Discussion Paper

A Successful (Yet Somewhat Untested) Case of Disaster Financing: Terrorism Insurance under TRIA 2002-2020

Feb 15, 2017 | Erwann Michel-Kerjan, Howard Kunreuther

Summary

This paper provides a detailed discussion of the operation of the Terrorism Risk Insurance program. It summarizes findings from simulations of loss sharing under the current program design for various possible terrorist attacks.

Abstract

The Terrorism Risk Insurance Act (TRIA), passed at the end of 2002, established a public-private partnership between the US federal government, private insurers, and all commercial enterprises operating on US soil. Renewed and modified by the US Congress and the president in January 2015 until December 2020, the TRIA program requires insurers to offer terrorism insurance to their commercial policyholders while providing insurers with free up-front financial protection up to $100 billion against terrorist attacks in the United States. With the federal government providing a financial safety net, the private insurance sector can offer coverage against an uncertain risk that would otherwise be largely considered uninsurable, thus making terrorism insurance widely available and affordable. Overall premiums have been at about 2 to 6 percent of property premiums over the past four years, with the most significant increase recently for financial institutions (from 4 percent in 2012 to 9 percent in 2015). A significant portion of insurance policies, 23 percent according to a recent study by the US Treasury, which are typically those covering smaller firms, include terrorism coverage at no disclosed additional cost. TRIA is a successful case of public-private disaster risk financing that has received bipartisan political support. Yet it remains untested for large losses and it is unclear how the market and policymakers will react should another large-scale insured loss occur. TRIA also raises concerns about the indemnification of individual victims of a terrorist attack (in addition to workers’ compensation).