Insurance and Disasters
Overview: Insurance in an Era of Terrorism
A Public-Private Partnership Strengthens Economic Security
The September 11, 2001, terrorist attacks marked a turning point for the nation that left no industry untouched, including insurance. As a result of that single day, the insurance industry paid $39.5 billion in claims (adjusted to 2008 dollars), including commercial liability and group life.
Recognizing the ongoing threat of terrorism and the limited availability of terrorism insurance coverage, Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002. Under this law, while the insurance industry is liable for claims associated with terrorism, the federal government provides a backstop for terrorism losses. Currently, federal funds become available once industry losses from a terrorist attack exceed $100 million. TRIA, which helped increase the availability of terrorism insurance, has been renewed twice and currently runs until 2014.
Key Public Policy and Industry Issues
As the cause of catastrophic events, terrorism poses unique challenges to the insurance industry and policymakers seeking to help our nation address the economic threats associated with terrorism. Challenges in this area and policy proposals include:
- Risk Assessment—Typically insurers assess risk and provide insurance by measuring the frequency and severity of specific risks. For instance, insurers use continually updated data to determine the frequency and severity of car accidents by geographical region. All drivers face accident risk, but losses are broadly random with regard to time, location and magnitude. Though many terrorist attacks have been severe, they are still infrequent and little data is available to assess risk. Further, terrorism is intentional, not random. Risk modeling organizations do offer loss estimations, but the degree of uncertainty remains high, which constrains the insurance industry’s ability to underwrite terrorism policies.
- Evaluating the Terrorism Risk Insurance Act (TRIA)—While TRIA helped spur the development of a market for terrorism insurance, there are some who believe that TRIA now inhibits further free market growth in this area of insurance. The industry holds the position that without TRIA, there would be no private market for terrorism insurance. Studies by the RAND Corporation, the Organization of Economic Cooperation and Development (OECD), and others have supported the continuation of TRIA.
- Tax Policy Incentives—For a number of years—even before September 11 or Hurricane Katrina—policymakers and industry organizations have considered proposals to encourage insurers to establish pre-catastrophe reserves through a system of tax deferrals. Currently, catastrophe losses are paid through traditional policyholders’ surpluses and reinsurance. Tax deferrals would help mitigate the opportunity costs borne by insurers when they accumulate excessive surpluses for a once-in-a-lifetime disaster.
- Uninsurable Events—At this time, there is general consensus in the insurance industry that terrorist attacks that are nuclear, biological, chemical or radiological in nature are uninsurable. Federal government studies have supported this assessment.
- III White Paper—Terrorism Risk and Insurance
An in-depth discussion of terrorism risk insurance, including comparisons with practices in other nations.