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Federal Reinsurance for Terrorism Risk: An Update 1 (January 2015)

handle is hein.congrec/cbo2021 and id is 1 raw text is: JANUARY 2015 Federal Reinsurance for Terrorism Risk: An Update The federal program that provides insurance against the risk of terrorism expired at the end of 2014. Without such a program, taxpayers will face less financial risk, but some businesses will lose or drop their terrorism coverage and economic activity might slow if a large terrorist attack occurs. Last year, the Congress considered legisla- tion to reauthorize the program but shift more risk to the private sector. Other options include limiting federal coverage to attacks using nonconventional weapons, and charging risk-based prices for federal coverage. The Congressional Budget Office (CBO) has examined the likely effects of different approaches on the private sector and on the federal government. The September 11, 2001, terrorist attacks resulted in nearly 3,000 deaths and roughly $44 billion of insured losses (in 2014 dollars). In light of the unexpected and unprecedented losses from the attacks, as well as the heightened uncertainty surrounding future losses, private insurers subsequently reduced the availability of terrorism coverage for businesses and commercial properties sharply. Policymakers were concerned that without ter- rorism insurance, commercial developers in high-risk areas would not be able to finance their projects, which would reduce new construction and job creation and thereby slow economic growth. In response, lawmakers enacted the Terrorism Risk Insur- ance Act (TRIA) in 2002 as a temporary measure to pro- vide catastrophic federal reinsurance for terrorism risks without charging premiums up front. Although no major terrorist attacks have occurred in the United States since 9/11, and thus the government has paid no claims, the threat of terrorist attacks persists, and lawmakers 1. This report updates Congressional Budget Office, Federal Reinsurance for Terrorism Risks: Issues in Reauthorization (August 2007), www.cbo.gov/publication/19035. reauthorized TRIA in 2005 and in 2007. The program ensured that primary insurers continued to offer terror- ism coverage on business and commercial policies (including workers' compensation insurance), and it might have reduced the need for federal disaster assis- tance if an attack had occurred. But, as structured, the program exposed the government to a significant amount of financial risk and subsidized policyholders (many of which were large businesses). How Did the Federal Terrorism Risk Insurance Program Work? TRIA required all property and casualty insurers to offer terrorism coverage to their commercial policyholders. (Property and casualty insurance covers businesses against losses from property damage, workers' compensation claims, business interruption, and most liability claims.) The federal government provided reinsurance to private insurers by agreeing to reimburse them for a portion of their terrorism-related losses of up to $100 billion on commercial policies after an attack. Losses above that amount would be uninsured. Under TRIA, all types of losses from events certified as major terrorist attacks by the Secretary of the Treasury were covered unless such losses were excluded by the underlying property and casualty policies.2Nuclear, biological, chemical, and radiological (NBCR) risks are typically excluded from property and casualty policies because they are difficult to estimate and potentially 2. The Secretary could certify only events that caused at least $5 million in insured property and casualty losses. The April 2013 bombings at the Boston Marathon, which killed 3 people and injured 250 people, did not satisfy that criterion. Moreover, the federal government would not make any payments for attacks that caused insured losses of less than $100 million.

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