The 9/11 attacks changed the landscape of terrorism loss compensation. Those attacks resulted in at least $20 billion in insured losses (Dixon and Kaganoff-Stern, 2005) and may eventually reach $32 billion in insured losses (Hartwig, 2004). As a result of the substantial losses incurred, insurers questioned their ability to pay claims in future attacks and began to exclude terrorism coverage from commercial insurance policies (U.S. General Accounting Office, 2002; Hubbard and Deal, 2004). In turn, private-sector decisionmakers involved in large real estate developments, building large buildings, and choosing where to locate business operations began to have second thoughts about the...

TRIA requires primary insurers to make terrorism coverage available to commercial policyholders. In return for making coverage available, TRIA limits the amount that insurers are responsible for paying by means of a risk-sharing formula. In this formula, a primary insurer is responsible for payouts up to an annual deductible and for a copayment of 10 percent of all losses above the deductible. Insured losses beyond the deductible and co-payment are paid by a surcharge on all commercial insurance policyholders and by taxpayers.

The requirement to offer coverage and the risk-sharing scheme in TRIA apply to commercial property and casualty policies...

To provide an accurate basis on which to examine the effects of TRIA, we examined in detail the losses that would be expected in three types of large terrorist attacks: an aircraft impact into a tall building, an anthrax release inside a major building, and an outdoor anthrax release in a major urban area. This chapter summarizes the modeling methodology and results. The methodology and results are discussed in detail in Appendix A.

The treatment of terrorist attack losses under TRIA depends on the insurance line under which a given loss is covered. The objective of the modeling, therefore, was...

We estimated how terrorism losses would be distributed among various parties under TRIA. Our analysis is based on the losses and allocation of losses by insurance line estimated for the attack scenarios described in Chapter Three. Calculating how losses would be distributed under TRIA requires estimating the fraction of the total loss that is insured and the fraction of insured loss that is eligible for TRIA. TRIA-covered losses are then apportioned to various parties according to the loss-sharing scheme defined in TRIA.

The uninsured loss from a terrorist attack is simply the difference between the total loss and the insured...

Some observers might object to one or another aspect of the distributions accomplished by TRIA, believing that some group could be allocated an inappropriate share under certain circumstances, such as particular modes or sizes of terrorist attacks. Others might believe that the distributions accomplished by the current TRIA might fail to achieve TRIA’s objective of maintaining a viable terrorism insurance market. In either case, TRIA would have to be modified to change the loss distribution. Accordingly, to achieve a desired change in the ways in which terrorist attack losses will be distributed among these groups, TRIA would have to be...

The primary objective of TRIA is to maintain a viable terrorism insurance market. It attempts to do this by spreading risk of terrorism loss among several different parties to reduce the risk to any one. Through the combination of making some terrorism insurance coverage available and providing for risk spreading, TRIA influences the distribution of losses resulting from terrorist attacks among five groups: the uninsured, target insurers in lines not covered by TRIA (primarily life and health), target insurers in lines covered by TRIA, all commercial policyholders, and taxpayers. Five provisions of TRIA—insurance availability and take-up, TRIA eligibility, deductibles...