RAND Study Supports TRIA Renewal

A new report from the RAND Corporation indicates that the Terrorism Risk Insurance Act (TRIA), which will expire in December unless extended by Congress, “creates an effective mechanism for sharing the financial risk that businesses face from terrorism.”

The report by the RAND Center for Terrorism Risk Management Policy also suggests that the federal government consider encouraging uninsured businesses to buy terrorism insurance coverage. Somewhat less than half of all businesses now do so.

In addition, the study says that terrorism insurance provided under TRIA “would not require federal subsidies unless there is a very large terrorist attack on the scale of the Sept. 11, 2001 terrorist strike on the World Trade Center, or a series of large terrorist attacks within a year. This is because federal subsidies to insurance companies are only triggered if TRIA-covered insured losses exceed $15 billion. “

The report also concludes: “In considering whether to extend or modifying TRIA, Congress should give concerns over the uninsured a higher priority than concerns about possible federal payments to insurance companies. This is because uninsured losses would be common in terrorist scenarios, while taxpayer funds would probably not be needed to support the terrorism insurance system.
“The study estimates the pattern of payments for insured losses that might be triggered under TRIA in the event of three kinds of terrorist attacks: a hijacked aircraft hitting a major office building; anthrax being released inside a major office building; and an outdoor anthrax release in an urban area.

“Under each of the scenarios RAND examined, TRIA-covered financial losses would not be large enough to trigger federal subsidies to insurers. Since less than half of businesses currently buy terrorism insurance policies, losses to businesses without the coverage don’t cost insurance companies anything.”

The researchers at RAND who conducted the study also indicated that during the debate about extending TRIA, lawmakers should consider decreasing “the cost of terrorism risk insurance to buyers by adjusting the cost-sharing formula for insurance providers and policyholders.

“Another change to consider would be to require that all businesses purchase terrorism insurance coverage as a part of commercial insurance policies, the report says. However, such a requirement would be controversial and difficult to implement. But if enacted, mandatory coverage would enable more businesses to be protected and would enable insurance companies to collect premiums from more companies and to spread their exposure to risk.”

“The nation’s terrorism insurance system would not rely on payments from taxpayers under the terrorist scenarios we studied,” stated Stephen Carroll, a RAND senior economist and lead author of the study. “There are questions whether the system should be changed to expand coverage.”

After reviewing TRIA’s history and the types of coverage it provides, the report said: “Even with the other types of insurance making payouts, researchers estimate the proportion of losses not covered by insurance would range from 13 percent in the indoor anthrax attack to 57 percent in the outdoor anthrax attack in the scenarios they studied.”

Copies of “Distribution of Losses From Large Terrorist Attacks Under the Terrorism Risk Insurance Act” (ISBN: 0-8330-3865-6) can be ordered from RAND’s Distribution Services at: order@rand.org or call toll-free in the U.S. 1-877-584-8642).