Event Recap: TRIA After 2014
July 24, 2014
Following the terrorist attacks of September 11, 2001, many insurance companies decided to no longer offer terrorism insurance because of the difficulty of accurately pricing terrorism risk. President George W. Bush then signed into law the Terrorism Risk Insurance Act (TRIA) which provided a temporary federal backstop for insurance claims resulting from a terrorist attack. The bill has since been renewed in both 2005 and 2007, but is set to expire again on December 31, 2014. The Senate and the House are currently considering two different bills (S. 2244 and H.R. 4871, respectively).
Howard Kunreuther first discussed insurers’ exposure to terrorism. By analyzing an insurer’s deductible under TRIA and comparing that to the insurer’s surplus, he concluded that if the insurer’s deductible increased beyond the current 20% of direct earned premiums, small companies may lack the capital to financially survive a severe terrorist attack. He also concluded that increasing the trigger from the current $100 million to the House proposed $500 million will likely not affect large insurance companies, but could hurt small insurers if the attack occurs in a concentrated area.
Erwann Michel-Kerjan then discussed the costs of several plausible terrorist attacks and analyzed how current and proposed legislation would cover the losses. The report concludes that, “American taxpayers will not be responsible for any payments after mandatory recoupment by the federal government until total losses from a terrorist attack exceed $40 billion under TRIA today, $59 billion under the proposed Senate bill, and would vary from $52 to $74 billion under the House bill (depending if market retention is $32 or $44 billion).”
The full report “TRIA After 2014: Examining Risk Sharing Under Current and Alternative Designs” is available for free download at the Wharton Risk Management and Decision Processes Center.
Howard Kunreuther, Co-Director, Risk Management and Decision Processes Center and James. G. Dinan Professor of Operations and Information Management, University of Pennsylvania
Erwann Michel-Kerjan, Managing Director, Risk Management and Decision Processes Center and Associate Professor of Operations and Information Management, University of Pennsylvania