Webel - Terrorism

  1. Reasons for intro TRIA
    • To fill need unmet by private as they generally exclude terrorism
    • need it for mortagage -> unmet business need
    • delayed construction if no coverage -> slow down eco (social purpose)
    • Convenience: gov can set it up quickly and find ways to recoup losses
  2. Goals of TRIA
    1. Temp fed program of public and private sharing of terrorism losses to allow private market to stabilize
    2. Protect consumers by ensuring availability and affordability of terrorism insurance
    3. Preserve state regulation of insurance
  3. 2007 eval of TRIA against goals
    • Temporary fed program: No, market was not stable enough with low take‐up and not enough credible data
    • Protect customers: Yes, available for all commercial p.h. with affordable price with fed reinsurance support
    • State regulation: Yes, did not interfere with state power (except definition of terrorism act)
  4. How does loss sharing work between public and private
    • Small: no fed sharing
    • Medium: fed role is to spread loss over time and insurance industry, assist up front but recoup payments thru levy on insurance policies
    • Large: fed pays most of losses, but recoupment still possible.
  5. Criteria under the current TRIA program
    • Certified as Act of terrorism; only comm P&C; Losses > 5m in US
    • Industry losses > 100m for Fed to start sharing
    • Insurer pays ded (20% of direct EP)
    • Fed pays 85% of insurer’s net losses, until industry totals 100b, after which no coverage from fed or insurer
    • Fed recoup outlays thru surcharges:
      • If insured losses < 27.5b, recoup 133% of gov outlays
      • If > 27.5b, recoup reduced amount of outlays
  6. Consumer protection - 2nd goal of TRIA
    • Require insurers offering LOB covered by TRIA to make terrorism insurance available to their comm p.h.
    • Terrorism insurance offer must reveal both premium charged and possible fed share of compensation.
    • State regulators have authority to modify excessive, inadequate, or unfairly discriminatory rates.
  7. Exceptions to preservation of State Insurance Regulation - 3rd goal of TRIA
    • Fed defines Act of Terror
    • States not allowed to enact laws on rate and form approval for terrorism or on policy exclusions for acts of terror.
  8. Elements of an insurable risk & Insurability of Terrorism Risk and Flood risk
    1. A sufficiently large # of insureds to make losses reasonably predictable
    2. Losses are definite and measurable
    3. Losses are fortuitous or accidental
    4. Losses are not catastrophic (unlikely to affect a large # of insured at the same time)
    1. No. not mandatory coverage and expensive so dfficult to achieve large enough pool
    2. Likely not. no credible history of data to predict losses with accuracy; have to use models with expert views.
    3. No. deliberate act.
    4. Depends on geographic concentration (UW can make it not catastrophic)
    1. No. if not mandatory, likely only high risks purchase. Can have large pool if mandatory
    2. No. lack of historical industry data, not easy to quantify loss potential
    3. Yes. caused by random weather events, but can argue predictable if insured is in flood prone areas
    4. catastrophic if insurer has exposure concentrated in one area that is affected
  9. How can private replace TRIA
    • CAT bond
    • private reinsurance
Card Set
Webel - Terrorism
Webel 1 - Terrorism Risk Insurance: Issue Analysis and Overview of Current Program