Terrorism Insurance

Question 1

Pre-9/11 status of terrorism coverage

Answer 1

insurers did NOT exclude or charge separately for terrorism coverage

Question 2

Post-9/11 status of terrorism coverage

Answer 2

insurers and reinsurers withdrew coverage (due to lack of credible data and potentially catastrophic losses)

Question 3

Motivation for gov’t involvement in terrorism coverage (TRIA) (3)

Answer 3

• Fill unmet need: private insurers withdrew coverage post-9/11
• Convenience: gov’t can set up program quickly and work with Treasury Dept regarding compensation
• Social Purpose: econ disruption from lack of terrorism insurance availability (new construction projects couldn’t get required insurance)

Question 4

Goals of TRIA

Answer 4

1. Stabilize private market by providing temporary public/private terrorism insurance
2. Protect consumers by ensuring affordability and availability
3. Preserve state regulation of insurance

Question 5

How goal 1 is accomplished (stability)

Answer 5

TRIA created a gov’t-backed loss-sharing mechanism

Question 6

How goal 2 is accomplished (consumer protection)

Answer 6

• TRIA requires insurers to offer commercial coverage
• but insureds are not required to purchase
• insurers must provide transparency (disclose terrorism premium separately, and potential share of compensation)
• terrorism prem requires regulator approval (no specific limits however)

Question 7

How goal 3 is accomplished (preserve state regulation)

Answer 7

-TRIA explicity preserves state insurance commissioner’s powers
- but with certain exceptions: the state can’t enact its own definition of terrorism

Question 8

Loss sharing criteria in TRIA legislation (7)

Answer 8

1. certification
   - terrorist act must be certified
   - certification done by Secretary of Treasury, Secretary of Homeland Security, Attorney General
   - losses must be >= 5m in US, air or sea vessels
2. federal gov’t threshold
   - aggregate industry losses >= 200m for federal assistance to begin
3. coverage
   - covers only commercial P&C
4. deductibles
   - insurer’s deductible = 20% of earned premium
5. coinsurance
   - insurer pays 20% of losses above deductible
6. federal gov’t limit
   - no federal coverage for aggregate loss >= 100b
   - insurers are not required to provide coverage beyond this limit
7. surcharges
   - Secretary of Treasury must establish surcharges to recoup 140% of federal outlay when aggregate losses <= 37.5b
   - for aggregate losses >37.5b, may establish surcharges but not mandatory

Question 9

How TRIA treats loss-sharing for small losses

Answer 9

covered by private insurance (aggregate industry losses <= 200m)

Question 10

How TRIA treats loss-sharing for medium losses

Answer 10

federal gov’t provides loans to insurers (but spreads repayment across time and industry with future premium surcharges)

Question 11

How TRIA treat loss-sharing for large losses

Answer 11

federal gov’t covers most of the loss without recoupment (aggregate industry losses between 37.5b and 100b)

Question 12

Who administers TRIA

Answer 12

Federal Insurance Office (FIO under Dodd-Frank) assists Secretary of the Treasury

Question 13

Is NBCR terrorism covered under TRIA (Nuclear, Biological, Chemical, Radiological)

Answer 13

• not explicitly included or excluded so should be covered by TRIA
• but most primary policies covered by TRIA have exclusions for NBCR
• note that NBCR coverage has never been legally tested

Question 14

Is cyber-terrorism covered under TRIA

Answer 14

Yes but only 50% of standalone cyber insurance policies included terrorism

Question 15

Terrorism coverage in other countries (4)

Answer 15

Spain: gov’t owned reinsurer that has provided coverage for catastrophes since 1954
UK: privately owned mutual insurance company with gov’t backing (Pool Re)
Germany: private insurer with government backing
Canada: considered, but rejected, creating a gov’t program following 9/11

Question 16

Partial solution to lack of terrorism data

Answer 16

use models in place of actual data (similar to hurricane models)