Webel - Terrorism Risk Insurance Act Flashcards

1
Q

What was the motivation for TRIA? (3)

A
  • to FILL AN UNMET NEED as private insurers withdrew coverage after the events of 9/11
  • for CONVENIENCE as the government can set up a program quickly & can work with the Treasury Department regarding compensation
  • as a SOCIAL PURPOSE as there can be economic disruption from lack of terrorism insurance availability, and new construction projects wouldn’t be able to get required insurance
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2
Q

Identify the goals of the TRIA paper. (3)

A

i) STABILIZE the private market by providing temporary terrorism insurance for the public and private clientele
ii) PROTECT consumers by ensuring Availability & Affordability
iii) PRESERVE state regulation of insurance

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3
Q

How is TRIA goal accomplished? (3)

A

i) TRIA created a government-backed loss sharing mechanism
ii) requires insurers to offer commercial coverage & provide transparency
- but, insureds are NOT REQUIRED to purchase the insurance
- government acts as a reinsurer
iii) explicitly preserves state insurance Commissioner’s powers (but state cannot enact its own definition of terrorism)

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4
Q

Evaluate whether the goals of TRIA where achieved. (i, ii, iii)

A

i) YES, prices went down, and market penetration increased
ii) YES, insurers MUST offer commercial terrorism coverage (prices decreased as a result)
iii) YES, explicitly preserved with some exceptions

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5
Q

General idea of “insurability”.

A

Need enough data with which to predict Frequency and Severity of events.

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6
Q

Partial solution to lack of terrorism data.

A

The use of models (similar to hurricane models).

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7
Q

4 elements of insurable risk.

A

i) CREDIBILITY: need a large number of customers
ii) MEASURABLE: losses must be definite & measurable
iii) ACCIDENTAL: losses must be accidental
iv) not CATASTROPHIC: losses must not be catastrophic

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8
Q

Evaluate terrorism on the elements of insurable risk.

A

i) Credibility: FAIL - applies to commercial insurance and coverage is not mandatory -> penetration too low for predictability & spreading losses
ii) Measurability: FAIL - low frequency, high severity -> hard to measure risk
iii) Accidental: FAIL - losses are deliberate, although not by insured
iv) Not Catastrophic: DEPENDS - on insurer’s concentration of terrorism risk

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9
Q

Does Canada have a terrorism program in any way similar to the TRIA in the US?

A

Canada rejected creating a governmental program after 9/11.

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10
Q

Describe in general how TRIA works.

A
  • federal reinsurance ensures Availability & Affordability for commercial policyholders
  • loss sharing between the federal government and private insurance depends on the size of loss
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11
Q

Describe the TRIA loss-sharing for small, medium and large losses.

A

SMALL: private insurance
MEDIUM: federal government makes loan to private insurance , but spreads repayment across time & industry with future premium surcharges
LARGE: federal government covers most of the loss

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12
Q

Identify the triggers to receive federal payment under TRIA. (3)

A

i) act must be certified as terrorism
ii) >$100M aggregate insurer losses for federal-private sharing
iii) deductible of 20% of annual premiums must be met before federal payments begin

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13
Q

Reimbursement formula.

A

For eligible losses only:

(losses - deductible) x (1 - coinsurance%)
where
coinsurance% = 15%
- MAX = $100B -> then no federal payments & insurers are not liable

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14
Q

Criteria for terrorism certification. (4)

A
  • insurer losses >$5M
  • danger to life, property, infrastructure
  • occurred in US or on US vessels
  • purpose was to coerce US population or government policies
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15
Q

Who must certify an act of terrorism?

A

An act of terrorism is JOINTLY certified by the Secretary of the Treasury, the Secretary of State and the Attorney General.

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16
Q

Ways that the private market could replace TRIA. (2)

A
  • private reinsurance, rather than federal reinsurance

- CAT bond market

17
Q

Arguments that TRIA is not insurance. (2)

A
  • insurers don’t pay premiums prior to incurring losses

- provides universal coverage and is subsidized through taxation

18
Q

Exclusions on TRIA.

A

Covers ONLY commercial P&C, AND specifically excludes several specific lines.

19
Q

Describe the federal government recoupment of terrorism losses under TRIA.

A
  • for losses federal government recoups 133%

- for losses >$27.5B -> federal government recoups a progressively smaller %

20
Q

Who administers the TRIA?

A

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

21
Q

Are other types of terrorism (such as Nuclear, Chemical, Biological, Radiological) covered?

A

TRIA would cover insured losses
BUT these losses are normally EXCLUDED by policy provisions -> however, these coverage provisions have never been tested.

22
Q

Difference between original TRIA (2002) and the 2007 update?

A
  • in 2002: covered only foreign terrorism

- in 2007: covered both domestic and foreign terrorism

23
Q

To what date was TRIA extended in 2015?

A

To the end of 2020.

24
Q

Differences between TRIA 2007 and 2015? (3)

A

FEDERAL LOSS SHARING: decreases gradually from 85% to 80%
TRIGGER: increases gradually from $100M to $200M (by $20M per year)
MANDATORY RECOUPMENT: increases from $27.5B to $37.5B