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The Federal Role in Terrorism Insurance

The Federal Role in Terrorism Insurance: Evaluating Alternatives in an Uncertain World

Lloyd Dixon
Robert J. Lempert
Tom LaTourrette
Robert T. Reville
Copyright Date: 2007
Edition: 1
Published by: RAND Corporation
Pages: 148
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  • Book Info
    The Federal Role in Terrorism Insurance
    Book Description:

    What are the Terrorism Risk Insurance Act's effects on the market for terrorism insurance? What would be the effect of enhancing provisions for nuclear, biological, chemical, and radiological (NBCR) attacks? The authors conclude that the program yields positive outcomes in a number of dimensions for conventional attacks and identify specific reforms that can improve results for NBCR attacks.

    eISBN: 978-0-8330-4433-4
    Subjects: Law, Political Science

Table of Contents

  1. Front Matter
    (pp. i-ii)
  2. Preface
    (pp. iii-iv)
  3. Center for Terrorism Risk Management Policy Terrorism Insurance Project Advisory Board
    (pp. v-vi)
  4. Table of Contents
    (pp. vii-viii)
  5. Figures
    (pp. ix-x)
  6. Tables
    (pp. xi-xii)
  7. Summary
    (pp. xiii-xxii)
  8. Acknowledgments
    (pp. xxiii-xxiv)
  9. Glossary
    (pp. xxv-xxvi)
  10. CHAPTER ONE Introduction
    (pp. 1-4)

    The proper federal role in the provision of insurance against terrorist attacks is the subject of a wide-ranging debate. After the 9/11 attacks, most commercial insurers began excluding losses caused by terrorist attacks from their property-insurance policies, which previously had not identified terrorism as a separate peril. Concerned that this unavailability would impede economic recovery after the attacks and hinder growth, Congress responded with the Terrorism Risk Insurance Act of 2002 (TRIA). The act requires commercial property-casualty insurers to offer insurance for losses suffered in terrorist attacks, and, in return, taxpayers and holders of future commercial insurance policies will reimburse...

  11. CHAPTER TWO Analytic Methods
    (pp. 5-28)

    This chapter summarizes the approach used in this analysis. Our approach involves constructing simulation models to estimate the effects of different government interventions in the market for terrorism insurance and then using an RDM approach to examine the trade-offs among alternative options in terms of specific outcome measures.

    The simulation model projects how alternative government interventions in the terrorism-insurance system perform according to several outcome measures over a wide range of plausible futures. The outcome measures we use are related to the distribution of losses among various parties. The simulation projects the losses from a range of terrorist attacks, the...

  12. CHAPTER THREE Consequences of Allowing TRIA to Expire
    (pp. 29-48)

    In this chapter, we use the methodology described in the Chapter Two to examine the consequences of allowing TRIA to expire. We compare outcomes with and without TRIA in thousands of plausible future scenarios that capture uncertainties in the type and size of attack, take-up rates with and without TRIA, government compensation for the uninsured and unpaid insured loss, and the other variables listed in Table 2.3 in Chapter Two. We consider scenarios with conventional attacks separately from those with NBCR attacks.

    In the context of our model, losses caused by terrorist attacks must be borne by insurers, taxpayers, future...

  13. CHAPTER FOUR Consequences of Requiring Insurers to Offer Terrorism Coverage for Conventional and NBCR Attacks
    (pp. 49-68)

    As noted in Chapter Three, TRIA has done little to increase insurance coverage for commercial property losses due to NBCR attacks. In this chapter, we examine enhancements to TRIA that aim to address this shortcoming by requiring insurers to offer policies that cover terrorism losses due to both NBCR and conventional attacks. We consider the following four variants of such TRIA enhancements that differ in their deductibles and the hardnesses of their program caps:

    The TRIA cap remains unchanged and the deductible remains at 20 percent.

    The TRIA cap remains unchanged and the deductible falls to 7.5 percent.

    The TRIA...

  14. CHAPTER FIVE Conclusion
    (pp. 69-72)

    Terrorism is an ongoing threat to life, property, and economic prosperity in the United States, and terrorism insurance is an important component of the system of institutions that can help mitigate the impact of the terrorism threat on U.S. society. A well-functioning terrorism insurance market can reduce the impact of terrorism on economic activity prior to any attack as well as enhance economic resiliency after any attack. However, debate exists over the role the federal government should play to ensure the proper functioning of this market.

    This monograph contributes to this debate by comparing the performance of the current TRIA...

  15. APPENDIX A RMS’s Probabilistic Terrorism Model
    (pp. 73-80)
  16. APPENDIX B Policyholder Take-Up of Terrorism Insurance
    (pp. 81-98)
  17. APPENDIX C Loss-Distribution Model
    (pp. 99-106)
  18. APPENDIX D Identifying Key Factors Driving Trade-Offs Between Interventions
    (pp. 107-110)
  19. APPENDIX E Calculating Expected Losses with Multiple Probability Distributions
    (pp. 111-116)
  20. References
    (pp. 117-122)