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TRIA (Terrorism Risk Insurance Act), signed in 2002, was an act of U.S. congress to ensure the continued availability of commercial terrorism insurance in the U.S. It is a cooperative public/private scheme. (There is no such scheme in Canada, and terrorism coverage by private insurers is limited)

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Pop Quiz

List 5 reasons for governmental participation in insurance from the reading Germani.GovtIns. (These reasons are relevant for terrorism.) [Hint: FCC(ES)]

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• goals of TRIA
• insurability of terrorism - evaluate using C-MAC
• evaluate goals of TRIA - have they been met
• pros/cons of TRIA
• motivation for TRIA
• certification of terrorism, triggers for federal payments
• TRIA versus private insurance

reference	part (a)	part (b)	part (c)	part (d)
E (2017.Spring #10)	goals: - of TRIA	insurability of terrorism: - evaluate	reducing tax burden: - changes to TRIA
E (2016.Fall #6)	insurability of terrorism: - evaluate	goals: - of TRIA	evaluate goals: - have they been met
E (2016.Spring #7)	insurability of terrorism: - evaluate	goals: - of TRIA	pros/cons: - of TRIA
E (2015.Fall #10)	goals: - of TRIA	TRIA exclusion: - homeowner's insurance	TRIA exclusion: - reinsurance
E (2015.Spring #7)	private insurance: - crop / UI / TRIA 1	see Germani.GovtIns	pros/cons: - of TRIA
E (2014.Fall #8)	calculate: - reimbursement	certification: - of terrorism	insurability of terrorism: - evaluate
E (2014.Spring #12)	roles in TRIA: - fed / state / private ins.	govt involvement: - in TRIA 1	evaluate goals: - have they been met

¹ Cross-reference with Germani.GovtIns.

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In Plain English!

Intro

TRIA was a response to the Sept 11, 2001 (9/11) terrorist attack on the World Trade Center in New York City. Prior to that, insurers did not exclude or charge separately for terrorism coverage. But after this catastrophic event, insurers and reinsurers withdrew coverage. This was due to lack of credible data for pricing & reserving, and the risk of catastrophic losses.

Specific motivation for the introduction of terrorism insurance in the U.S. includes:

• Fill Unmet Need: private insurers withdrew coverage after 9/11
• Convenience: government can set up a program quickly and can work with the Treasury Department regarding compensation
• Social Purpose: lessen economic disruption from lack of terrorism insurance availability (new construction projects couldn't get required insurance)

Specific goals of the legislation were:

1. STABILIZE private market by providing temporary public/private terrorism insurance
2. PROTECT consumers by ensuring AA (Availability & Affordability)
3. PRESERVE state regulation of insurance

To me, motivation and goals sound almost like the same thing. I suppose you could say that motivations are more general - what are the new realities that must be addressed? The subsequent legislation then incorporated more specific items. (The BattleCards describe the ways these goals are accomplished.)

A concise way of describing TRIA is:

TRIA is a federal reinsurance mechanism designed to ensure AA (Availability & Affordability) for commercial customers.

Let's finish this section with a brief overview of how the TRIA legislation was written to ensure its goals were reached:

1. to stabilize the market:
      - TRIA created a government-backed loss-sharing mechanism
2. to protect consumers:
      - TRIA requires insurers to offer commercial coverage & to provide transparency
      - but insureds are not required to purchase
      - government acts as reinsurer
3. to preserve state regulation of insurance
      - this is explicitly written into TRIA
      - but with certain exceptions like: the state cannot enact its own definition of terrorism (otherwise they would create a lax definition to generate reimbursement)

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Is Terrorism Insurable?

Terrorism is a low-frequency, high-severity risk. That means there is a lack of credible data, so how can we price it accurately? One way of addressing this lack of credible data is to use models, as is often done with hurricanes. Anyway, the reading addresses this issue of insurability and identifies 4 elements of an insurable risk: C-MAC

C: (Credibility) need a large number of customers

M: (Measurable) losses must be definite & measurable

A: (Accidental) losses must be accidental

C: (not Catastrophic) losses must not be catastrophic

The next question, of course, is whether terrorism satisfies these conditions. The answer is NO! Let's go through each point:

C: FAIL: applies only to commercial insurance and coverage is not mandatory --> penetration too low for predictability & spreading of losses

M: FAIL: low frequency, high severity --> hard to measure risk

A: FAIL: losses are deliberate, although not by insured

C: DEPENDS: on insurer's concentration of terrorism risk

Huh??!! If terrorism is uninsurable, then how can TRIA possibly work?

• This is the discussed in the next section.
• The answer is that terrorism insurance can't be handled exclusively by the private market.
• The federal government acts as a reinsurer, and coverage is subsidized through general taxation.

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How TRIA Works

There are currently 10 BattleCards in the subsection called: how TRIA works. And 6 of them are old exam problems. One was a calculation problem where you had to calculate the reimbursement after a terrorist event: E (2014.Spring #11b).

But if they do ask this type of question again, note that TRIA has changed in the following ways:

• aggregate industry losses must be 200m for reimbursement to start (it was previously only 100m)
• the coinsurance is now 20% (it was previously 15%)

The BattleCards provide further mundane details on how TRIA works, including (among other things):

• that loss-sharing depends on size of loss
• criteria for terrorism certification
• ways that the private market could replace TRIA

(See BattleCard #5 in the next mini BattleQuiz, or equivalently BattleCard #19 in the full BattleQuiz.)

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POP QUIZ ANSWERS

5 reasons for governmental participation in insurance: FCC(ES)

for FILLING NEEDS unmet by private insurance (Ex: terrorism)

- may occur when private insurance is not economically viable (after 9/11 terrorist attack in NYC, private market withdrew coverage)

when insurance is COMPULSORY (Ex: BC auto - see the wiki article ICBC.Affordable)

- if insurance is compulsory but not offered by the private market (for whatever reason) then government must be the provider

for CONVENIENCE (Ex: flood)

- government may already have necessary structures in place (government already provides disaster relief after floods)

for EFFICIENCY (Ex: auto)

- agent commissions eliminated → lower expense ratio → lower premiums for consumer

for SOCIAL purposes (Ex: medical coverage)

- private market is motivated by profit, sometimes at the expense of social purposes like universal medical coverage