November 15, 2019

Are Insurance Companies Prepared for Another 9/11?

The terrorist attacks on 9/11, in which terrorist hijacked and flew commercial airliners into the World Trade Center Towers and the Pentagon, demonstrated how such events are unpredictable, highly destructive and possibly uninsurable.

These attacks still count as the deadliest and most costly terrorist incidents in U.S. history, with insurance losses totaling approximately $47 billion, according to the Insurance Information Institute (III). Even though U.S. and international insurers were able to pay virtually all claims from the attacks, it was clear that insurance company reserves would not realistically be able to respond to similar losses in the future.

Terrorism Risk Insurance Act Set to Expire

In response to these concerns, the U.S. Congress enacted the Terrorism Risk Insurance Act of 2002 (TRIA), creating a federal backstop for catastrophic terrorism losses that is designed to keep terrorism risk insurance available and affordable. Renewed in 2005, 2007 and again in 2015, the act is set to expire on December 31, 2020.

With its expiration only a year away, how well prepared are U.S. commercial insurers for the possibility of another terrorist attack? And how would TRIA assist insurers if renewed?

According to estimates made by the Reinsurance Association of America (RAA) for the III, the government’s net payout under TRIA would be less than zero, as it would recover more from mandatory surcharges to insurance policies than it would reimburse insurers for a portion of their losses.

Meanwhile, the net payout by insurance companies would be nearly $20 billion. Repeating the exercise in the future, the insurer contribution would steadily grow, assuming the law was renewed with the same terms under which it is set to expire at the end of next year. The share borne by policyholders through the surcharge increases more dramatically.

A 9/11 Event in 2030 Would Cost the Government Nothing

III estimates that adjusted for inflation, 9/11 this year would generate insurance losses of $45.7 billion. According to the RAA model, the government would contribute $6.6 billion. It would front another $19.3 billion but recover $27.0 billion from a mandatory surcharge that would be placed on the insurance purchased in all lines of business that the program covers. Netting all that out means the government would pay less than zero. Insurers would be responsible for $19.7 billion, or 43 percent of the total insured loss.

By 2030 9/11 would be a $58 billion event. The government would contribute nothing. It would front $29.6 billion but recover $41.5 billion from policyholders due to the recoupment and surcharge. Insurers would be responsible for $28.4 billion, or 49 percent of the total insured loss.

Though 9/11 is used to illustrate the numbers, the RAA model can be adjusted to show how TRIA would handle other types of catastrophic events, such as 25-ton truck bombs, chemical or biological events, industrial sabotage and port bombs. It also can tailor results to individual cities; car bombs in New York and Baltimore, for example, will generate different levels of loss.

Proposed Changes to TRIA

The main drivers of the changes to TRIA when it’s renewed would be:

  • Beginning in 2020, the law makes the size of the industry marketplace retention a function of insurers’ aggregate premiums, so the marketplace retention grows as the industry’s premium does.
  • Also, in 2020 the government’s co-payment shrinks to 80 cents per dollar insurers pay above their deductible, down from 81 cents in 2019.
  • The amount of losses subject to policyholder surcharges grows to $29.6 billion from $19.3 billion, shrinking the federal support.

The work “is a reminder under the current statute, policyholder and company retentions go up over time,” said RAA President Frank Nutter. “In 2020 this becomes effective in a way that changes retentions of the private sector. It also shows a vanishing federal share.”

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