrorism risk. Spain, which has seen significant terrorist
activity by Basque separatist movements, insures against acts of terrorism via a broader government-owned reinsurer that has
provided coverage for catastrophes since 1954. The United Kingdom, responding to the Irish Republican Army attacks in the
1980s, created Pool Re, a privately owned mutual insurance company with government backing, specifically to insure terrorism
risk. In the aftermath of the September 11, 2001, attacks, the UK greatly expanded Pool Re, and Germany created a private
insurer with government backing to offer terrorism insurance policies. Canada specifically considered, and rejected, creating a
government program following September 11, 2001. For more information on other countries’ programs addressing terrorism
risk, see GAO,
Terrorism Risk Insurance: Comparison of Selected Programs in the United States and Foreign Countries, GAO-
16-316, April 12, 2016, at https://www.gao.gov/products/GAO-16-316.
26 For more information, see CRS Report R44593,
Introduction to the National Flood Insurance Program (NFIP), by Diane P.
Horn and Baird Webel.
27 P.L. 90-448; 82 Stat. 476.
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in American cities in the late 1960s, insurers generally pulled back from insuring in those markets, either
adding policy exclusions to limit their exposure to damage from riots or ceasing to sell property damage
insurance altogether. The federal riot reinsurance program offered reinsurance contracts similar to
commercial excess reinsurance. The government agreed to cover some percentage of an insurance
company’s losses above a certain deductible in exchange for a premium paid by that insurance company.
Private reinsurers eventually returned to the market, and the federal riot reinsurance program was
terminated in 1985.
The Terrorism Insurance Market Post-9/11 and Pre-TRIA
The September 2001 terrorist attacks, and the resulting billions of dollars in insured losses, caused
significant upheaval in the insurance market. Even before the attacks, the insurance market was showing
signs of a cyclical “hardening” of the market in which prices typically rise and availability is somewhat
limited. The unexpectedly large losses caused by terrorist acts exacerbated this trend, especially with
respect to the commercial lines of insurance most at risk for terrorism losses. Post-September 11, insurers
and reinsurers started including substantial surcharges for terrorism risk, or, more commonly, they
excluded coverage for terrorist attacks altogether. Reinsurers could make such rapid adjustments because
reinsurance contracts and rates are generally unregulated. Primary insurance contracts and rates are more
closely regulated by the individual states, and the exclusion of terrorism coverage for the individual
insurance purchaser required regulatory approval at the state level in most cases. States acted fairly
quickly, and, by early 2002, 45 states had approved insurance policy language prepared by the Insurance
Services Office, Inc. (ISO, an insurance consulting firm), excluding terrorism damage in standard
commercial policies.28
The lack of readily available terrorism insurance caused fears of a larger economic impact, particularly on
the real estate market. In most cases, lenders prefer or require that a borrower maintain insurance
coverage on a property. Lack of terrorism insurance coverage could lead to defaults on existing loans and
a downturn in future lending, causing economic ripple effects as buildings are not built and construction
workers remain idle.
The 14-month period after the September 2001 terrorist attacks and before the November 2002 passage of
TRIA provides some insight into the effects of a lack of terrorism insurance. Some examples in
September 2002 include the Real Estate Roundtable releasing a survey finding that “$15.5 billion of real
estate projects in 17 states were stalled or cancelled because of a continuing scarcity of terrorism
insurance”29 and Moody’s Investors Service downgrading $4.5 billion in commercial mortgage-backed
securities.30 This picture, however, was not uniform. For example, in July 2002,
The Wall Street Journal reported that “despite concerns over landlords’ ability to get terrorism insurance, trophy properties were
in demand.”31 CBO concluded in 2005 that “[TRIA] appears to have had little measurable effect on office
construction, employment in the construction industry, or the volume of commercial construction loans
made by large commercial banks,” but CBO also noted that a variety of economic factors at the time
“could be masking positive macroeconomic effects of TRIA.”32
28 Jeff Woodward, “The ISO Terrorism Exclusions: Background and Analysis,”
IRMI Insights, February 2002, at
http://www.irmi.com/expert/articles/2002/woodward02.aspx.
29 The Real Estate Roundtable, “Terror Insurance Drag on Real Estate Still Climbing,”
Roundtable Weekly, September 19, 2003.
30 “Moody’s Downgrades Securities on Lack of Terrorism Insurance,”
Wall Street Journal, September 30, 2002, p. C14.
31 Ray A. Smith, “Office-Building Demand Rises Despite Vacancies,”
Wall Street Journal, July 24, 2002, p. B6.
32 Congressional Budget Office,
Federal Terrorism Reinsurance: An Update, January 2005, pp. 10-11, at http://www.cbo.gov/
publication/16210.
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After TRIA
TRIA’s “make available” provisions addressed the availability problem in the terrorism insurance market,
as insurers were required by law to offer commercial terrorism coverage. However, significant uncertainty
existed as to how businesses would react, because there was no general requirement to purchase terrorism
coverage and the pricing of terrorism coverage was initially high. 33 Analyzing the terrorism insurance
market in the aftermath of TRIA is challenging as well because there was no consistent regulatory
reporting by insurers until P.L. 114-1 required detailed reporting, which Treasury began in 2016. Before
this time, data on terrorism insurance typically stemmed from insurance industry surveys or rating
bureaus. In examining the terrorism insurance market since TRIA, it is also important to note that no
terrorist attacks have occurred that reached TRIA thresholds, thus property and casualty insurance has not
made any large-scale payouts for terrorism damages.
The initial consumer reaction to the terrorism coverage offers was relatively subdued. Marsh, Inc., a large
insurance broker, reported that 27% of its clients bought terrorism insurance in 2003. This take-up rate,
however, climbed relatively quickly to 49% in 2004 and 58% in 2005. Marsh reported that, since 2005,
the overall take-up rate has remained near 60%, with Marsh reporting a rate of 62% in 2017.34 The
Treasury reports based on industry data calls have found similar or higher take-up rates. For 2017,
Treasury found that the take-up rate based on premium volumes was 62%, whereas based on policy
counts, the rate was 78%.35
The price for terrorism insurance has appeared to decline over time, although the price level reported may
not always be comparable between sources. The 2013 report by the President’s Working Group on
Financial Markets, based on survey data by insurance broker Aon, showed a high of more than 7% for the
median terrorism premium as a percentage of the total property premium in 2003, with a generally
downward trend, and more recent values around 3%.36 The trend may be downward, but there has been
variability, particularly across industries. For example, Marsh reported rates in 2009 as high as 24% of the
property premium for financial institutions and as low as 2% in the food and beverage industry.37 In the
2013 Marsh report, this variability was lower, as 2012 rates varied from 7% in the transportation industry
and the hospitality and gaming industry to 1% in the energy and mining industry.38 In 2017, Marsh found
rates varying from 10% in hospitality and gaming to 2% in the energy and mining and construction
industries. The 2018 Treasury report, based on lines of insurance, not on industry category, found
premiums varying from 6.1% in excess workers’ compensation to 1.4% in ocean marine in 2017.39
Treasury found that the total premium amount paid for terrorism coverage in 2017 was approximately
$3.65 billion, or 1.75%, of the $209.15 billion in total premiums for TRIA-eligible lines of insurance.40
Since the passage of TRIA, Treasury estimates that a total of approximately $38 billion was earned for
33 Although there is no requirement in federal law to purchase terrorism coverage, businesses may be required by state law to
purchase the coverage. This is particularly the case in workers’ compensation insurance. Market forces, such as requirements for
commercial loans, may also compel businesses to purchase terrorism coverage.
34 Marsh, Inc.,
2018 Terrorism Risk Insurance Report, April 2018, p. 1.
35 FIO,
Report on the Effectiveness of the Terrorism Risk Insurance Program, June 2018, p. 30.
36 President’s Working Group on Financial Markets,
The Long-Term Availability and Affordability of Insurance for Terrorism
Risk, April 2014, p. 26.
37 Marsh, Inc.,
The Marsh Report: Terrorism Risk Insurance 2010, p. 14.
38 Marsh, Inc.,
2013 Terrorism Risk Insurance Report, May 2013, p. 12.
39 FIO,
Report on the Effectiveness of the Terrorism Risk Insurance Program, June 2018, p. 20.
40 FIO,
Report on the Effectiveness of the Terrorism Risk Insurance Program, June 2018, pp. 72-74. Calculations by CRS.
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terrorism coverage by nonrelated insurers, with another $7.4 billion earned by captive insurers (which are
insurers who are owned by the insureds).
In general, insurers’ capacity to bear terrorism risk has increased over the life of the TRIA program. The
combined policyholder surplus among all U.S. property and casualty insurers was $686.9 billion at the
end of 2017 compared with $408.6 billion (inflation adjusted) at the start of 2002.41 This $686.9 billion
has been bolstered by the estimated $38 billion in premiums paid for terrorism coverage over the years
without significant claims payments. The policyholder surplus, however, backs all property and casualty
insurance policies in the United States and is subject to depletion in a wide variety of events. For
example, extreme weather losses could particularly draw capital away from the terrorism insurance
market, because events such as hurricanes share some characteristics—low frequency and the possibility
of catastrophic levels of loss—with terrorism risk.
Evolution of Terrorism Risk Insurance Laws
Table 1 presents a side-by-side comparison of selected provisions from the original TRIA law, along with
the reauthorizing laws of 2005, 2007, and 2015.
41 AM Best,
Best’s Aggregates & Averages, Property-Casualty, 2002 Edition, p. 2; and AM Best,
Best’s Aggregates & Averages,
Property-Casualty, 2018 Edition, p. 2. Inflation adjustment from the Bureau of Labor Statistics’ CPI inflation calculator at
https://data.bls.gov/cgi-bin/cpicalc.pl. Actual 2002 figure is $293.5 billion.
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Table 1. Side-by-Side of Enacted Terrorism Risk Insurance Laws
(selected provisions)
Original 2002 Law
15 U.S.C. 6701
2005
2007
2015
Note
Reauthorization
Reauthorization
Reauthorization
Provision
(P.L. 107-297)
P.L. 109-144
P.L. 110-160
P.L. 114-1
Title
Terrorism Risk
Terrorism Risk
Terrorism Risk
Terrorism Risk
Insurance Act of 2002
Insurance Extension
Insurance Program
Insurance Program
Act of 2005
Reauthorization Act
Reauthorization Act
of 2007
of 2015
Expiration Date
December 31, 2005
December 31, 2007
December 31, 2014
December 31, 2020
(§108(a))
(§2)
(§3(a))
(§101)
“Act of Terrorism”
For an act of
No Change
Removed
Removed Secretary of
Definition
terrorism to be
requirement that a
State from
covered under TRIA,
covered act of
certification process
it must be a violent
terrorism be
and inserted
act committed on
committed on behalf
Secretary of
behalf of a foreign
of a foreign person or
Homeland Security.
person or interest as
interest (thus
(§105)
part of an effort to
expanding coverage
coerce the U.S.
to domestic
civilian population or
terrorism). (§2)
influence U.S.
government policy. It
must have resulted in
damage within the
United States or to a
U.S. airliner or
mission abroad.
Terrorist act is to be
certified by the
Secretary of the
Treasury in
concurrence with the
Attorney General and
Secretary of State.
(§102(1)(A))
Limitation on Act of
Terrorist act would
No Change
No Change
No Change
Terrorism
not be covered in the
Certification in Case
event of a war, except
of War
for workers’
compensation
insurance.
(§102(1)(B)(I))
Minimum Damage To
Terrorist act must
No Change
No Change
No Change
Be Certified
cause more than $5
mil ion in property
and casualty insurance
losses to be certified.
(§102(1)(B)(i ))
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Original 2002 Law
15 U.S.C. 6701
2005
2007
2015
Note
Reauthorization
Reauthorization
Reauthorization
Provision
(P.L. 107-297)
P.L. 109-144
P.L. 110-160
P.L. 114-1
Aggregate Industry
No Provision
Created a “program
No Change. Program
Program trigger
Loss
trigger” that would
trigger remained at
increased $20 mil ion
Requirement/Program
prevent coverage
$100 mil ion until
per year until it
Trigger
under the program
2014. (§3(c))
reaches $200 mil ion
unless “aggregate
in 2020. (§102)
industry losses
resulting from such
certified act of
terrorism” exceed
$50 mil ion in 2006
and $100 mil ion for
2007. (§6)
Insurer Deductible
7% of earned
Raised deductible to
No Change.
No Change.
premium for 2003,
17.5% for 2006 and
Deductible remained
Deductible remained
10% of earned
20% for 2007. (§3)
at 20% until 2014.
at 20% for each
premium for 2004,
(§3(c))
calendar year of the
15% of earned
program. (§106)
premium for 2005.
(§102(7))
Covered Lines of
Commercial property
Excluded commercial
No Change
No Change
Insurance
and casualty
auto, burglary and
insurance, including
theft, professional
excess insurance,
liability (except for
workers’
directors and officers
compensation, and
liability), and farm
surety but excluding
owners multiple peril
crop insurance,
from coverage. (§3)
private mortgage
insurance, title
insurance, financial
guaranty insurance,
medical malpractice
insurance, health or
life insurance, flood
insurance, or
reinsurance.
(§102(12))
Mandatory Availability Every insurer must
No Change.
No Change.
No Change.
make available
Mandatory availability
Mandatory availability
Mandatory availability
terrorism coverage
extended through
extended through
in effect for each
that does not differ
2007. (§2(b))
2014. (§3(c))
calendar year of the
materially from
program. (§106)
coverage applicable to
losses other than
terrorism. (§103(c))
Insured Loss Shared
Federal share of
Reduced federal share No Change. Federal
Reduced federal share
Compensation
losses wil be 90% for
of losses to 85% for
share remained at
one percentage point
insured losses that
2007. (§4)
85% through 2014.
per year until it
exceed the applicable
reaches 80%. (§102)
insurer deductible.
(§103(e))
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Original 2002 Law
15 U.S.C. 6701
2005
2007
2015
Note
Reauthorization
Reauthorization
Reauthorization
Provision
(P.L. 107-297)
P.L. 109-144
P.L. 110-160
P.L. 114-1
Cap on Annual
Federal share of
No Change
Removed the
No Change
Liability
compensation paid
possibility that a
under the program
future Congress could
wil not exceed $100
require insurers to
bil ion and insurers
cover some share of
are not liable for any
losses above $100
portion of losses that
bil ion if the insurer
exceed $100 bil ion
has met its individual
unless Congress acts
deductible. Requires
otherwise to cover
insurers to clearly
these losses.
disclose this to
(§103(e))
policyholders.
(§4(a) and §4(d))
Payment Procedures
After notice by the
No Change
Required Secretary of
No Change
if Losses Exceed $100 Secretary of the
the Treasury to
bil ion
Treasury, Congress
publish regulations
determines the
within 240 days of
procedures for
passage regarding
payments if losses
payments if losses
exceed $100 bil ion.
exceed $100 bil ion.
(§103(e)(3))
(§4(c))
Aggregate Retention
$10 bil ion for 2002-
Raised amount to $25
No Change.
Raises amount $2
Amount Maximum
2003, $12.5 bil ion for
bil ion for 2006 and
Aggregate retention
bil ion per year until it
2004, $15 bil ion for
$27.5 bil ion for 2007.
remained at $27.5
reaches $37.5 bil ion.
2005
(§5)
bil ion through 2014.
Beginning in 2020,
(§103(6))
sets the amount equal
to annual average of
the sum of insurer
deductibles for
previous three years.
(§104)
Mandatory
If insurer losses are
No Change
Increases total
Increases total
Recoupment of
less than the
recoupment amount
recoupment amount
Federal Share
aggregate retention
to be col ected by the
to be col ected by the
amount, a mandatory
premium surcharges
premium surcharges
recoupment of the
to 133% of the
to 140% of the
federal share of the
previously defined
previously defined
loss wil be imposed.
mandatory
mandatory
If insurer losses are
recoupment amount.
recoupment amount.
over the aggregate
Ful mandatory
Ful mandatory
retention amount,
recoupment must
recoupment must
such recoupment is at
occur by September
occur by September
the discretion of the
30, 2017. (§4(e)(1))
30, 2024. (§104)
Secretary of the
Treasury.
(§103(e)(7))
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Recoupment
Surcharge is limited to No Change
Removed 3% limit for
No Change
Surcharge
3% of property-
mandatory surcharge.
casualty insurance
(§4(e)(2)(A))
premium and may be
adjusted by the
Secretary to take into
account the economic
impact of the
surcharge on urban
commercial centers,
the differential risk
factors related to
rural areas and
smaller commercial
centers, and the
various exposures to
terrorism risk across
lines of insurance.
(§103(e)(8))
Source: The Congressional Research Service using public laws obtained from the Government Publishing Office through
http://www.congress.gov.
Notes: Section numbers for the initial TRIA law are as codified in 15 U.S.C. §6701 note. Section numbers for P.L. 109-
144, P.L. 110-160, and P.L. 114-1 are from the legislation as enacted.
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
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