GAO on the Availability of Terrorism Insurance

On Monday, September 15, the Government Accountability Office (GAO) released a study called "Terrorism Insurance: Status of Efforts by Policyholders to Obtain Coverage". (GAO-08-1057) As a member of the American Academy of Actuaries Terrorism Risk Insurance Subcommittee, I was involved in meetings in Washington DC as the GAO was pulling together expert opinions and background on the issues involved.

Background

The terrorist attacks of 9/11 are estimated to have caused insured losses of about 32.5 billion (as of 2006). Just after the attacks, the availability of coverage was severely impaired, causing problems in the real estate sector and other negative economic consequences.

To help mitigate these consequences, Congress enacted the Terrorism Risk Insurance Act of 2002, more commonly known as TRIA. Under TRIA, insured must offer terrorism insurance to their commercial policyholders on the same terms they offer for other coverages on the policy. In the event of a terrorist attack, the insurance industry is responsible for a deductible of 20% of their direct earned premium and 15% of losses after that. The US government would cover 85% up to a maximum of $100 billion annually. (NOTE: This seems very small compared to the financial services bailout being considered!)

The act has been reauthorized in 2005 and 2007, with changing amounts of deductible for the industry and changes in the lines of business covered. The current act doesn't expire until 2014.

The study here was to determine if specific markets in the US are having any trouble getting the amounts of coverage they wish to obtain. Specifically:

1. Availability of terrorism insurance in certain geographical areas
   
2. Factors limiting insurers' willingness to offer coverage
   
3. Advantages and disadvantages of some options for changes to TRIA or the funding mechanism.
   

The study looked at take up rates, data on insurance companies, and interviews with more than 100 experts on various parts of the insurance process.

GAO Conclusions

The GAO Concludes:

• That some high-value properties in major cities may face initial challenges in obtaining enough coverage, but eventually manage to by using several insurance companies in more complex insurance structures, buying separate terrorism coverage, or self-insuring
  
• The current "soft" market has helped the availability of terrorism insurance overall
  
• Many insurance company CEOs worry about their overall exposure (aggregation limits) in some geographical areas and seek to control their concentration there.
  

• There is a lack of consensus on what future TRIA options would be the most useful for improving the availability of terrorism insurance coverage.
  

Other interesting facts from the GAO report:

• The "take-up rate", or the percentage of commercial insurance policyholders opting to buy terrorism coverage has been between 60% and 65% since 2004.
  
• The cost has generally amounted to about 4% of annual premium for these customers. Note that coverage is not usually priced on a percentage basis, but as a loss cost that varies by territory. I'm assuming that the 4% refers to high risk areas since those were targeted in the scope of the study.
  
• The policyholders that don't purchase coverage do so because they don't feel at risk or their lender doesn't require it.
  
• Reinsurers and Rating Agencies may influence the purchase of terrorism insurance.
  
• Options for modifying TRIA include:
  
  • Lowering TRIA industry deductible following large terrorist attacks
    
  • Permitting tax-deductible reserves for terrorism losses
    
  • Forming insurance pools for sharing assets and losses
    
  • Catastrophe bonds
    
  • Limiting state regulation and requirements
    

What does it mean for you

The fact that the GAO didn't find any serious availability issues means that TRIA will remain in place, unchanged for some time to come, unless a big terrorist attack occurs. In that case, availability will "harden" in the short term while losses are assessed.

From a risk management and actuarial point of view, controlling concentration (or your aggregation limits) is key to sleeping easy at night, even if it makes potential insurers (or their brokers) work harder to find coverage. That effort makes the system work better because spreading the loss is an important function of insurance.

The industry's lack of consensus when it comes to alternative options really hurts the industry's credibility and their ability to influence the options eventually selected. I think a industry-wide conference with interested stakeholders in the terrorism insurance arena (A "constitutional convention" so to speak) would be a valuable first step to a more permanent terrorism insurance solution. In my mind, the government HAS to have a stake in the final arrangement, since the government's actions have a great influence on terrorism activity in the US.

Sources:

GAO-08-1057 at gao.gov

I would love to field comments about the study or the options for modifying TRIA.