Tag Archives: TRIA

The 2015 U.K. Budget and Terrorism Insurance

On 18 March, the Chancellor of the Exchequer, George Osborne, delivered his pre-election budget. Billions of further public spending cuts are needed. Several weeks earlier, Pool Re, the U.K. terrorism insurance pool, announced its first ever purchase of reinsurance in the commercial market.

These two announcements are not unconnected.

Pool Re was set up in 1993, after the IRA bombing of the Baltic Exchange in 1992. Since the pool was established, it has built up quite a substantial surplus; claims have been low thanks to the vigilance of the security and intelligence services. Almost all the major plots since the September 11, 2001 attack have been foiled.

Terrorism insurance is effectively insurance against counter-terrorism failure, and the huge sums spent on blanket indiscriminate surveillance have helped to minimize terrorism insurance losses. The low level of losses is not coincidental, or due to some unpredictable whim of terrorist behavior but readily explainable; too many terrorists spoil the plot. The type of plots capable of causing terrorism insurance losses of a billion pounds or more would involve a sizeable number of operatives.

As the NSA whistleblower Edward Snowden has revealed, the level of surveillance of electronic communications is so intensive that sizeable terrorist social networks end up being tracked by NSA and GCHQ. Lesser plots involving lone wolves or several operatives are most likely to be successful. A string of these have struck the western alliance over the past months in Ottawa, Sydney, Paris, and Copenhagen. Besides causing terror, these have attracted global media publicity, inspiring Jihadi recruitment. But terrorism insurance covers property loss, not the spread of fear or growth in the ranks of Islamic State.

Having developed a tough security environment, it is unsurprising that the U.K. Government should be questioning its continuing exposure to terrorism insurance risk. This is an age of austerity. Pool Re’s three year program provides £1.8bn of reinsurance cover, so diminishing this exposure. More cover might have been purchased, but this was the market limit, given that Chemical-Biological-Radiological-Nuclear (CBRN) risks were included.

The idea of separating out extreme CBRN terrorism risks was considered in Washington by the House Financial Services Committee in the discussions last year over the renewal of the Terrorism Risk Insurance Act. The objective was to provide a federal safety net for such extreme risks, whilst encouraging further private sector solutions for conventional terrorist attacks. This idea was considered at some length, but was a step too far for this TRIA renewal. It might be a step for Pool Re.

The modus operandi of the IRA was to avoid killing civilians. This would alienate their Catholic community support. Bomb warnings, genuine and hoax, were often given. Thus the metric of IRA attacks was typically physical destruction and economic loss. Islamist militants of all persuasions have no such qualms about killing civilians. Indeed, gruesome killings are celebrated. Terrorists follow the path of least resistance in their actions. For Islamic State, this is the path of brutal murder rather than property damage.

Terrorism Modeling 101

Acts of terror can result in wide ranges of potential damage and the financial repercussions can threaten an insurer’s solvency.

Terrorism risk can be modeled probabilistically with an increasing degree of confidence. Its damages at long return periods are comparable to natural disasters such as hurricanes and earthquakes.

The events of September 11, 2001 resulted in insurable damages in excess of $44 billion, causing insurers to explicitly exclude terrorism from standard property policies. This resulted in the downgrade of billions in mortgage securities, and the costly delay of many important development, construction, and infrastructure projects.

The Terrorism Risk Insurance Act (TRIA)

To address the terrorism insurance shortage, the Terrorism Risk Insurance Act (TRIA) was signed into law by President George W. Bush in 2002, creating a $100 billion federal backstop for insurance claims related to acts of terrorism.

Originally set to expire December 31, 2005, it was extended for two years in December 2005, and again in 2007. The current extension, entitled the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), will expire on December 31, 2014 and its renewal is up for debate in Congress.

Insuring Against Terrorism

Just as with natural catastrophe risk, insurers rely on catastrophe models to underwrite and price terrorism risk.

Terrorism threat is a function of intent, capabilities, and counter-terrorism action; counter-terrorism factors have an impact on frequency, multiplicity, attack type, and targeting of terrorist actions, as well mitigation of loss. It’s not just what the terrorists can do that controls the outcome; it’s what governments can do to counteract their efforts.

RMS was first-to-market with a probabilistic terrorism model and has been providing solutions to model and manage terrorism risk since 2002. The RMS Probabilistic Terrorism Model takes a quantitative view of risk, meaning it uses mathematical methods from game theory, operational research, and social network analysis to inform its view of frequency. Its development involved the input of an extensive team of highly qualified advisors, all of which are authorities in their field of assessing terrorism threats.

The Probabilistic Terrorism Model is made up of four components:

  • The potential targets (comprised of landmark properties in major cities) and associated attack mode combinations (both conventional and CBRN – chemical biological, radiological, and nuclear), knowing that not every target is susceptible to all types of attack modes.
  • The relative likelihood of an attack, taking into account the target and type of attack. For example, attacks using conventional bombs are easier to plan for and execute than anthrax releases; locations having high symbolic or economic importance are much more likely to be targeted.
  • The relative likelihood of multiple attacks making up a single event. For example, a hallmark of many terrorist operations is to attack two or more targets simultaneously. Attack multiplicity modeling is derived based on terrorist groups’ ability to coordinate multiple attacks for a particular weapon type.
  • Event frequency, which is empirically-driven and determined by modeling three input parameters: the number of attempted events in a year, the distribution of success rate of attempted events, and a suppression factor that is based on government response to an event.

The RMS terrorism model’s damage module has been validated against historical terrorism events. All known terrorist plots or attacks that have occurred since the model’s launch have been consistent with our underlying modeling principles. There are blue ocean opportunities for those willing to understand terrorism risk and underwrite it accordingly.

To read more, click here to download “Terrorism Insurance & Risk Management in 2015: Five Critical Questions.”

Dueling Agendas on TRIA

On Thursday, July 17, the Senate passed a reauthorization of TRIA, the Terrorism Risk and Insurance Act, extending the bill for seven years after its expiration at the end of 2014. The bill was passed with a 93-4 vote and made minor modifications to the expiring legislation. This is a promising sign for the insurance industry, which has been lobbying vigorously for a renewal since last year. But before the bill becomes law, there is certain to be opposition from influential members of Congress who favor more significant reductions to the federal government’s participation.

The Senate bill reduces TRIA’s coverage in two key ways: by increasing the industry co-pay from 15% to 20% over a five year period, and by pushing the Federal Government’s “mandatory recoupment” responsibility from $27.5 billion to $37.5 billion. By contrast, a competing bill proposed by Congress calls for even more substantial modifications, most notably raising the program trigger from $100 million to $500 million for all acts of terrorism except those arising from CBRN (chemical, biological, radiological, and nuclear) events.

How the two bills are reconciled will have significant implications for the insurance industry, as any reduction in federal participation will amount to additional risk assumed by insurance carriers. However, property insurers today are more willing to take on terrorism risk that they would have previously excluded, as evidenced by the dramatic drop in terrorism insurance prices over the past decade. A recent study by the Wharton Center for Risk Management downplayed the impact of TRIA changes, noting that while the changes could increase the price of coverage, “firms’ demand for terrorism insurance is not very sensitive to gradual price changes under current market conditions.”

Whatever the case, the ultimate outcome of the TRIA will have a measurable impact on the price and availability of terrorism insurance, primary carriers’ risk appetites in urban areas, and the securitization of terrorism risk, which my colleague Gordon Woo recently wrote about. The U.S. has made great strides in the capability of its counterterrorism operations over the past decade, but even with these gains, insurers and reinsurers must continue managing their pricing, underwriting, and capital deployment strategies to address the risk of future catastrophic acts of terror.

TRIA Renewal #3: No Cake Walk

The Terrorism Risk Insurance Act (TRIA), which provides assistance to pay claims in the USA in the event of a terrorist attack, expires at the end of 2014.

The debate over whether the Act should be extended a third time is likely to be acrimonious given partisan divides over financial legislation. If the renewal fails, the banking, construction, and insurance sectors will be impacted in a significant and troubling manner.

RMS: TRIA Program Highlights, August 2013

RMS: TRIA Program Highlights, August 2013

TRIA was first passed in 2002 and has since been extended and amended, twice. Each extension of the Act has led to tightened coverage by raising deductibles, increasing minimum losses, and reducing the pro-rata government share of losses (currently 85% of a $100 billion layer).

Sponsoring members from both parties have proposed the upcoming 2014 extension three times in Congress this year. This is a hopeful sign of bipartisan support. But the potential for strong opposition should not be underestimated.

Opponents of a TRIA renewal will be quick to label the legislation a “subsidy”. They will correctly point out that TRIA’s federal guarantee has been provided—and insurer money collected—for over ten years without incident. And opponents would be remiss to not mention the U.S. insurance industry surplus, which has grown to almost $600 billion as of this writing—compared to only $290 billion at the time of the September 11, 2001 attacks. From this, they will argue that the insurance industry is sufficiently capitalized to absorb the losses from a catastrophic terrorist incident without government assistance.

This argument against a further TRIA extension is likely to fall on the receptive ears of an electorate (and many freshman lawmakers) that has been galvanized by recent federal involvement in the financial and automotive sectors. In order to successfully counter this narrative, the parties’ case must be reframed to include a discussion of the public benefits of terrorism insurance, of which there are many.

To quantify TRIA’s benefit, it is instructive to look to late 2002, when Moody’s downgraded more than $4 billion of mortgage securities due to the shortage of terrorism coverage.

Additionally, when the bill approached its first expiration in 2005, many property insurers inserted sunset clauses into their contracts, enabling them to alter or revoke terrorism cover in the event of a TRIA non-renewal.

The demand for financial protection against terrorism is as undeniable as the insurance industry’s reluctance to provide it.

The impact of a TRIA non-renewal would be felt the most by cities perceived to be appealing terrorist targets. The RMS® Probabilistic Terrorism Model classifies the most terrorist-prone cities as New York, Washington DC, Chicago, San Francisco, and Los Angeles.

Without TRIA, these cities can expect a shortage of terrorism insurance capacity and corresponding rate increases at the very least. At most, construction and lending activity will be compromised; and the economic consequences (lost jobs, stalled projects, missed opportunities) would surely follow.

TRIA must be viewed in the context of the government’s broader role in the insurance industry. In additional to terrorism insurance, the federal government provides billions of dollars annually in subsidized coverage for lines of business including flood, crop, mortgage, pension, and health— sometimes as a direct primary insurer, other times as a reinsurer.

Occasionally, as in the case of TRIA’s recoupment provision, the federal government’s role is similar to that of a bank, whereby losses are indemnified and then recovered, with interest, through future policy surcharges.

  • Is terrorism fundamentally different from other perils in regard to how the federal government should approach it?
  • What is public benefit of terrorism coverage, and can it be quantified?
  • Can the demand for coverage ever be met by private means alone?

These are critical questions, and they must be addressed directly and publicly by stakeholders in order to justify TRIA’s renewal.

See also ‘TRIPRA – Perspectives on the upcoming expiration & proposed renewal‘ from the RMS Terrorism Risk Briefing in May 2013.