Webel - Terrorism Risk Insurance Act Flashcards
What was the motivation for TRIA? (3)
- 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
Identify the goals of the TRIA paper. (3)
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
How is TRIA goal accomplished? (3)
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)
Evaluate whether the goals of TRIA where achieved. (i, ii, iii)
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
General idea of “insurability”.
Need enough data with which to predict Frequency and Severity of events.
Partial solution to lack of terrorism data.
The use of models (similar to hurricane models).
4 elements of insurable risk.
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
Evaluate terrorism on the elements of insurable risk.
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
Does Canada have a terrorism program in any way similar to the TRIA in the US?
Canada rejected creating a governmental program after 9/11.
Describe in general how TRIA works.
- federal reinsurance ensures Availability & Affordability for commercial policyholders
- loss sharing between the federal government and private insurance depends on the size of loss
Describe the TRIA loss-sharing for small, medium and large losses.
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
Identify the triggers to receive federal payment under TRIA. (3)
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
Reimbursement formula.
For eligible losses only:
(losses - deductible) x (1 - coinsurance%)
where
coinsurance% = 15%
- MAX = $100B -> then no federal payments & insurers are not liable
Criteria for terrorism certification. (4)
- insurer losses >$5M
- danger to life, property, infrastructure
- occurred in US or on US vessels
- purpose was to coerce US population or government policies
Who must certify an act of terrorism?
An act of terrorism is JOINTLY certified by the Secretary of the Treasury, the Secretary of State and the Attorney General.