• U.S. Government Accountability Office--Not Enough TRIA Data Available To Accurately Forecast Federal Fiscal Exposure
  • June 16, 2014
  • Law Firm: Colodny Fass P.A. - Fort Lauderdale Office
  • Given the federal government's fiscal exposure should the Terrorism Risk Insurance Act ("TRIA") be re-authorized beyond 2014, the U.S. Government Accountability Office ("GAO") was asked to review the TRIA program, on which it issued a report yesterday, June 11, 2014.

    The GAO's comprehensive TRIA analysis evaluated (1) the extent of available data on terrorism insurance and efforts to date in determining federal exposure, (2) changes in the terrorism insurance market since 2002, and (3) potential impacts of selected changes to TRIA.

    Congress passed TRIA in 2002 to help ensure the availability and affordability of terrorism insurance for commercial property and casualty policyholders after the September 11, 2001 terrorist attacks. TRIA, which expires on December 31, 2014, is administered by the U.S. Treasury as a program in which the federal government and private sector share losses on commercial property and casualty damage resulting from a terrorist attack.

    According to yesterday's GAO report, comprehensive statistics on the terrorism insurance market are not readily available. Further, U.S. Treasury efforts to better understand federal fiscal exposure under various terrorist attack scenarios have been limited.

    Although federal internal control standards state that agencies should obtain needed data and analyze risks, and industry best practices indicate that analysis of location and coverage amount could help measure financial risks, the Treasury nevertheless lacks the needed information to help ensure that TRIA's goals are being met. For example, take-up rate--an indicator of demand based on the percentage of businesses buying terrorism coverage--increased from 2003 to 2006, and remained constant through 2010, according to Marsh, one of the world's leading insurance brokers and risk advisers. However, the GAO noted that neither the Treasury or National Association of Insurance Commissioners collects any similar information.

    Notwithstanding, available information indicates that terrorism insurance premiums and other market indicators are stable.

    In its study, the GAO learned from insurers that terrorism insurance premiums comprised less than two percent of commercial property and casualty premiums in 2012, on average. According to industry participants, prices for terrorism coverage have declined, while the percentage of businesses buying coverage seems to have leveled recently, and insurers' ability to provide it has remained constant.

    Insurance industry participants also cited concerns about the availability and price of terrorism coverage if TRIA expired or was substantially revised. Nevertheless, the GAO noted that some changes could reduce federal fiscal exposure from TRIA's impact, such as increasing the deductible or threshold for required recoupment of the government's share of losses through surcharges on all commercial policyholders.

    Some insurer representatives contacted by the GAO said their companies would stop covering terrorism if TRIA expired. Most worried about solvency and ability to provide coverage if their deductible or share of losses increased, but were less concerned about increases to the threshold at which government coverage would begin, or the required recoupment of the government's share of losses.

    Reinsurance capacity for terrorism risk has increased, but remains small relative to the federal reimbursements available through TRIA.

    According to the GAO, several factors limit the reinsurance market for terrorism risk. For instance, unlike primary insurers, reinsurers are not subject to TRIA and therefore are not required to offer coverage for terrorism risk to them. According to industry representatives, reinsurers face the same challenges as primary insurers--that is, terrorism risk is difficult to model and price, another factor contributing to a limited market. Ironically, the very difficulty of modeling terrorism risk was described in the report as an additional overall challenge to developing the private market for terrorism insurance.

    Insurers queried told the GAO that they typically purchase terrorism reinsurance as part of a multi-peril policy that covers terrorism risk in addition to other risks.

    The transference of terrorism risk through reinsurance and alternatives such as insurance-linked securities has been limited, the GAO report continued, noting that, as of April 2014, no property and casualty terrorism bonds have been issued. Among the challenges to issuing catastrophe bonds covering terrorism risk have been:

    • Investors generally avoid risks not widely underwritten in reinsurance markets and therefore lack interest in such catastrophe bonds.
    • Investors are reluctant to make investments in which losses may be correlated with widespread financial market losses (as was the case with terrorism losses after September 11, 2001), as well as low returns or payouts.
    • Rating agencies have not been willing to use terrorism loss models that estimate the probability of terrorism events (probabilistic models) for rating purposes and at least for terrorism risk investors tend to avoid risks that cannot be credibly modeled and rated.

    While questions remain about TRIA, such as whether a pre-funding mechanism should replace the current post-funding version, the Treasury has meanwhile agreed to begin collecting the data needed to analyze and periodically assess the terrorism insurance market, as well as to address market uncertainty of whether the law covers cyber-terrorism risk.