Tag Archives: Terrorism Risk Insurance Program Reauthorization Act

Re-evaluating TRIA

At this year’s RMS Terrorism Risk Summit, we focused attention on the U.S. landscape. The main issue these days in terrorism insurance discussions relates to the Terrorism Risk Insurance Protection and Reauthorization Act (TRIPRA), which will expire at the end of December 2020 if not reauthorized. This important legislation is also known by other acronyms including TRIA (Terrorism Risk Insurance Act) and TRIP (Terrorism Risk Insurance Program). In discussing the U.S. federal backstop for certified acts of terrorism, all these names are synonymous.

To help make sense of the speculation and various policy options, RMS was proud to host Scott Williamson, Vice President and Director of Financial Analytics at the Reinsurance Association of America (RAA). Mr. Williamson has developed legislative models to assist the RAA in its advocacy on issues such as TRIA.  

At the RMS event, Mr. Williamson provided an overview of the current TRIA structure and explored some alternative modifications to the program that were considered to make a legislative recommendation. This included an evaluation of multiple ‘what-if’ scenarios, using a range of attack modes and targets, and various assumptions regarding the compounded average growth rate of the U.S. economy. For this study, RMS partnered with RAA to estimate economic losses due to a range of scenario terrorism events for property and workers’ compensation lines of businesses, using its latest Terrorism Model and Economic Exposure Data.  

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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.”