Since the events of September 11, 2001, the federal government has developed a robust and sophisticated counter-terrorism apparatus that has thus far succeeded in preventing large-scale terrorist attacks on the United States homeland. However, the threat of terrorism is continuing to evolve amid a changing, unstable, and dangerous international environment. Attacks such as the Boston Marathon bombing are stark and painful reminders that the United States must remain vigilant. Unfortunately, it will likely never simply be about prevention – response and recovery are also integral pieces of the country’s national security. It is vital that we, as a nation, protect the U.S. economy from the financial devastation that could accompany a catastrophic terrorist attack and help get it back on its feet after an attack.

Insuring against the losses from such an attack could be one way to achieve that vital protection. However, simply put, terrorism is not an insurable risk as it involves strategic human behavior and represents a dynamic threat that is intentional, responsive to countermeasures, and purposefully unpredictable. The objectives of terrorists, the means and methods of achieving those objectives, and the propensity to collaborate with unknown national and international actors are not knowable or measurable in a commercial context. Compare this with hurricanes and floods, which, as forces of nature subject to relatively stable and statistically predictable laws of behavior, enable insurers to predict the frequency and severity of such risks, and therefore, to properly underwrite them on both a local and catastrophic basis. In short, insurers cannot underwrite risks that lack a statistically reliable foundation.

Following 9/11 it became evident that no self-sustaining private market for terrorism risk coverage was likely to develop. Therefore, in 2002, Congress passed the Terrorism Risk Insurance Act, or TRIA, creating a risk-sharing mechanism between the private and public sectors. This mechanism allows for a large and temporal transfer of risk that would not occur in a fully private market but does – potentially exclusively – utilize private capital.

The TRIA program creates the space to allow a viable private market to function. The unique structure of the program’s recoupment mechanism takes losses that could render a single company insolvent and spreads them throughout the private sector and over time. This has created the certainty needed for the commercial insurance industry to effectively operate and policyholders to purchase coverage that would otherwise be unavailable. Now, losses from all but the largest terrorist attacks are completely borne by the private sector without involvement of the TRIA program.

The purpose of the program is to make sure that the economy can recover in as orderly a fashion as possible from a terrorist event. In order to encourage private-sector involvement in the terrorism insurance marketplace – and thereby protect and promote our nation’s finances, security, and economic strength – the U.S. needs a well-functioning terrorism loss management plan. Fortunately, the current TRIA program has proven to be such a plan.

Resource Details

Publish Date

March 26, 2019

Topics

  • Terrorism Risk Insurance