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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
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Goals of TRIA
- Temp fed program of public and private sharing of terrorism losses to allow private market to stabilize
- Protect consumers by ensuring availability and affordability of terrorism insurance
- Preserve state regulation of insurance
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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)
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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.
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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
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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.
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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.
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Elements of an insurable risk & Insurability of Terrorism Risk and Flood risk
- A sufficiently large # of insureds to make losses reasonably predictable
- Losses are definite and measurable
- Losses are fortuitous or accidental
- Losses are not catastrophic (unlikely to affect a large # of insured at the same time)
- No. not mandatory coverage and expensive so dfficult to achieve large enough pool
- Likely not. no credible history of data to predict losses with accuracy; have to use models with expert views.
- No. deliberate act.
- Depends on geographic concentration (UW can make it not catastrophic)
- No. if not mandatory, likely only high risks purchase. Can have large pool if mandatory
- No. lack of historical industry data, not easy to quantify loss potential
- Yes. caused by random weather events, but can argue predictable if insured is in flood prone areas
- catastrophic if insurer has exposure concentrated in one area that is affected
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How can private replace TRIA
- CAT bond
- private reinsurance
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