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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 CAS.GovtIns. (These reasons are relevant for terrorism.) [Hint: FCC(ES)]

BattleTable

reference	part (a)	part (b)	part (c)	part (d)
E (2017.Spring #10)	goals: - of TRIA	insurability of terrorism: - evaluate	reduce 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
E (2015.Spring #7)	see gov't ins ??	see gov't ins ??	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.	goals: - of TRIA	pros/cons - of TRIA

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

• insurability of terrorism:
• motivation for, and goals of TRIA
• certification of terrorism, triggers for federal payments
• TRIA versus private insurance

reference	part (a)	part (b)	part (c)	part (d)
E (2015.Fall #6)	insurability of terrorism: - evaluate	oudated: (old flood paper)
E (2015.Fall #9)	goals: - of TRIA	goals: - achieved?	triggers: - for federal payments
E (2014.Spring #11)	motivation: - for TRIA	calculate: - reimbursement	insurability of terrorism: - evaluate
E (2013.Fall #15)	certification: - of terrorism	TRIA replacement: - by private insurance	justify: - TRIA isn't insurance

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: E (2014.Spring #11a).

• 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: E (2015.Fall #9a)

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.

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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. See:

E (2015.Fall #6a)

E (2014.Spring #11c).

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).

I would be a little surprised if they asked something like this again. (No guarantees - I could be wrong!) It's a good question for the U.S. version of Exam 6 because it pertains to U.S. legislation, but it seems too detailed for the Canadian version. On the other hand, if you were on a Canadian committee in charge of creating a governmental reinsurance program for terrorism, you would definitely want to know how the U.S. calculation works. If you're running out of time for studying, this reimbursement calculation is probably not that important. Stay focused on the concepts.

But if they do ask this type of question again, note that TRIA has changed in the following ways: (See Webel2.TRIA. Thx to user Thanathos52 for noticing this!)

• 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

Shout-out to cgc2018 for noticing that the answer for part (a) in the examiner's report was wrong for E (2013.Fall #15a)!!

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

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Timbits

Just a couple of little factoids to finish up...(Are you hungry for Timbits now?!)

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BattleCodes

Memorize:

• a concise way of describing TRIA
• 3 motivations for creating TRIA, 3 goals of TRIA
• 4 criteria for terrorism insurability + are they satisfied for terrorism
• how TRIA works (lots of details on BattleCards)

Conceptual:

• Terrorism insurance is one of the high profile LOBs discussed on the syllabus. Other examples are flood, earthquake, agricultural. It might be interesting to evaluate the insurability of these relative to C-MAC, the criteria given for insurability of terrorism.
• Let's also think back to the DCAT reading. Do you remember F-PIP-RIGOR? Which one of these risk categories would terrorism be in? I think it would come under F (Frequency & Severity). One of the stated causes of deterioration in frequency and/or severity is a catastrophe.
  • One of the ripple effects might be loss of reinsurance. One of the subsequent management actions would be to look for another reinsurer. Would that apply here? Probably not, since the U.S. federal government is the reinsurer. They likely wouldn't drop anyone because one of the goals of TRIA was to stabilize the private market.

Calculational:

• reimbursement under TRIA (probably not very important for the Canadian version of Exam 6)

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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