03/06/2014 | By Ron Kuykendall
A new study of the national security benefits of the Terrorism Risk Insurance Act (TRIA) conducted by the RAND Corporation’s Center for Catastrophic Risk Management and Compensation confirms the experience of business insurance consumers that TRIA is key to ensuring the availability and affordability of the terrorism coverage that undergirds the U.S. economy, according to the Coalition to Insure Against Terrorism (CIAT), which represents business insurance policyholders.
TRIA originally was passed in 2002 in the wake of the September 11, 2001 terror attacks when reinsurers withdrew from the terrorism risk insurance marketplace, causing primary insurers to withdraw, as well. The lack of availability of this coverage stalled economic activity, including lending for new construction, contributing to massive job losses.
TRIA restored terrorism risk coverage to the market. The legislation was reauthorized in 2005 and 2007, and, for more than a decade, has made it possible for businesses to purchase the terrorism risk coverage they need through the private market at almost no cost to the taxpayer. TRIA is scheduled to sunset at the end of this year unless it is extended.
“The RAND study makes it clear that TRIA enables the smooth functioning of the terrorism risk insurance marketplace, which is critical to commercial insurance consumers representing a broad range of industries, from real estate, to public utilities, to major entertainment venues,” said CIAT spokesperson Martin DePoy. The study reaffirmed the fact that insurers continue to be unable to effectively price catastrophic terrorism risk – a key to providing terrorism coverage – because risk from such attacks, unlike risk from natural disasters, is man-made, designed to overcome loss-mitigation efforts and inherently unpredictable.
As the study noted, “Terrorism risk models cannot predict exposure to catastrophic terrorism…While history does tell us how bad such attacks could be, it doesn’t tell us how likely such events will be because both intentions and capabilities of terrorist groups are evolving in response to a dynamic terrorism security environment.”
The RAND study also found that, “To the extent insurance is available without TRIA before the [terrorist] event, prices and availability of markets after terrorism events may become further unstable as firms seek to understand whether recent events signal significant changes in future terrorism risk.”
RAND’s analysis additionally pointed out the significant contribution TRIA makes to national security by enabling more rapid rebuilding after an attack and supporting economic growth. “The primary influences of TRIA on national security,” the study noted, “are likely through improvements in resilience and recovery. To the extent TRIA leads to greater access to insurance, this could improve both the pace and effectiveness of recovery efforts and in turn makes communities more resilient to future terrorism events…To the extent that terrorism insurance is more available with TRIA than without it, renewing the legislation contributes to improved national security.”
“The RAND study underscores the fact that TRIA continues to be the factor that makes possible the wide availability of terrorism risk coverage today,” DePoy said. “This legislation is a shield against the potentially devastating economic impact of terrorism and a major component of our national security policy. CIAT strongly advocates that TRIA be reauthorized.”
DePoy also emphasized the need for reauthorization of TRIA at the earliest possible date.
“In both 2005 and 2007, our members saw policy renewals that included “springing exclusions,” which would have voided terrorism coverage upon the expiration of TRIA,” DePoy said. “This year, we already have been told by members that carriers have advised them to again expect springing exclusions on the renewal of policies that extend past December 31, 2014. “We urge Congress to act as soon as possible to eliminate the possibility of gaps in coverage, which would produce severe financial disruption,” he said.
The recently released RAND study on the national security impacts of TRIA is the first of three studies being conducted by the corporation on the effects of the legislation. Forthcoming research will explore in detail the effect of TRIA on the economy and on the Workers’ Compensation insurance marketplace.
The Coalition to Insure Against Terrorism represents a wide range of businesses and other organizations throughout the real estate, manufacturing, utility, construction, transportation, entertainment and retail sectors. CIAT speaks for business insurance policyholders as part of an ongoing effort to ensure that terrorism coverage is both available and affordable.