Insuring against Terrorism: America’s Post-9/11 Recovery

In a nation founded on a system of checks and balances – House against Senate, Supreme Court versus the Presidency – gridlock can be a fact of life, especially in peacetime. But in a time of real trouble from terrorism, gridlock in the federal government was temporarily broken by a growing sense of urgency in business and insurance spheres. With the 9/11 attacks on the World Trade Center and Pentagon, staggering levels of risk were introduced to the marketplace, prompting Congress to lay aside partisan differences and cooperate to draft critical federal laws for terrorism risk management.

The first, called the Terrorism Risk Insurance Act (TRIA), was passed in 2002, establishing a temporary backstop for public and private sharing of insured losses from any future acts of terrorism in the United States. Up to that point, terrorism coverage was underwritten inconsistently; no standard policy language expressly addressing terrorism was readily available before September 2001, and few tools could scale the risk by exposure or geography. Congress passed additional extensions, with modifications, to this legislation at the end of 2005 and 2007.

But by the close of 2014, Congress adjourned without taking action on an extension of TRIA. Without this federal backstop, commercial insurers would no longer be required under that law to make terrorism coverage available. Resulting market uncertainty at the start of 2015 introduced potential problems in addressing the risk of terrorism, especially with respect to high concentrations of insured risk in major cities. Concerns emerged that terrorism coverage might become unavailable or unaffordable. As 2014 came to an end, many insurance carriers worked closely with their brokers to ensure adequate terrorism coverage was in place, given TRIA’s uncertain future. Fortunately, Congress found a solution early in 2015 and reauthorized TRIA through Dec. 31, 2020.

Retreat from Terrorism Risk

The story of TRIA remains a valuable lesson for both the insurance industry and nation at large. Following 9/11, some providers of both property/casualty insurance declined coverage, many reinsurers left the terrorism coverage market, and most of those that stayed provided limited coverage – resulting in skyrocketing premiums pushed by rating agency concerns about insufficient capitalization of terrorism risk.

It became clear the federal government had to find an insurance safeguard to pacify the market.

In 2005, following the initial enactment of TRIA three years earlier, Congress renewed TRIA as the Terrorism Risk Insurance Extension Act (TRIEA). Lawmakers visited the issue again in 2007 with another acronym, TRIPRA, the Terrorism Risk Insurance Program Reauthorization Act. That law provided substantial peace of mind to insurers and maintained momentum in the recovery for developers, investors, and brokers involved in commercial real estate.

Even so, financial politics stalled the program as Congress failed to pass an extension in late 2014. What then? In the absence of TRIA, the workers’ compensation insurance market would be particularly vulnerable to losses from terror attacks. A number of state statutes on workers’ compensation tend to limit insurers’ flexibility to control terrorism risk through modifications such as policy limits or coverage exclusions; this is not the case for many other regulated commercial lines of business.

With or without TRIA, many states generally require employers to provide workers’ compensation coverage. If workers’ compensation coverage isn’t readily available, employers could be forced to purchase insurance in residual markets or to self-insure.

What about potential effects on property transactions within the commercial real estate industry? If development projects required better funding securitization, construction and operational costs might increase. Investors might be more wary of portfolios with locations in high-density locales. In short order, businesses might then be reluctant to move into those locales and choose instead to spread their employees between distinct locations. Speculation also swirled about high-profile public events and tourist centers such as Disney World and Las Vegas.

Under those troubling conditions, TRIA was set to expire at the close of 2014. Despite strong bipartisan support in both chambers of Congress – and with overwhelming support from the insurance industry and other market sectors – Congress failed to reach an agreement before adjourning at year-end.

Vulnerable Again?

For the first time since early 2002, the nation awoke on New Year’s Day 2015 with a feeling of vulnerability about financial exposures to potential terrorist attacks. Fortunately, the absence of Congressional action would only be temporary. Both the House and Senate moved to reauthorize coverage, and President Obama signed TRIPRA of 2015 into law in January.

The new act extends the Terrorism Insurance Program, including a number of provisions, as amended, outlined in TRIA as of December 2014, for an additional six years. Washington’s latest iteration of TRIA appears designed to start the process of more fully transitioning terrorism risk back to the private market, as evidenced through gradual increases in the program trigger, private market retention, and reduced federal loss share percentage over the life of TRIPRA 2015.

During the period of uncertainty in 2014, one large A-rated reinsurer launched a product for private market terrorism coverage. That reinsurer’s offering generally provided policy limits of up to $100 million and contained a terrorism definition that included political, religious, and ideological acts as well as sabotage and business interruption. Even with TRIPRA’s renewal, this reinsurer reportedly plans to continue to market its product to address a perceived gap with respect to mid-market and smaller insurers.

Some in the insurance industry have taken notice of an A-rated veteran’s exploration of the private market terrorism space, and additional players to the field are possible in the future.

The related reinsurer’s launch took off during a period in which the insurance industry has recorded increases in policyholder surplus in every quarter since the third quarter of 2012. The current surplus is estimated at more than $675 billion, according to the Insurance Information Institute, up from $290 billion in 2002.

Those figures may raise a question about the industry’s capacity to assume more risk on the private side.

Models for Measuring Risks

Even so, some reinsurers have been hesitant to jump into the arena, given the difficulty of modeling terrorism risk. To better understand parameters of frequency and uncertainty, a number of reinsurers depend on expertise from private developers of terrorism models. The probabilistic and deterministic results derived from terrorism modeling are now being reviewed by asset managers and investors in commercial real estate and can yield insights through risk scoring, resilience, and benchmarking metrics.

Risk managers and investors need to start strategizing for a market that may gradually move to the private provider side, with greater fluctuations in prices and product structure. The worst and most devastating effects from 9/11 may have passed, but the specter of terrorism will continue to move markets.