FEDERAL INSURANCE PROGRAMS - TERRORISM

Question 1

SECT B: FEDERAL INSURANCE PROGRAMS – TERRORISM

NEED FOR TERRORISM INSURANCE

Answer 1

1. Lack of coverage would have economic impact
2. Terrorism insurance required for various transactions: real estate, transportation, construction, energy & utility sectors

Question 2

SECT B: FEDERAL INSURANCE PROGRAMS – TERRORISM

UNINSURABILITY OF TERRORISM RISK

Answer 2

1. Lack of data about both the probability and severity of terrorist acts to measure risk
2. Lack of predictive modelling for terrorism risk
3. Ideal characteristics of insurable loss
   i. Definite and measurable – YES
   ii. Fortuitous or accidental – NO
   iii. Not catastrophic – NO
   iv. Sufficiently large number of insureds to make losses reasonably predictable – NO

Question 3

SECT B: FEDERAL INSURANCE PROGRAMS – TERRORISM

2019 TRIA CRITERIA

Answer 3

(5M / 200M / 100B; 20% of DEP / 19% insurer share)

1. Act of terrorism must be certified by Secretary of Treasury, in consultation with Secretary of Homeland Security & Attorney General
2. US losses (including losses to US air carriers/sea vessels) > 5M
3. Aggregate industry insured losses > 200M in 2020 (180M in 2019)
4. Commercial P&C lines of busines only; some lines specifically excluded
5. Insurer deductible = 20% of insurer’s annual direct earned premium for TRIA lines of insurance
6. Federal government share = 81% (19% insurer share)
7. Aggregate limit = 100B (ground up)
8. Federal government recoupment
   i. Insured losses < 37.5B = 140% of government outlays through surcharges on P&C policies
   ii. Insured losses > 37.5B => Secretary has discretionary authority to recoup all of the government outlays; may be required to recoup some outlays
   => recoupment completed within 10-year timeframe following enactment
   => recoupment surcharges are certain percentage of premiums paid on all TRIA-eligible policies
   => Secretary has authority to adjust amount of premiums, taking into account rural/urban areas and terrorism exposure to different lines of insurance

Question 4

SECT B: FEDERAL INSURANCE PROGRAMS – TERRORISM

TRIA STATED GOALS

Answer 4

1. Temporary federal program of shared public and private compensation for insured terrorism losses to allow markets to stabilize/calm down
   i. Time to gather data
   ii. Time to create the structures & capacity necessary for private insurance
2. Protect consumers by ensuring availability & affordability of terrorism insurance
   i. TRIA requires insurers with lines of insurance covered by TRIA to make terrorism insurance available to commercial policyholders
   ii. Each terrorism insurance offer must reveal both premium charged for terrorism insurance and possible federal share of compensation
   iii. Policyholders are not required to purchase coverage => insurer can exclude terrorism losses
3. Preserve state regulation of insurance
   • Provision in law: “nothing in this title shall affect the jurisdiction or regulatory authority of the insurance commission [of a state]”
   • Exceptions:
   a. Federal statute preempts any state definition of “act of terrorism” in favour of federal definition
   b. State rate & form approval laws for terrorism insurance were preempted from enactment to end of 2003
   c. Section 105 preempts state law with respect to insurance policy exclusions for acts of terrorism
   • Since Dodd-Frank, administered by FIO with Secretary of Treasury