TRIA

Question 1

before 9/11 & after 9/11

Answer 1

• before 9/11, coverage from terrorist attacks was normally included in commercial insurance policies at no additional cost
• after 9/11 coverage became very expensive if it was offered at all

Question 2

policymakers feared that lack of terrorism insurance

Answer 2

could result in wider economic impact

Question 3

TRIA provided

Answer 3

gov reinsurance to share terrorism losses, purpose was to give insurance industry time to gather data and create structure and capacity to be able to offer terrorism coverage

-insurers do not pay premiums to gov for coverage but gov would cover portion of losses

Question 4

because of TRIA,

Answer 4

terrorism insurance has become widely available and affordable, but had not been success in developing longer term private solution

Question 5

TRIA has had to be extended twice

Answer 5

2005 focused on reducing gov up front financial exposure and 2007 accelerated post event recoupment provisions and expanded coverage to include domestic acts of terrorism

Question 6

TRIA protects consumers by ensuring

Answer 6

availability and affordability of terrorism insurance

Question 7

Specifics of Current program

Answer 7

• create temporary federal program of shared public and private compensation for terrorism losses while private market stabilizes after 9/11
• insurer must offer coverage to PH if offer lines covered by TRIA, law does not limit amount insurer can charge, but regulators can modify rates that they believe excess/inadequate/unfairly discriminatory
• preserve state regulation of insurance; policymakers confirmed that there will be no changes to state regulator’s authority but federal definition of act of terrorism applies no state definition

Question 8

TRIA covers commercial insurance and excludes

Answer 8

federal crop, private crop or livestock, private mortgage, title, financial guaranty, med mal, flood, reinsurance, all life insurance

Question 9

TRIA structure

Answer 9

single act of terrorism must be certified by secretary of treasury, secretary of state, and AG, industry insured losses must > $5M to be certified for TRIA coverage, aggregate industry certified losses in year must exceed $100M for gov coverage to begin, each insurer has deductible =20% of direct (not assumed) annual EP

-after thresholds passed, gov will cover 85% of insured losses that exceed deductible, if agg industry loss do not exceed $27.5B secretary of treasury will recoup 133% of coverage via surcharges, if losses do exceed it has discretion to apply surcharges to recoup money paid, gov will only cover up to $100B of losses after this point no federal coverage nor requirement that private market has to provide coverage

Question 10

Terrorism Risk Insurance Program Reauthorization Act of 2015

Answer 10

-included provisions to extend TRIA til 2020, decrease federal sharing gradually from 85 to 80%, increase program trigger by $20M a year from 100M til it reaches $200M, increase insurer aggregate retention by $2B a yr from $27.5 until it reaches $37.5B, extend date for mandatory recoupment by 7 years, increased mandatory recoup provision so that 140% will be recouped, require treasure to study certification process and collect additional data on terrorism insurance market, require GAO study possible effects of instituting insurer premiums for TRIA coverage and require capital reserve funds for terrorism

Question 11

TRIA administration

Answer 11

• TRIA was originally administered by secretary of treasury
• dodd-frank act created FIO to assist secretary with administration

Question 12

Insurability of terrorism risk

Answer 12

• terrorism risk is often considered uninsurable due to lack of data
• insurers need to rely on models
• elements of insurable risk: must be sufficiently large # of insured to make losses reasonably predictable (terrorism risk fails), losses must be definite and measurable, losses must be fortuitous or accidental (terrorism fails this bc caused by deliberate human action), losses must not be catastrophic
• large scale riots in late 60s, insurers reduce coverage, gov stepped in by covering a % of insurer’s losses that exceeded a deductible, private market eventually returned and gov program was cancelled

Question 13

International Experience

Answer 13

• US did not have lot of experience with terrorism losses
• other countries have had to deal more extensively
• Spain insures risk via gov owned reinsurer
• uk created privately owned mutual insurer that has gov backing to cover terrorism risk
• Germany created private insurer with gov backing
• not all countries introduced gov backing, Canada considered but rejected the plan

Question 14

Coverage for Nuclear, Chemical, Biological, & Radiological Terrorism

Answer 14

• attack from nuclear etc weapon is likeliest type of attack that would generate large scale losses
• many insurance policies limit coverage of NCBR event although these limitation have not yet been legally tested
• if coverage is limited, TRIA coverage will also be limited

Question 15

TRIA necessary: support and against

Answer 15

Support: -It serves a social purpose to prevent economic disruptions following a terrorist attack and the private insurance sector is unwilling to offer terrorism insurance

Against: -Participation is fairly low and the private industry may be able to cover through risk exchanges and cat bonds. - We haven’t had a terrorist attack since 9/11, and pre-9/11, private insurers were able to provide coverage. They should have recovered enough by now to do the same. TRIA was meant to be temporary and eventually handed back to the private insurance sector. -the industry is well capitalized enough so that the TRIA program is unnecessary and an additional cost that is not needed; it also may encourage insurers to be lax in their U/W standards & aggregation monitoring if they know a backstop is there