Claims News Service, Oct. 31, 2:30 p.m. EST — A RAND Corporation report issued recently says the Terrorism Risk Insurance Act (TRIA), which will expire in December unless extended by Congress, creates an effective mechanism for sharing the financial risk that businesses face from terrorism.
The report also suggests that the federal government consider encouraging uninsured businesses to buy terrorism insurance coverage, because somewhat less than half of all businesses now do so.
In addition, the study says that terrorism insurance provided under TRIA would not require federal subsidies unless there is a very large terrorist attack on the scale of the Sept. 11, 2001 terrorist strike on the World Trade Center, or a series of large terrorist attacks within a year. This is because federal subsidies to insurance companies are only triggered if TRIA-covered insured losses exceed $15 billion.
The report says that, in considering whether to extend or modifying TRIA, Congress should give concerns over the uninsured a higher priority than concerns about possible federal payments to insurance companies. This is because uninsured losses would be common in terrorist scenarios, while taxpayer funds would probably not be needed to support the terrorism insurance system.
The study estimates the pattern of payments for insured losses that might be triggered under TRIA in the event of three kinds of terrorist attacks: a hijacked aircraft hitting a major office building; anthrax being released inside a major office building; and an outdoor anthrax release in an urban area.
Under each of the scenarios RAND examined, TRIA-covered financial losses would not be large enough to trigger federal subsidies to insurers. Since less than half of businesses currently buy terrorism insurance policies, losses to businesses without the coverage don't cost insurance companies anything.
RAND researchers say one change lawmakers might consider as they debate whether to extend TRIA would be to decrease the cost of terrorism risk insurance to buyers by adjusting the cost-sharing formula for insurance providers and policyholders.
Another change to consider would be to require that all businesses purchase terrorism insurance coverage as a part of commercial insurance policies, the report says. However, such a requirement would be controversial and difficult to implement. But if enacted, mandatory coverage would enable more businesses to be protected and would enable insurance companies to collect premiums from more companies and to spread their exposure to risk.
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