Webel.TRIA-1

TRIA (Terrorism Risk Insurance Act), signed in 2002, was an act of U.S. congress to ensure the continued availability of commercial terrorism insurance in the U.S. It is a cooperative public/private scheme. It was reauthorized in 2007 and again in 2015. (There is no such scheme in Canada and terrorism coverage by private insurers is limited.)

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Pop Quiz

List 5 reasons for governmental participation in insurance from the reading Germani.GovtIns. (These reasons are relevant for terrorism.) [Hint: FCC(ES)]

Answer

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• goals of TRIA
• insurability of terrorism - evaluate using C-MAC
• evaluate goals of TRIA - have they been met
• pros/cons of TRIA
• certification of terrorism
• TRIA versus private insurance

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #7)	Cook.Personal	market stability: - how TRIA promotes	loss-sharing: - how TRIA works
E (2018.Fall #8)	roles in TRIA: - fed / state / private ins.	goals: - of TRIA	evaluate goals: - have they been met
E (2017.Spring #10)	goals: - of TRIA	insurability of terrorism: - evaluate	reducing tax burden: - changes to TRIA
E (2016.Fall #6)	insurability of terrorism: - evaluate	goals: - of TRIA	evaluate goals: - have they been met
E (2016.Spring #7)	insurability of terrorism: - evaluate	goals: - of TRIA	pros/cons: - of TRIA
E (2015.Fall #10)	goals: - of TRIA	TRIA exclusion: - homeowner's insurance	TRIA exclusion: - reinsurance
E (2015.Spring #7)	private insurance: - crop / UI / TRIA 1	see Germani.GovtIns	pros/cons: - of TRIA
E (2014.Fall #8)	calculate: - reimbursement 2	certification: - of terrorism	insurability of terrorism: - evaluate
E (2014.Spring #12)	roles in TRIA: - fed / state / private ins.	govt involvement: - in TRIA 1	evaluate goals: - have they been met

¹ Cross-reference with Germani.GovtIns.

² The reimbursement calculation uses the old coinsurance percentage of 15%. This has been changed to 20% as of 2020. The adjusted answer is that the federal government now pays 136m (instead of 144.5m) and the company pays 34m (instead of 55.5m.)   ← shout-out to SK!

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In Plain English!

Intro

TRIA was a response to the Sept 11, 2001 (9/11) terrorist attack on the World Trade Center in New York City. Prior to that, insurers did not exclude or charge separately for terrorism coverage. But after this catastrophic event, insurers and reinsurers withdrew coverage. This was due to lack of credible data for pricing & reserving, and the risk of catastrophic losses.

Specific motivation for the introduction of terrorism insurance in the U.S. includes:

• Fill Unmet Need: private insurers withdrew coverage after 9/11
• Convenience: government can set up a program quickly and can work with the Treasury Department regarding compensation
• Social Purpose: lessen economic disruption from lack of terrorism insurance availability (new construction projects couldn't get required insurance)

Specific goals of the legislation were:

1. STABILIZE private market by providing temporary public/private terrorism insurance
2. PROTECT consumers by ensuring AA (Availability & Affordability)
3. PRESERVE state regulation of insurance

To me, motivation and goals sound almost like the same thing. I suppose you could say that motivations are more general - what are the new realities that must be addressed? The subsequent legislation then incorporated more specific items. (The BattleCards describe the ways these goals are accomplished.)

A concise way of describing TRIA is:

TRIA is a federal reinsurance mechanism designed to ensure AA (Availability & Affordability) of coverage to commercial customers.

Let's finish this section with a brief overview of how the TRIA legislation was written to ensure its goals were reached:

1. to stabilize the market:
      - TRIA created a government-backed loss-sharing mechanism
2. to protect consumers:
      - TRIA requires insurers to offer commercial coverage & to provide transparency
      - but insureds are not required to purchase
      - government acts as reinsurer
3. to preserve state regulation of insurance
      - this is explicitly written into TRIA
      - but with certain exceptions like: the state cannot enact its own definition of terrorism (otherwise they would create a lax definition to generate reimbursement)

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Is Terrorism Insurable?

Terrorism is a low-frequency, high-severity risk. That means there is a lack of credible data, so how can we price it accurately? One way of addressing this lack of credible data is to use models, as is often done with hurricanes. Anyway, the reading addresses this issue of insurability and identifies 4 elements of an insurable risk: C-MAC

C (Credibility) need a large number of customers

M (Measurable) losses must be definite & measurable

A (Accidental) losses must be accidental

C (not Catastrophic) losses must not be catastrophic

The next question, of course, is whether terrorism satisfies these conditions. The answer is NO! Let's go through each point:

C → FAIL: applies only to commercial insurance and coverage is not mandatory --> penetration too low for predictability & spreading of losses

M → FAIL: low frequency, high severity --> hard to measure risk

A → FAIL: losses are deliberate, although not by insured

C → DEPENDS: on insurer's concentration of terrorism risk

Wait, now I'm majorly confused - if terrorism is uninsurable, then how can TRIA possibly work?

• This is the discussed in the next section.
• The answer is that terrorism insurance can't be handled exclusively by the private market.
• The federal government acts as a reinsurer, and coverage is subsidized through general taxation.

(Basically, TRIA is backstopped by the taxing authority of the federal government.)

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How TRIA Works

This section consists of simple facts that you just have to memorize. The explanation on page 6 of the source reading is pretty good. Alice decided to put most of these facts in the BattleCards and not clutter up the wiki, but there are a few points that deserve mention:

• We know that TRIA is a federal reinsurance program designed to ensure AA (Affordability & Availability) of coverage to commercial customers.

But so far, we haven't discussed any of the details. Well, the first details is:

The loss-sharing between the federal government & private insurance depends on the size of loss

• small losses: covered by private insurance
• medium losses: federal government makes loans to private insurance (but spreads the repayment across time & industry with future premium surcharges)
• large losses: federal government covers most of the loss

Example: Suppose that in 2020, a certified terrorism event caused 80 billion of industry losses. An insurance company experienced 250 million of losses. How much of this is paid by the federal government and how much is paid by the insurance company according to the 2015 reauthorization of TRIA.

line of business	direct EP (2020)
auto	30 million
commercial property	100 million
WC	80 million

federal government reimbursement = (loss - deductible) x (1 - coinsurance%)

loss = 250 million

deductible = 20% X (direct EP) = 20% x (180 million) = 36 million (recall that TRIA includes only commerical insurance, so auto is excluded)

coinsurance = 20% (In 2015 this was 15%, but is set to increase 1%-pt per-year until it reaches 20% in 2020.) ← shout-out to G.A.!

federal government reimbursement = (250 - 36) x 80% = 171.2 million

Note the differences between the 2007 & 2015 versions of TRIA:

• aggregate industry losses must be 200m for reimbursement to start (up through 2015, it was 100m, then set to increase 20m per-year until 2020)
• as of 2020 the coinsurance will be 20% (up through 2015, it was 15%, then set to increase by 1%-pt per-year until 2020)
• aggregate retention is 37.5b (up through 2015, it was 29.5b, then set to increase by 2b per-year until 2020)

Take a look at this problem: (but note that the formulas are outdated because it's from 2014 and uses the 2007 version of TRIA.)

E (2014.Fall #8)

Before I sentence you to more BattleCard torture, Alice wants me to draw your attention to the fact that reimbursement depends on the event being certified. Ok, now WTF does that mean? Well, 4 things have to be true: 5-DUC

• aggregate insurer losses > 5 million
• Danger to life, property, infrastructure
• occurred in U.S. or on U.S. vessels
• purpose was to Coerce U.S population or government policies

I know this getting tedious, but you should probably also know WHO does the actual certification. It is done jointly by:

1. Secretary of the Treasury

2. removed by 114th congress: Secretary of State

added by 114th congress: Secretary of Homeland Security   (shout-out to PA!)

3. Attorney General.

(OMG, I'm dying of boredom...clunk...head hits table...Alice applies first aid.)

Note that certifying a terrorism event is different from the triggers to receive federal payments under TRIA.

triggers:

• act must be certified as a terrorism
• must have > 200m of aggregate insurer losses for federal-private loss-sharing to begin
• must meet deductible of 20% x (prior year direct EP) for loss-sharing to begin

- (note that the deductible was always 20%, but the coinsurance increased from 15% to 20% in the 2015 version of TRIA)

Ok, here's the quiz...

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POP QUIZ ANSWERS

5 reasons for governmental participation in insurance: FCC(ES)

for FILLING NEEDS unmet by private insurance (Ex: terrorism)

- may occur when private insurance is not economically viable (after 9/11 terrorist attack in NYC, private market withdrew coverage)

when insurance is COMPULSORY (Ex: BC auto - see the wiki article ICBC.Affordable)

- if insurance is compulsory but not offered by the private market (for whatever reason) then government must be the provider

for CONVENIENCE (Ex: flood)

- government may already have necessary structures in place (government already provides disaster relief after floods)

for EFFICIENCY (Ex: auto)

- agent commissions eliminated → lower expense ratio → lower premiums for consumer

for SOCIAL purposes (Ex: medical coverage)

- private market is motivated by profit, sometimes at the expense of social purposes like universal medical coverage

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