Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Updated December 27 2019 Congressional Research Service https crsreports congress gov R45707 SUMMARY Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress R45707 December 27 2019 Baird Webel Specialist in Financial Prior to the September 11 2001 terrorist attacks coverage for losses from such attacks Economics was normally included in general insurance policies without additional cost to the policyholders Following the attacks such coverage became expensive if offered at all Some observers feared the absence of insurance against terrorism loss would have a wider economic impact because insurance is required to consummate a variety of transactions e g real estate For example if real estate deals were not completed due to lack of insurance this could have ripple effects—such as job loss—on related industries Terrorism insurance was largely unavailable for most of 2002 and some have argued that this adversely affected parts of the economy others suggest the evidence is inconclusive Congress responded to the disruption in the insurance market with the Terrorism Risk Insurance Act of 2002 TRIA P L 107-297 which created a temporary three-year Terrorism Insurance Program Under TRIA the government would share the losses on commercial property and casualty insurance should a foreign terrorist attack occur with potential recoupment of this loss sharing after the fact TRIA requires insurers to make terrorism coverage available to commercial policyholders but does not require policyholders to purchase the coverage The program expiration date was extended in 2005 P L 109-144 2007 P L 110-160 and 2015 P L 114-1 Through these reauthorizations the prospective government share of losses has been reduced and the recoupment amount increased although the 2007 reauthorization also expanded the program to cover losses from acts of domestic terrorism Following P L 114-1 the TRIA program was slated to expire at the end of 2020 In general terms if a terrorist attack occurs under TRIA the insurance industry covers the entire amount for relatively small losses For a medium-sized loss the government assists insurers initially but is then required to recoup the payments it made to insurers through a broad levy on insurance policies afterwards—the federal role is to spread the losses over time and over the entire insurance industry and insurance policyholders As the size of losses grows larger the federal government covers more of the losses without this mandatory recoupment Ultimately for the largest losses the government is not required to recoup the payments it has made although discretionary recoupment remains possible The precise dollar values where losses cross these small medium and large thresholds are uncertain and will depend on how the losses are distributed among insurers The specifics of the current program are as follows 1 a terrorist act must cause $5 million in insured losses to be certified for TRIA coverage 2 the aggregate insured losses from certified acts of terrorism must be $180 million in a year for the government coverage to begin this amount increases to $200 million in 2020 and 3 an individual insurer must meet a deductible of 20% of its annual premiums for the government coverage to begin Once these thresholds are met the government covers 81% of insured losses due to terrorism this amount decreases to 80% in 2020 If the insured losses are less than $37 5 billion the Secretary of the Treasury is required to recoup 140% of government outlays through surcharges on TRIA-eligible property and casualty insurance policies As insured losses rise above $37 5 billion the Secretary is required to recoup a progressively reduced amount of the outlays At some high insured loss level which will depend on the exact distribution of losses the Secretary would no longer be required to recoup outlays Since TRIA’s passage the private industry’s willingness and ability to cover terrorism risk have increased According to data collected by the Treasury in 2017 approximately 78% of insureds purchased the optional terrorism coverage paying $3 65 billion in premiums Over the life of the program premiums earned by unrelated insurers have totaled $38 billion This relative market calm has been under the umbrella of TRIA coverage and in a period in which no terrorist attacks have occurred that resulted in government payments under TRIA It is unclear how the insurance market would react to the expiration of the federal program although at least some instability might be expected were this to occur In the 116th Congress standalone legislation to extend the TRIA Congressional Research Service program for seven years H R 4634 and S 2877 was considered and P L 116-94 enacted December 20 2019 included language extending TRIA to December 31 2027 Congressional Research Service Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Contents Introduction 1 Terrorism Risk Insurance Program Reauthorization Act of 2019 P L 116-94 H R 4634 S 2877 2 Goals and Specifics of the Current TRIA Program 3 Terrorism Loss Sharing Criteria 3 Initial Loss Sharing 4 Recoupment Provisions 5 Program Administration 6 TRIA Consumer Protections 6 Preservation of State Insurance Regulation 6 Coverage for Nonconventional Terrorism Attacks 7 Nuclear Biological Chemical and Radiological Terrorism Coverage 7 Cyberterrorism Coverage 7 Background on Terrorism Insurance 8 Insurability of Terrorism Risk 8 International Experience with Terrorism Risk Insurance 9 Previous U S Experience with “Uninsurable” Risks 9 The Terrorism Insurance Market 10 Post-9 11 and Pre-TRIA 10 After TRIA 11 Evolution of Terrorism Risk Insurance Laws 12 Figures Figure 1 Initial Loss Sharing Under Current TRIA Program 5 Tables Table 1 Side-by-Side of Previous Terrorism Risk Insurance Laws 13 Table A-1 Example of TRIA Recoupment Calculations 18 Appendixes Appendix Calculation of TRIA Recoupment Amounts 17 Contacts Author Information 19 Congressional Research Service Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Introduction Prior to the September 2001 terrorist attacks on the United States insurers generally did not exclude or separately charge for coverage of terrorism risk The events of September 11 2001 changed this as insurers realized the extent of possible terrorism losses Estimates of insured losses from the 9 11 attacks are more than $45 billion in current dollars the largest insured losses from a nonnatural disaster on record These losses were concentrated in business interruption insurance 34% of the losses property insurance 30% and liability insurance 23% 1 Although primary insurance companies—those that actually sell and service the insurance policies bought by consumers—suffered losses from the terrorist attacks the heaviest insured losses were absorbed by foreign and domestic reinsurers the insurers of insurance companies Because of the lack of public data on or modeling of the scope and nature of the terrorism risk reinsurers felt unable to accurately price for such risks and largely withdrew from the market for terrorism risk insurance in the months following September 11 2001 Once reinsurers stopped offering coverage for terrorism risk primary insurers suffering equally from a lack of public data and models also withdrew or tried to withdraw from the market In most states state regulators must approve policy form changes Most state regulators agreed to insurer requests to exclude terrorism risks from commercial policies just as these policies had long excluded war risks Terrorism risk insurance was soon unavailable or extremely expensive and many businesses were no longer able to purchase insurance that would protect them in future terrorist attacks In some cases such insurance is required to consummate various transactions particularly in the real estate transportation construction energy and utility sectors Although the evidence is largely anecdotal some were concerned that the lack of coverage posed a threat of serious harm—such as job loss—to these industries in turn threatening the broader economy In November 2002 Congress responded to the fears of economic damage due to the absence of commercially available coverage for terrorism with passage of the Terrorism Risk Insurance Act TRIA 2 TRIA created a three-year Terrorism Insurance Program to provide a government reinsurance backstop in the case of terrorist attacks Prior to the 116th Congress the TRIA program was amended and extended in 2005 3 2007 4 and 2015 5 Following the 2015 amendments the TRIA program was set to expire at the end of 2020 A side-by-side of the original law and the 2005 2007 and 2015 reauthorization acts is in Table 1 The executive branch has been skeptical about the TRIA program in the past Bills to expand TRIA were resisted by then-President George W Bush’s Administration 6 and previous presidential budgets under then-President Barack Obama called for changes in the program that 1 Insurance Information Institute III Background on Terrorism Risk and Insurance at https www iii org article background-on-terrorism-risk-and-insurance III figures further adjusted using data from the Bureau of Labor Statistics 2 P L 107-297 116 Stat 2322 codified at 15 U S C §6701 note For more information see CRS Report RS21444 The Terrorism Risk Insurance Act of 2002 A Summary of Provisions by Baird Webel 3 P L 109-144 119 Stat 2660 For more information see CRS Report RL33177 Terrorism Risk Insurance Legislation in 2005 Issue Summary and Side-by-Side by Baird Webel 4 P L 110-160 121 Stat 1839 For more information see CRS Report RL34219 Terrorism Risk Insurance Legislation in 2007 Issue Summary and Side-by-Side by Baird Webel 5 P L 114-1 129 Stat 3 For more information see CRS Report R43849 Terrorism Risk Insurance Legislation in the 114th Congress Issue Summary and Side-by-Side Analysis by Baird Webel 6 See for example the Statement of Administration Policy on H R 2761 dated December 11 2007 at http www whitehouse gov sites default files omb legislative sap 110-1 hr2761sap-h pdf Congressional Research Service 1 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress would have had the effect of scaling back the TRIA coverage 7 The Trump Administration has not called for specific changes to TRIA but has indicated that it is “evaluating reforms…to further decrease taxpayer exposure ”8 The insurance industry largely continues to support TRIA 9 as do commercial insurance consumers in the real estate and other industries that have formed a “Coalition to Insure Against Terrorism” CIAT 10 However not all insurance consumers have consistently supported the renewal of TRIA For example the Consumer Federation of America has questioned the need for the program in the past 11 Although the United States has suffered attacks deemed “terrorism” since the passage of TRIA no acts of terrorism have been certified and no payments have occurred under TRIA For example although the April 2013 bombing in Boston was termed an “act of terror ” by the President 12 the insured losses in TRIA-eligible insurance from that bombing did not cross the $5 million statutory threshold to be certified under TRIA See precise criteria under the TRIA program below Terrorism Risk Insurance Program Reauthorization Act of 2019 P L 116-94 H R 4634 S 2877 H R 4634 was introduced on October 11 2019 and ordered reported following a House Financial Services Committee hearing and markup 13 The House passed the bill on a 385-22 vote on November 18 2019 The Senate Banking Committee held a hearing on the issue in June 2019 14 and S 2877 was introduced November 14 2019 and reported without a written report on December 3 2019 Both H R 4634 and S 2877 would extend the Terrorism Risk Insurance Program by seven years until December 31 2027 with the various mandatory recoupment provisions Section 103 e 7 E i also extended During the House committee markup two reporting requirements were added to the bill 1 the Treasury would be directed to add to the annual ongoing report on market conditions an evaluation of the availability and affordability of terrorism risk insurance 7 See for example Office of Management and Budget OMB Analytical Perspectives Budget of the United States FY2011 p 184 at http www gpo gov fdsys pkg BUDGET-2011-PER pdf BUDGET-2011-PER pdf 8 OMB A Budget for a Better America – President’s Budget FY2020 p 83 at https www whitehouse gov wpcontent uploads 2019 03 budget-fy2020 pdf 9 See for example “U S insurers seek renewal of federal ‘backstop’ against acts of terrorism ” Reuters March 5 2019 at https www reuters com article us-insurance-terrorism-program-idUSKCN1QM1CI 10 See the CIAT website at http www insureagainstterrorism org 11 Consumer Federation of America “Growing Insurer Surplus Calls into Question Industry Need for Congressional Renewal of Terrorism Insurance ” May 8 2013 at http consumerfed org news 666 12 The White House “Statement by the President ” press release April 16 2013 at http www whitehouse gov thepress-office 2013 04 16 statement-president 13 U S Congress House Committee on Financial Services Subcommittee on Housing Community Development and Insurance and Subcommittee on National Security International Development and Monetary Policy Protecting America The Reauthorization of the Terrorism Risk Insurance Program hearing on H R 4634 116th Cong 1st sess October 16 2019 at https financialservices house gov calendar eventsingle aspx EventID 404481 Also see https financialservices house gov calendar eventsingle aspx EventID 404489 14 U S Congress Senate Committee on Banking Housing and Urban Affairs The Reauthorization of the Terrorism Risk Insurance Program hearing 116th Cong 1st sess June 18 2019 at https www banking senate gov hearings the-reauthorization-of-the-terrorism-risk-insurance-program Congressional Research Service 2 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress for places of worship and 2 the Comptroller General would be directed to report on cyberterrorism and TRIA S 2877 as introduced also included these reporting requirements The Further Consolidated Appropriations Act 2020 H R 1865 as amended included the Terrorism Risk Insurance Program Reauthorization Act of 2019 in Division I Title V The House passed the bill on December 17 2019 and the Senate did so on December 19 2019 The President signed H R 1865 into law P L 116-94 on December 20 2019 Goals and Specifics of the Current TRIA Program The original TRIA legislation’s stated goals were to 1 create a temporary federal program of shared public and private compensation for insured terrorism losses to allow the private market to stabilize 2 protect consumers by ensuring the availability and affordability of insurance for terrorism risks and 3 preserve state regulation of insurance Although Congress has amended specific aspects of the original act the operation of the program generally usually follows the original statute The changes to the program have largely reduced the government coverage for terrorism losses except that the 2007 amendments expanded coverage to domestic terrorism losses rather than limiting the program to foreign terrorism The 2019 extension made no substantive changes except for extending the program Terrorism Loss Sharing Criteria To meet the first goal the TRIA program creates a mechanism through which the federal government could share insured commercial property and casualty losses with the private insurance market 15 The role of federal loss sharing depends on the size of the insured loss For a relatively small loss there is no federal sharing For a medium-sized loss the federal role is to spread the loss over time and over the entire insurance industry The federal government provides assistance up front but then recoups the payments it made through a broad levy on insurance policies afterwards For a large loss the federal government is to pay most of the losses although recoupment is possible but not mandatory in these circumstances as well The precise dollar values where losses cross these small medium and large thresholds are uncertain and will depend on how the losses are distributed among insurers For example for loss sharing to occur an attack must meet a certain aggregate dollar value and each insurer must pay out a certain amount in claims—known as its deductible For some large insurers this individual deductible might be higher than the aggregate threshold set in statute meaning that loss sharing might not actually occur until a higher level than the figure set in statute The criteria under the TRIA program in 2019 are as follows 1 An individual act of terrorism must be certified by the Secretary of the Treasury in consultation with the Secretary of Homeland Security and Attorney General 15 Commercial insurance is generally insurance purchased by businesses in contrast to personal lines of insurance which is purchased by individuals This means damage to individual homes and autos for example would not be covered under the TRIA program Property and casualty insurance generally includes most lines of insurance except for life insurance and health insurance The TRIA statutory definition in §102 11 specifically excludes “ i federal or private crop insurance ii private mortgage insurance or title insurance iii financial guaranty insurance issued by monoline insurers iv medical malpractice insurance v health or life insurance including group life insurance vi federal flood insurance vii reinsurance or retrocessional reinsurance vii commercial automobile insurance ix burglary and theft insurance x surety insurance xi professional liability insurance or xii farm owners multiple peril insurance ” Congressional Research Service 3 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress 2 3 4 5 6 7 losses must exceed $5 million in the United States or to U S air carriers or sea vessels for an act of terrorism to be certified The federal government shares in an insurer’s losses due to a certified act of terrorism only if “the aggregate industry insured losses resulting from such certified act of terrorism” exceed $180 million increasing to $200 million in 2020 16 The federal program covers only commercial property and casualty insurance and it excludes by statute several specific lines of insurance 17 Each insurer is responsible for paying a deductible before receiving federal coverage An insurer’s deductible is proportionate to its size equaling 20% of an insurer’s annual direct earned premiums for the commercial property and casualty lines of insurance specified in TRIA Once the $180 million aggregate loss threshold and 20% deductible are met the federal government would cover 81% of each insurer’s losses above its deductible until the amount of losses totals $100 billion After $100 billion in aggregate losses there is no federal government coverage and no requirement that insurers provide coverage In the years following the federal sharing of insurer losses the Secretary of the Treasury is required to establish surcharges on TRIA-eligible property and casualty insurance policies to recoup 140% of some or all of the outlays to insurers under the program If losses are high the Secretary has the authority to assess surcharges but is not required to do so See “Recoupment Provisions” below for more detail Initial Loss Sharing The initial loss sharing under TRIA can be seen in Figure 1 adapted from a Congressional Budget Office CBO report The exact amount of the 20% deductible at which TRIA coverage would begin depends on how the losses are distributed among insurance companies In the aggregate 20% of the direct-earned premiums for all of the property and casualty lines specified in TRIA totaled approximately $42 billion in 2017 according to data collected by the Department of the Treasury TRIA coverage is likely however to begin well under this amount as the losses from an attack are unlikely to be equally distributed among insurance companies 16 17 15 U S C §6701 note §103 e 1 B 15 U S C §6701 note §102 11 Congressional Research Service 4 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Figure 1 Initial Loss Sharing Under Current TRIA Program Source Congressional Research Service CRS adapted from Congressional Budget Office Federal Reinsurance for Terrorism Risks Issues in Reauthorization August 1 2007 p 12 Note Aggregate of all individual insurer deductibles totaled approximately $42 billion in 2017 according to Department of the Treasury data and CRS calculations Loss sharing is likely to begin well under this amount as the distribution of terrorism losses is unlikely to be equally spread among insurers Recoupment Provisions The precise amount TRIA requires the Treasury to recoup after the initial loss sharing is determined by the interplay between a number of different factors in the law and insurance marketplace The general result of the recoupment provisions is that for attacks that result in under $37 5 billion in insured losses 18 the Treasury Secretary is required to recoup 140% of the government outlays through surcharges on property and casualty insurance policies For events with insured losses over $37 5 billion the Secretary has discretionary authority to recoup all the government outlays and may be required to partially recoup the government outlays depending on 18 This $37 5 billion figure is the current one and has been increased over time from $10 billion at the beginning of the TRIA program Beginning in 2020 this will be indexed according to the total of the insurer deductibles averaged over the previous three years Congressional Research Service 5 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress the size of the attacks and the amount of uncompensated losses paid by the insurance industry See the Appendix for more information on exact recoupment calculations If the requirement for recoupment is triggered TRIA as amended by P L 116-94 requires the government to recoup all payments prior to the end of FY2029 with an accelerated schedule if the payments occurred prior to end of 2023 Thus such recoupment would be completed within a 10-year timeframe following enactment For an attack causing significant insured loses however this requirement could result in high surcharges being applied for a relatively short time The recoupment surcharges are to be imposed as a percentage of premiums paid on all TRIA-eligible property and casualty insurance policies but the Secretary has the authority to adjust the amount of the premiums taking into consideration differences between rural and urban areas and the terrorism exposures of different lines of insurance Program Administration The administration of the TRIA program was originally left generally to the Treasury Secretary This was changed somewhat in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 19 The act created a new Federal Insurance Office FIO to be located within the Department of the Treasury Among the duties specified for the FIO in the legislation was to assist the Secretary in the administration of the Terrorism Insurance Program 20 TRIA Consumer Protections TRIA addresses the second goal—to protect consumers—by requiring insurers that offer TRIAcovered lines of insurance to make terrorism insurance available prospectively to their commercial policyholders This coverage may not differ materially from coverage for other types of losses Each terrorism insurance offer must reveal both the premium charged for terrorism insurance and the possible federal share of compensation Policyholders are not however required to purchase coverage under TRIA 21 If a policyholder declines to purchase terrorism coverage the insurer may exclude terrorism losses Federal law does not limit what insurers can charge for terrorism risk insurance although state regulators typically have the authority under state law to modify excessive inadequate or unfairly discriminatory rates Preservation of State Insurance Regulation TRIA’s third goal—to preserve state regulation of insurance—is expressly accomplished in Section 106 a which provides that “Nothing in this title shall affect the jurisdiction or regulatory authority of the insurance commissioner of a state ” The Section 106 a provision has two exceptions one permanent and one temporary and expired 1 the federal statute preempts any state definition of an “act of terrorism” in favor of the federal definition and 2 the statute briefly preempted state rate and form approval laws for terrorism insurance from enactment to the end of 2003 In addition to these exceptions Section 105 of the law also preempts state laws with respect to insurance policy exclusions for acts of terrorism 19 P L 111-203 124 Stat 1376 §502 of P L 111-203 codified at 31 U S C §313 c 1 D 21 Although the purchase of terrorism coverage is not required under federal law the interaction of TRIA and state laws on workers’ compensation insurance results in most businesses being required to purchase terrorism coverage in workers’ compensation policies 20 Congressional Research Service 6 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Coverage for Nonconventional Terrorism Attacks The TRIA statute does not specifically include or exclude property and casualty insurance coverage for terrorist attacks according to the particular methods used in the attacks such as nuclear biological chemical and radiological NBCR and cyberterrorism risks Such nonconventional means however have the potential to cause losses that may or may not end up being covered by TRIA and have been a source of particular concern and attention in the past Nuclear Biological Chemical and Radiological Terrorism Coverage Some observers consider a terrorist attack with some form of NBCR weapon to be the most likely type of attack causing large scale losses 22 The current TRIA statute does not specifically include or exclude NBCR events thus the TRIA program in general would cover insured losses from terrorist actions due to NCBR as it would for an attack by conventional means The term insured losses however is a meaningful distinction Except for workers’ compensation insurance most insurance policies that would fall under the TRIA umbrella include exclusions that would likely limit insurer coverage of an NCBR event whether it was due to terrorism or to some sort of accident although these exclusions have never been legally tested in the United States after a terrorist event 23 If these exclusions are invoked and do indeed limit the insurer losses due to NBCR terrorism they would also limit the TRIA coverage of such losses Language that would have specifically extended TRIA coverage to NBCR events was offered in the past 24 but was not included in legislation as enacted In 2007 the Government Accountability Office GAO was directed to study the issue and a GAO report was issued in 2008 finding that “insurers generally remain unwilling to offer NBCR coverage because of uncertainties about the risk and the potential for catastrophic losses ”25 In the past legislation e g H R 4871 in the 113th Congress would have provided for differential treatment of NBCR attacks under TRIA but such legislation has not been enacted Cyberterrorism Coverage Concern regarding potential damage from cyberterrorism has grown as increasing amounts of economic activity occur online The TRIA statute does not specifically address the potential for cyberterrorism thus there was uncertainty about such attacks would be covered in the same manner as terrorist attacks using conventional means In 2016 state insurance regulators introduced a new Cyber Liability line of insurance raising questions as to whether coverage under this line would be covered under TRIA or whether it would not be covered under the law’s exclusion of “professional liability” insurance The Department of the Treasury released guidance 22 There is some variance in the acronym used for such attacks The U S Department of Defense for example uses “CBRN ” rather than NCBR in its Dictionary of Military and Associated Terms see p 34 at https www jcs mil Portals 36 Documents Doctrine pubs dictionary pdf 23 Insurers might have attempted to exclude the September 11 2001 losses under existing war risk exclusions but did not generally attempt to do so 24 See for example H R 2761 110th Congress as passed by the House on September 19 2007 and H Rept 110-318 available at http www gpo gov fdsys pkg CRPT-110hrpt318 pdf CRPT-110hrpt318 pdf 25 U S Government Accountability Office GAO TERRORISM INSURANCE Status of Coverage Availability for Attacks Involving Nuclear Biological Chemical or Radiological Weapons GAO-09-39 December 12 2008 at http gao gov products GAO-09-39 Congressional Research Service 7 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress in December 2016 clarifying that “stand-alone cyber insurance policies reported under the ‘Cyber Liability’ line are included in the definition of ‘property and casualty insurance’ under TRIA ”26 Despite Treasury’s guidance cyberterrorism coverage remains a particular concern The Department of the Treasury devoted a specific section of the latest report on TRIA to cyber coverage reporting that 50% of standalone cyber insurance policies based on premium value included terrorism coverage The take-up rate for those choosing cyber coverage that is embedded in policies covering additional perils was 54% These rates are similar to but slightly lower than the 62% take-up rate for general terrorism coverage found across all TRIA-eligible lines 27 P L 116-94 includes a requirement for the Comptroller General to study and report on cyberterrorism including the potential costs of cyberattacks the new state-defined cyber liability line of insurance’s adequacy the private market’s ability to adequately price cyber risks and the TRIA structure’s appropriateness for covering cyberterrorism Background on Terrorism Insurance Insurability of Terrorism Risk Stripped to its most basic elements insurance is a fairly straightforward operation An insurer agrees to assume an indefinite future risk in exchange for a definite current premium The insurer pools a large number of risks such that at any given point in time the ongoing losses will not be larger than the current premiums being paid plus the residual amount of past premiums that the insurer retains and invests plus in a last resort any borrowing against future profits if this is possible For the insurer to operate successfully and avoid failure it is critical to accurately estimate the probability of a loss and the severity of that loss so that a sufficient premium can be charged Insurers generally depend upon huge databases of past loss information in setting these rates Everyday occurrences such as automobile accidents or natural deaths can be estimated with great accuracy Extraordinary events such as large hurricanes are more difficult but insurers have many years of weather data coupled with sophisticated computer models with which to make predictions Many see terrorism risk as fundamentally different from other risks and thus it is often perceived as uninsurable by the private insurance market without government support for the most catastrophic risk The argument that catastrophic terrorism risk is uninsurable typically focuses on lack of public data about both the probability and severity of terrorist acts The reason for the lack of historical data is generally seen as a good thing—few terrorist attacks are attempted and fewer have succeeded Nevertheless the insurer needs some type of measurable data to determine which terrorism risks it can take on without putting the company at risk of failure As a replacement for large amounts of historical data insurers turn to various forms of terrorism models similar to those used to assess future hurricane losses Even the best model however can only partly replace good data and terrorism models are still relatively new compared with hurricane models Department of the Treasury “Guidance Concerning Stand-Alone Cyber Liability Insurance Policies Under the Terrorism Risk Insurance Program ” 81 Federal Register 95313 December 27 2016 27 Department of the Treasury Federal Insurance Office FIO Report on the Effectiveness of the Terrorism Risk Insurance Program June 2018 p 55 26 Congressional Research Service 8 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress One prominent insurance textbook identifies four ideal elements of an insurable risk 1 a sufficiently large number of insureds to make losses reasonably predictable 2 losses must be definite and measurable 3 losses must be fortuitous or accidental and 4 losses must not be catastrophic i e it must be unlikely to produce losses to a large percentage of the risks at the same time 28 Terrorism risk in the United States would appear to fail the first criterion as terrorism losses have not proved predictable over time Losses to terrorism when they occur are generally definite and measurable so terrorism risk could pass under criteria two Such risk however also likely fails the third criterion due to the malevolent human actors behind terrorist attacks whose motives means and targets of attack are constantly in flux Whether it fails the fourth criterion is largely decided by the underwriting actions of insurers themselves i e whether the insurers insure a large number of risks in a single geographic area that would be affected by a terrorist strike Unsurprisingly insurers generally have sought to limit their exposures in particular geographic locations with a conceptually higher risk for terrorist attacks making terrorism insurance more difficult to find in those areas International Experience with Terrorism Risk Insurance29 Although the U S experience with terrorism is relatively limited other countries have dealt with the issue more extensively and have developed their own responses to the challenges presented by terrorism risk Spain which has seen significant terrorist activity by Basque separatist movements insures against acts of terrorism via a broader government-owned reinsurer that has provided coverage for catastrophes since 1954 The United Kingdom UK responding to the Irish Republican Army attacks in the 1980s created Pool Re a privately owned mutual insurance company with government backing specifically to insure terrorism risk In the aftermath of the September 11 2001 attacks many foreign countries reassessed their terrorism risks and created a variety of approaches to deal with the risks The UK greatly expanded Pool Re whereas Germany created a private insurer with government backing to offer terrorism insurance policies Germany’s plan like the United States’ TRIA was created as a temporary measure It has been extended since its inception most recently until the end of 2019 30 Not all countries however concluded that some sort of government backing for terrorism insurance was necessary Canada specifically considered and rejected creating a government program following September 11 2001 31 Previous U S Experience with “Uninsurable” Risks Terrorism risk post-2001 is not the first time the United States has faced a risk perceived as uninsurable in private markets that Congress chooses to address through government action During World War II for example Congress created a “war damage” insurance program and it 28 Emmett J Vaughan and Therese Vaughan Fundamentals of Risk and Insurance Hoboken NJ John Wiley Sons 2003 p 41 29 For more information on other countries’ programs addressing terrorism risk see GAO Terrorism Risk Insurance Comparison of Selected Programs in the United States and Foreign Countries GAO-16-316 April 12 2016 at https www gao gov products GAO-16-316 30 Extremus Versicherungs AG “Neue Bedingungen Staatsgarantie verlängert ” at https www extremus de index php aktuelles news 31 For a discussion of the approach in Canada see the following from the Canadian law firm McMillan Lyon Carol “Does Canada Need a Terrorism Risk Insurance Scheme ” McMillan Insurance Bulletin December 2015 at https mcmillan ca Does-Canada-need-a-terrorism-risk-insurance-scheme Congressional Research Service 9 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress expanded a program insuring against aviation war risk following September 11 2002 32 Since 1968 the National Flood Insurance Program has covered most of the insured flooding losses in the United States 33 The closest previous analog to the situation with terrorism risk may be the federal riot reinsurance program created in the late 1960s Following large scale riots in American cities in the late 1960s insurers generally pulled back from insuring in those markets either adding policy exclusions to limit their exposure to damage from riots or ceasing to sell property damage insurance altogether In response Congress created a riot reinsurance program as part of the Housing and Urban Development Act of 1968 34 The federal riot reinsurance program offered reinsurance contracts similar to commercial excess reinsurance The government agreed to cover some percentage of an insurance company’s losses above a certain deductible in exchange for a premium paid by that insurance company Private reinsurers eventually returned to the market and the federal riot reinsurance program was terminated in 1985 The Terrorism Insurance Market Post-9 11 and Pre-TRIA The September 2001 terrorist attacks and the resulting billions of dollars in insured losses caused significant upheaval in the insurance market Even before the attacks the insurance market was showing signs of a cyclical “hardening” of the market in which prices typically rise and availability is somewhat limited The unexpectedly large losses caused by terrorist acts exacerbated this trend especially with respect to the commercial lines of insurance most at risk for terrorism losses Post-September 11 insurers and reinsurers started including substantial surcharges for terrorism risk or more commonly they excluded coverage for terrorist attacks altogether Reinsurers could make such rapid adjustments because reinsurance contracts and rates are generally unregulated Primary insurance contracts and rates are more closely regulated by the individual states and the exclusion of terrorism coverage for the individual insurance purchaser required regulatory approval at the state level in most cases States acted fairly quickly and by early 2002 45 states had approved insurance policy language prepared by the Insurance Services Office Inc ISO an insurance consulting firm excluding terrorism damage in standard commercial policies 35 The lack of readily available terrorism insurance caused fears of a larger economic impact particularly on the real estate market In most cases lenders prefer or require that a borrower maintain insurance coverage on a property Lack of terrorism insurance coverage could lead to defaults on existing loans and a downturn in future lending causing economic ripple effects as buildings are not built and construction workers remain idle For more information see “Aviation Insurance Program ” at https www faa gov about office_org headquarters_offices ash ash_programs aviation_insurance 33 For more information see CRS Report R44593 Introduction to the National Flood Insurance Program NFIP by Diane P Horn and Baird Webel 34 P L 90-448 82 Stat 476 The act also created state Fair Access to Insurance Requirements FAIR plans and a Federal Crime Insurance Program 35 Jeff Woodward “The ISO Terrorism Exclusions Background and Analysis ” IRMI Insights February 2002 at http www irmi com expert articles 2002 woodward02 aspx 32 Congressional Research Service 10 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress The 14-month period after the September 2001 terrorist attacks and before the November 2002 passage of TRIA provides some insight into the effects of a lack of terrorism insurance Some examples in September 2002 include the Real Estate Roundtable releasing a survey finding that “$15 5 billion of real estate projects in 17 states were stalled or cancelled because of a continuing scarcity of terrorism insurance”36 and Moody’s Investors Service downgrading $4 5 billion in commercial mortgage-backed securities 37 This picture however was not uniform For example in July 2002 The Wall Street Journal reported that “despite concerns over landlords’ ability to get terrorism insurance trophy properties were in demand ”38 CBO concluded in 2005 that “ TRIA appears to have had little measurable effect on office construction employment in the construction industry or the volume of commercial construction loans made by large commercial banks ” but CBO also noted that a variety of economic factors at the time “could be masking positive macroeconomic effects of TRIA ”39 After TRIA TRIA’s “make available” provisions addressed the availability problem in the terrorism insurance market as insurers were required by law to offer commercial terrorism coverage However significant uncertainty existed as to how businesses would react because there was no general requirement to purchase terrorism coverage and the pricing of terrorism coverage was initially high 40 Analyzing the terrorism insurance market in the aftermath of TRIA is challenging as well since there was no consistent regulatory reporting by insurers until P L 114-1 required detailed reporting which Treasury began in 2016 Before this time data on terrorism insurance typically stemmed from insurance industry surveys or rating bureaus In examining the terrorism insurance market since TRIA it is also important to note that no terrorist attacks have occurred that reached TRIA thresholds thus property and casualty insurance has not made any large scale payouts for terrorism damages The initial consumer reaction to the terrorism coverage offers was relatively subdued Marsh Inc a large insurance broker reported that 27% of their clients bought terrorism insurance in 2003 This take-up rate however climbed relatively quickly to 49% in 2004 and 58% in 2005 Marsh reported that since 2005 the overall take-up rate has remained near 60% with Marsh reporting a rate of 62% in 2017 41 The Treasury reports based on industry data calls have found similar or higher take-up rates For 2017 Treasury found that the take-up rate based on premium volumes was 62% whereas based on policy counts the rate was 78% 42 The price for terrorism insurance has appeared to decline over time although the level of pricing reported may not always be comparable between sources The 2013 report by the President’s Working Group on Financial Markets based on survey data by insurance broker Aon showed a The Real Estate Roundtable “Terror Insurance Drag on Real Estate Still Climbing ” Roundtable Weekly September 19 2003 37 “Moody’s Downgrades Securities on Lack of Terrorism Insurance ” Wall Street Journal September 30 2002 p C14 38 Smith Ray A “Office-Building Demand Rises Despite Vacancies ” Wall Street Journal July 24 2002 p B6 39 Congressional Budget Office Federal Terrorism Reinsurance An Update January 2005 pp 10-11 at http www cbo gov publication 16210 40 Although there is no requirement in federal law to purchase terrorism coverage businesses may be required by state law to purchase the coverage This is particularly the case in workers’ compensation insurance Market forces such as requirements for commercial loans may also compel businesses to purchase terrorism coverage 41 Marsh Inc 2018 Terrorism Risk Insurance Report April 2018 p 1 42 FIO Report on the Effectiveness of the Terrorism Risk Insurance Program June 2018 p 30 36 Congressional Research Service 11 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress high of above 7% for the median terrorism premium as a percentage of the total property premium in 2003 with a generally downward trend and more recent values around 3% 43 The trend may be downward but there has been variability particularly across industries For example Marsh reported rates in 2009 as high as 24% of the property premium for financial institutions and as low as 2% in the food and beverage industry 44 In the 2013 Marsh report this variability was lower as 2012 rates varied from 7% in the transportation industry and the hospitality and gaming industry to 1% in the energy and mining industry 45 In 2017 Marsh found rates varying from 10% in hospitality and gaming to 2% in energy and mining and construction industries The 2018 Treasury report based on lines of insurance not on industry category found premiums varying from 6 1% in excess workers’ compensation to 1 4% in ocean marine in 2017 46 Treasury found that the total premium amount paid for terrorism coverage in 2017 was approximately $3 65 billion or 1 75% of the $209 15 billion in total premiums for TRIA-eligible lines of insurance 47 Since the passage of TRIA Treasury estimates that a total of approximately $38 billion was earned for terrorism coverage by non-related insurers with another $7 4 billion earned by captive insurers i e insurers who are owned by the insureds In general the capacity of insurers to bear terrorism risk has increased over the life of the TRIA program The combined policyholder surplus among all U S property and casualty insurers was $686 9 billion at the end of 2017 compared to $408 6 billion inflation adjusted at the start of 2002 48 This $686 9 billion has been bolstered by the estimated $38 billion in premiums paid for terrorism coverage over the years without significant claims payments The policyholder surplus however backs all property and casualty insurance policies in the United States and is subject to depletion in a wide variety of events For example extreme weather losses could particularly draw capital away from the terrorism insurance market because events such as hurricanes share some characteristics—low frequency and the possibility of catastrophic levels of loss—with terrorism risk Evolution of Terrorism Risk Insurance Laws Table 1 presents a side-by-side comparison of selected provisions from the original TRIA law along with the reauthorizing laws of 2005 2007 and 2015 President’s Working Group on Financial Markets The Long-Term Availability and Affordability of Insurance for Terrorism Risk April 2014 p 26 44 Marsh Inc The Marsh Report Terrorism Risk Insurance 2010 p 14 45 Marsh Inc 2013 Terrorism Risk Insurance Report May 2013 p 12 46 FIO Report on the Effectiveness of the Terrorism Risk Insurance Program June 2018 p 20 47 FIO Report on the Effectiveness of the Terrorism Risk Insurance Program June 2018 pp 72-74 Calculations by CRS 48 AM Best Best’s Aggregates Averages Property-Casualty 2002 Edition p 2 and AM Best Best’s Aggregates Averages Property-Casualty 2018 Edition p 2 Inflation adjustment from the Bureau of Labor Statistics’ CPI inflation calculator at https data bls gov cgi-bin cpicalc pl Actual 2002 figure is $293 5 billion 43 Congressional Research Service 12 Table 1 Side-by-Side of Previous Terrorism Risk Insurance Laws selected provisions Original 2002 Law 15 U S C 6701 Note P L 107-297 2005 Reauthorization P L 109-144 2007 Reauthorization P L 110-160 2015 Reauthorization P L 114-1 Title Terrorism Risk Insurance Act of 2002 Terrorism Risk Insurance Extension Act of 2005 Terrorism Risk Insurance Program Reauthorization Act of 2007 Terrorism Risk Insurance Program Reauthorization Act of 2015 Expiration Date December 31 2005 §108 a December 31 2007 §2 December 31 2014 §3 a December 31 2020 §101 “Act of Terrorism” Definition For an act of terrorism to be covered under TRIA it must be a violent act committed on behalf of a foreign person or interest as part of an effort to coerce the U S civilian population or influence U S government policy It must have resulted in damage within the United States or to a U S airliner or mission abroad Terrorist act is to be certified by the Secretary of the Treasury in concurrence with the Attorney General and Secretary of State §102 1 A No Change Removed requirement that a covered act of terrorism be committed on behalf of a foreign person or interest thus expanding coverage to domestic terrorism §2 Removed Secretary of State from certification process and inserted Secretary of Homeland Security §105 Limitation on Act of Terrorism Certification in Case of War Terrorist act would not be covered in the event of a war except for workers’ compensation insurance §102 1 B I No Change No Change No Change Provision CRS-13 Provision Original 2002 Law 15 U S C 6701 Note P L 107-297 2005 Reauthorization P L 109-144 2007 Reauthorization P L 110-160 2015 Reauthorization P L 114-1 Minimum Damage To Be Certified Terrorist act must cause more than $5 million in property and casualty insurance losses to be certified §102 1 B ii No Change No Change No Change Aggregate Industry Loss Requirement Program Trigger No Provision Created a “program trigger” that would prevent coverage under the program unless “aggregate industry losses resulting from such certified act of terrorism” exceed $50 million in 2006 and $100 million for 2007 §6 No Change Program trigger remains at $100 million until 2014 §3 c Program trigger increased $20 million per year until it reaches $200 million in 2020 §102 Insurer Deductible 7% of earned premium for 2003 10% of earned premium for 2004 15% of earned premium for 2005 §102 7 Raised deductible to 17 5% for 2006 and 20% for 2007 §3 No Change Deductible remained at 20% until 2014 §3 c No Change Deductible remained at 20% for each calendar year of the program §106 Covered Lines of Insurance Commercial property and casualty insurance including excess insurance workers’ compensation and surety but excluding crop insurance private mortgage insurance title insurance financial guaranty insurance medical malpractice insurance health or life insurance flood insurance or reinsurance §102 12 Excluded commercial auto burglary and theft professional liability except for directors and officers liability and farm owners multiple peril from coverage §3 No Change No Change Mandatory Availability Every insurer must make available terrorism coverage that does not differ materially from coverage applicable to losses other than terrorism §103 c No Change Mandatory availability extended through 2007 §2 b No Change Mandatory availability extended through 2014 §3 c No Change Mandatory availability in effect for each calendar year of the program §106 CRS-14 Provision Original 2002 Law 15 U S C 6701 Note P L 107-297 2005 Reauthorization P L 109-144 2007 Reauthorization P L 110-160 2015 Reauthorization P L 114-1 Insured Loss Shared Compensation Federal share of losses will be 90% for insured losses that exceed the applicable insurer deductible §103 e Reduced federal share of losses to 85% for 2007 §4 No Change Federal share remained at 85% through 2014 Reduced federal share one percentage point per year until it reaches 80% §102 Cap on Annual Liability Federal share of compensation paid under the program will not exceed $100 billion and insurers are not liable for any portion of losses that exceed $100 billion unless Congress acts otherwise to cover these losses §103 e No Change Removed the possibility that a future Congress could require insurers to cover some share of losses above $100 billion if the insurer has met its individual deductible Requires insurers to clearly disclose this to policy holders §4 a and §4 d No Change Payment Procedures if Losses Exceed $100 000 000 000 After notice by the Secretary of the Treasury Congress determines the procedures for payments if losses exceed $100 billion §103 e 3 No Change Required Secretary of the Treasury to publish regulations within 240 days of passage regarding payments if losses exceed $100 billion §4 c No Change Aggregate Retention Amount Maximum $10 billion for 2002-2003 $12 5 billion for 2004 $15 billion for 2005 §103 6 Raised amount to $25 billion for 2006 and $27 5 billion for 2007 §5 No Change Aggregate retention remained at $27 5 billion through 2014 Raises amount $2 billion per year until it reaches $37 5 billion Beginning in 2020 sets the amount equal to annual average of the sum of insurer deductibles for previous three years §104 CRS-15 Provision Original 2002 Law 15 U S C 6701 Note P L 107-297 2005 Reauthorization P L 109-144 2007 Reauthorization P L 110-160 2015 Reauthorization P L 114-1 Mandatory Recoupment of Federal Share If insurer losses are less than the aggregate retention amount a mandatory recoupment of the federal share of the loss will be imposed If insurer losses are over the aggregate retention amount such recoupment is at the discretion of the Secretary of the Treasury §103 e 7 No Change Increases total recoupment amount to be collected by the premium surcharges to 133% of the previously defined mandatory recoupment amount Full mandatory recoupment must occur by September 30 2017 §4 e 1 Increases total recoupment amount to be collected by the premium surcharges to 140% of the previously defined mandatory recoupment amount Full mandatory recoupment must occur by September 30 2024 §104 Recoupment Surcharge Surcharge is limited to 3% of property-casualty insurance premium and may be adjusted by the Secretary to take into account the economic impact of the surcharge on urban commercial centers the differential risk factors related to rural areas and smaller commercial centers and the various exposures to terrorism risk across lines of insurance §103 e 8 No Change Removed 3% limit for mandatory surcharge §4 e 2 A No Change Source The Congressional Research Service using public laws obtained from the Government Publishing Office through http www congress gov Notes Section numbers for the initial TRIA law are as codified in 15 U S C §6701 note Section numbers for P L 109-144 P L 110-160 and P L 114-1 are from the legislation as enacted CRS-16 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Appendix Calculation of TRIA Recoupment Amounts Table A-1 contains illustrative examples of how the recoupment for the government portion of terrorism losses under TRIA might be calculated in the aggregate for various sizes of losses The total amount of the combined deductibles in the table is simply assumed to be 30% of the insured losses for illustrative purposes The actual deductible amount is as detailed above based on the total amount of premiums collected by each insurer Without knowing the actual distribution of losses due to a terrorist attack it is impossible to know what the actual total combined deductible amount would be Table conclusions with regard to recoupment however hold across different actual deductible amounts 49 The specific provisions of the law define the “insurance marketplace aggregate retention amount” Column F for 2019 as the lesser of $37 5 billion or the total amount of insured losses Column A The “mandatory recoupment amount” Column G is defined as the difference between $37 5 billion and the aggregate insurer losses that were not compensated for by the program i e the total of the insurers’ deductible Column B and their 19% loss share Column C If the aggregate insured loss is less than $37 5 billion the law requires recoupment of 140% of the government outlays Column H For insured losses over $37 5 billion the mandatory recoupment amount decreases thus the Secretary would be required to recoup less than 133% of the outlays Depending on the precise deductible amounts the uncompensated industry losses Column D may eventually rise to be greater than $37 5 billion which would then mean that the mandatory recoupment provisions would not apply The Secretary would still retain discretionary authority to apply recoupment surcharges no matter what level uncompensated losses reached 49 For more detailed TRIA scenarios including different loss distribution assumptions see CBO Federal Reinsurance for Terrorism Risk in 2015 and Beyond Working Paper 2015-04 June 10 2015 pp 11-14 at https www cbo gov publication 50171 Congressional Research Service 17 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Table A-1 Example of TRIA Recoupment Calculations $ billions Column A Column B Column C Column D Column E Column F Column G Column H Theoretical Insured Losses Theoretical Combined Insurer Deductible Insurer 19% Share of Insured Losses 0 19x A-B Insurance Industry Uncompensated Losses B C Government 81% Share of Insured Losses 0 81x A-B Aggregate Retention Amount A or $37 5 Mandatory Recoupment Amount F-D Required Recoupment Amount Gx1 40 $0 50 $0 15 $0 07 $0 22 $0 28 $0 50 $0 28 $0 40 $1 0 $0 3 $0 13 $0 4 $0 6 $1 0 $0 6 $0 8 $5 0 $1 5 $0 67 $2 2 $2 8 $5 0 $2 8 $4 0 $10 0 $3 0 $1 33 $4 3 $5 7 $10 0 $5 7 $7 9 $20 0 $6 0 $2 66 $8 7 $11 3 $20 0 $11 3 $15 9 $30 0 $9 0 $3 99 $13 0 $17 0 $30 0 $17 0 $23 8 $37 5 $11 3 $4 99 $16 2 $21 3 $37 5 $21 3 $29 8 $50 0 $15 0 $6 65 $21 7 $28 4 $37 5 $15 9 $22 2 $75 0 $22 5 $9 98 $32 5 $42 5 $37 5 $5 0 $7 0 $100 0 $30 0 $13 30 $43 3 $56 7 $37 5 $0 $0 Source U S Treasury TRIA statute as amended calculations by CRS Notes Totals may not sum to 100% due to rounding For illustrative purposes the combined insurer deductible amount set at 30% of the insured loss size actual deductible varies depending on the distribution of events Congressional Research Service 18 Terrorism Risk Insurance Overview and Issue Analysis for the 116th Congress Author Information Baird Webel Specialist in Financial Economics Disclaimer This document was prepared by the Congressional Research Service CRS CRS serves as nonpartisan shared staff to congressional committees and Members of Congress It operates solely at the behest of and under the direction of Congress Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role CRS Reports as a work of the United States Government are not subject to copyright protection in the United States Any CRS Report may be reproduced and distributed in its entirety without permission from CRS However as a CRS Report may include copyrighted images or material from a third party you may need to obtain the permission of the copyright holder if you wish to copy or otherwise use copyrighted material Congressional Research Service R45707 · VERSION 4 · UPDATED 19