.GAO Report on Terrorism Insurance

On June 12, 2014, the GAO publically released a report that was submitted to Congress in May entitled “Terrorism Insurance: Treasury Needs to Collect and Analyze Data to Better Understand Fiscal Exposure and Clarify Guidance.” The report was prepared at the behest of Rep. Ed Royce (R-CA) and Rep. Randy Neugebauer (R-TX). The report:

  • Evaluates the extent of available data and the U.S. Department of the Treasury’s (Treasury) efforts in determining the federal government’s exposure under the Terrorism Risk Insurance Act (TRIA);
  • Describes changes in the terrorism insurance market since 2002; and
  • Evaluates the potential impact of selected changes to TRIA.

Under TRIA, the Treasury is required to compile information annually on terrorism risk insurance premium rates. The GAO found that the Treasury has not collected or sought this information. According to the GAO, the Treasury currently collects some information from certain large insurance brokers and A.M. Best, but it does not collect comprehensive data on the terrorism risk insurance market as a whole. Without this data, according to the report, the Treasury cannot provide Congress with information regarding:

  • How many insurers offer terrorism insurance;
  • The overall capacity in the terrorism insurance market; and
  • Whether differences exist between the pricing and take-up rate of terrorism coverage in companies of different sizes, between industries or in different regions.

The GAO noted that under TRIA the Treasury may issue “regulations and procedures to effectively administer and implement [the Terrorism Risk Insurance Program],” but questioned whether this authority would permit the Treasury to collect comprehensive market data directly from insurers. Without this data, the GAO found that the Treasury does not have sufficient information to assess “availability and affordability of terrorism risk insurance.” The Treasury also has not fully analyzed the federal government’s “fiscal exposure under different scenarios of potential terrorist attacks.”

The GAO evaluated the impact of not renewing TRIA as well as several proposed changes to the program. The GAO stated that the long-term impact of the expiration of TRIA “is difficult to determine,” but according to insurers – at least in the short term – the availability of terrorism coverage will “become more limited.”

The GAO surveyed insurers regarding potential changes to TRIA and found:

  • A majority of surveyed insurers said that TRIA's program trigger could be increased without significantly changing their ability to provide coverage;
  • Most of the insurers said that increases to the current deductible or private-sector co-share could affect insurer capacity and pricing. It might also impact their solvency in the case of a large terrorism loss;
  • Some insurers stated that the industry could absorb an increase to the industry aggregate retention amount;
  • Most surveyed insurers did not favor establishing a pre-funding mechanism (such as a pool) in place of the current post-funding mechanism under TRIA (recoupment).

The report discussed the potential use of reinsurance and insurance-linked securities to transfer terrorism risk, but noted that according to a reinsurance trade association representative, “[w]ithout TRIA, current reinsurance capacity would be insufficient to respond to a large-scale terrorist attack.” The report explained that “reinsurers face the same challenges as primary insurers––that is, [that] terrorism risk is difficult to model and price.” The GAO noted that as of April 2014, no property and casualty terrorism bonds have been issued.

The report also noted that insurers were uncertain about whether TRIA covers risks from a cyber terrorism attack. Specifically, it explained that “there [is] some uncertainty about what the term [cyber terrorism] encompasse[s].” The GAO suggested that without clarification that TRIA covers cyber terrorism, coverage for cyber risks may be restricted.

The GAO recommended that the Treasury:

  • Collect the data needed to analyze the terrorism insurance market, including, for example, data about terrorism coverage by line of insurance and terrorism insurance premiums earned. In taking this action, the Treasury should determine whether any additional authority is needed and, if so, work with Congress to ensure it has the authority needed to carry out this action.
  • Periodically assess data collected related to terrorism insurance, including analyzing differences in terrorism insurance by company size, geography or industry sector; conducting hypothetical illustrative examples to help estimate the potential magnitude of fiscal exposure; and examining how changing program parameters may impact the market and fiscal exposure.
  • Gather additional information needed from the insurance industry related to how cyber terrorism is defined and used in policies, and clarify whether losses that may result from cyber terrorism are covered under TRIA. Clarification could be made through an interpretative letter or revisions to program regulations, some combination thereof or any other vehicle that the Treasury deems appropriate.

Financial Services Committee to Consider TRIA Renewal and FSOC Reform Legislation

On June 19, 2014, the Financial Services Committee of the U.S. House of Representatives will consider amendments to the following legislation:

  • H.R. ____, TRIA Reform Act of 2014;
  • H.R. ____, to place a six-month moratorium on the authority of the Financial Stability Oversight Council (FSOC) to make financial stability determinations; and
  • H.R. 4387, the FSOC Transparency and Accountability Act.