Why the Terrorism Risk Insurance Act is Necessary

September 10, 2014 Insurance Topics 3
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Screen Shot 2014-09-10 at 12.44.33 PM 2Tommorow is the 13th anniversary of Sept. 11, 2001, so it is fitting take a look at why the Terrorism Risk Insurance Act of 2002 needs its third re-extension.

I cover this in “The TRIA Challenge,” which was recently published in the Casualty Actuarial Society’s Actuarial Review magazine as the September/October cover story and includes a sidebar on TRIA’s impact on workers’ compensation. The Terrorism Risk Insurance Act (TRIA) needs to be passed by December 31, 2104 to be extended.

I wrote my article in June — and what a difference the past few months have made in the nation’s concern regarding terrorist attacks by fundamentalist Islam groups.

As reported by The Hill, just yesterday, NBC News poll showed that 47 percent of Americans believe the U.S. is less safe than it was before September 11. That’s a huge difference from the 28 percent who felt that way last year and the two in 10 Americans who had those feelings a year after the 9/11 attacks.

Truly, the last couple months have been disturbing. Given the recent headlines about the terrorist group ISIS (called ISIL by President Obama) and Israel’s conflict with another terror group, Hamas, and evidence of terrorists using the nation’s permeable southern border for entry, it is a wonder that more Americans are not concerned. (Or are too many Americans just not paying attention?)

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For terrorism coverage, everything from U.S. foreign policy to a watchful security guard can affect the risk of terrorism attacks.
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If you are interested in an explanation of the Terrorism Risk Insurance Act (TRIA) or want to know the legislative progress, you will find that in my article. My piece also explores the challenge of pricing coverage with little relevant historical data (just like cyber coverage, which I cover in an upcoming article). The article includes sobering actuarial cost estimates for a truck or nuclear bomb in Manhattan.

While there are those who want to reduce the role of government in many areas, the federal government should have a backstop for costs from unthinkable terrorist attacks. Terrorism insurance is the only coverage of which I am aware where the private insurance industry is covering risk when mitigation is mostly left up to government intelligence agencies and law enforcement. That is different from workers’ compensation, where insurers can reward safer workplace practices with the experience modifier or cyber coverage policies that require certain safeguards before selling coverage to organizations.

For terrorism coverage, everything from U.S. foreign policy to a watchful security guard can affect the risk of terrorism attacks. If the insurance industry perceives greater risk, that means terrorism insurance prices can spike. Making terrorism courage available and affordable is the whole point behind TRIA. Meanwhile, legislative language has suggested an increase in insurer co-payments for TRIA, which the American Insurance Association opposes.

From an actuarial point of view, I like what Michael Angelina, the vice president of casualty for the American Academy of Actuaries, told me for the article. “If I feel the threat is more likely than prior belief, all else being equal, I am going to increase rates to account for this increase in frequency and additional uncertainty.”

Given that this week’s poll data shows that ordinary Americans feel less safe, it will be interesting to see how the actuarial community reaches its conclusions to develop future rates.

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