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Terrorism risk insurance uptake faces market challenges

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Terrorism insurance

A U.S. Government Accountability Office study on the Terrorism Risk Insurance Act said that the act's current challenges could increase prices for policyholders and result in lower market penetration. 

The study, released Jan. 12, said insurers do not assume the risk of the federal share of potential losses and do consider the federal share of losses in how they manage their terrorism risk exposure and price coverage. Many insurers include a nominal charge for terrorism risk coverage, the report said, if they charge for it at all.

Most insurers manage their exposure by limiting the amount of coverage they provide in certain geographic areas, the report said. In some cases, the report said, federal losses must be recouped through premium surcharges on policyholders with TRIA-eligible insurance coverage after a certified terrorism event. Depending upon the size of the event and the aggregate premiums of affected insurers, the federal government may not be required to recoup all its losses, it said.

“Under the current structure,” the report said, “in some scenarios federal losses must be recouped through premium surcharges on policyholders with TRIA-eligible insurance coverage after a certified terrorism event.”

Under the Terrorism Risk Insurance Act of 2002, losses from certified acts of terror are shared between insurers and the government. TRIA does not include an upfront federal charge the government’s share of potential losses. The Terrorism Risk Insurance Program Reauthorization Act of 2015 includes a provision for GAO to review alternative funding approaches for TRIA.

The GAO study said that designing and implementing alternatives to TRIA’s current funding structure would require tradeoffs among various policy goals.

A federal terrorism risk insurance charge on insurers or policyholders, the study said, could help cover potential losses but determining a price based on risk would be difficult.

An insurer set-aside to explicitly address terrorism could help cover insurers’ potential losses, but the report said some approaches would be complex to put in place due to implications to current accounting practices and state laws. 

“TRIA’s current recoupment structure and some alternative approaches could increase prices for policyholders and have various effects on market participants and the federal government,” the study said. 

The study suggested that lengthening recoupment time frames, charging a broad group of policyholders or allowing flexibility in applying a set-aside could improvements to the current system.