Webel - Terrorism Risk Insurance Act

Question 1

What was the motivation for TRIA? (3)

Answer 1

• 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

Question 2

Identify the goals of the TRIA paper. (3)

Answer 2

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

Question 3

How is TRIA goal accomplished? (3)

Answer 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)

Question 4

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

Answer 4

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

Question 5

General idea of “insurability”.

Answer 5

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

Question 6

Partial solution to lack of terrorism data.

Answer 6

The use of models (similar to hurricane models).

Question 7

4 elements of insurable risk.

Answer 7

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

Question 8

Evaluate terrorism on the elements of insurable risk.

Answer 8

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

Question 9

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

Answer 9

Canada rejected creating a governmental program after 9/11.

Question 10

Describe in general how TRIA works.

Answer 10

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

Question 11

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

Answer 11

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

Question 12

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

Answer 12

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

Question 13

Reimbursement formula.

Answer 13

For eligible losses only:

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

Question 14

Criteria for terrorism certification. (4)

Answer 14

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

Question 15

Who must certify an act of terrorism?

Answer 15

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

Question 16

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

Answer 16

• private reinsurance, rather than federal reinsurance

- CAT bond market

Question 17

Arguments that TRIA is not insurance. (2)

Answer 17

• insurers don’t pay premiums prior to incurring losses

- provides universal coverage and is subsidized through taxation

Question 18

Exclusions on TRIA.

Answer 18

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

Question 19

Describe the federal government recoupment of terrorism losses under TRIA.

Answer 19

• for losses federal government recoups 133%

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

Question 20

Who administers the TRIA?

Answer 20

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

Question 21

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

Answer 21

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

Question 22

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

Answer 22

• in 2002: covered only foreign terrorism

- in 2007: covered both domestic and foreign terrorism

Question 23

To what date was TRIA extended in 2015?

Answer 23

To the end of 2020.

Question 24

Differences between TRIA 2007 and 2015? (3)

Answer 24

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