The potential damage from a single terrorist attack, particularly in large cities, could be sufficiently large that it would bankrupt one or a group of insurers. No insurer or group of insurance companies could risk exposure to this magnitude of loss. As a general matter, insurance succeeds by spreading the random cost of losses across a large number of insured. But terrorist attacks are designed to maximize economic and psychological impact, and consequently do not occur at random times or places.
Historically, they are more likely to occur in large cities, at specific targets, and perhaps even on specific dates. Because they are not random, terrorist attacks make insuring specific types of properties or locations much riskier than insuring against other risks. Terrorism risk is unique in that perpetrators are able to change the source and target of their threats in a way that earthquakes and other natural perils cannot.
This reduces the ability of property owners to lessen risks and is a key reason why some type of federal involvement in coverage of terrorism risks has been deemed necessary. Congress recognized the need to continue the program to prevent significant disruptions to the insured, insurance market, and overall U. April Boston Three killed and injured at Boston Marathon.
Four U. July Fort Hood, Texas U. Historical data is scarce. In other lines of insurance such as personal auto, insurers know from historical experience roughly how many covered losses to expect frequency and what the costs of those losses will be severity.
This data is used to calculate a premium equal to the risk the insurers are assuming in issuing an insurance policy. Sometimes there is even enough data on natural catastrophes to allow for measurements of frequency and severity, often supplemented with catastrophe modeling.
For terrorism risk, on the other hand, frequency and severity data is scarce. There have been relatively few terrorist attacks in the United States, so there is little data on which to base estimates for future losses.
Furthermore, the range of possible severity of terrorism claims is much larger than in other lines of insurance. Acts of terrorism are not random. Unlike other risks, terror attacks are typically intentional, targeted attacks in specific locations designed to maximize damage. They are often geographically concentrated. For insurance to operate economically, losses are typically not such that many or all insureds in one location suffer the same loss, which could bankrupt an insurer.
Acts of terrorism are often geographically concentrated to produce a significant economic or psychological impact, making it difficult to efficiently spread the possibility of losses over a geographic portfolio. This geographic concentration could therefore lead to an accumulation of risk , in which multiple insureds in the same geographical area exposes a single insurer to a possible large loss following a single act of terrorism.
Concentration could also lead to adverse selection , in which the people who are most at risk will purchase coverage and are also the same people who are likely to file claims. Despite the difficulties of insuring against terrorism risk, acts of terrorism may be covered under various personal insurance policies:. For a while terrorism coverage became scarce as primary insurers filed requests with their state insurance departments for permission to explicitly exclude terrorism coverage from their commercial policies.
By early , 45 states had approved such exclusions for use in standard commercial policies. Reinsurers were also unwilling to reinsure policies in urban areas perceived to be vulnerable to attack. The heads of all the terrorism insurance programmes in OECD countries, the head of the terrorism insurance scheme of Russia and Israel which has since become a member of the OECD and more than leading experts in terrorism insurance gathered together for the first time at the OECD in Paris in They agreed that co-operation and information sharing between all the stakeholders in the terrorism risk insurance market should be enhanced in response to the global terrorism threat.
As very little regulatory and market information is available on a comparable basis on national programmes and markets, they decided that a permanent international e-platform on the financial management of terrorism risk should be set up to fill this information gap. This e-platform monitors the evolution of national terrorism insurance programmes and the degree of government participation in these schemes.
It tracks market trends, and identifies and shares best practices to continuously improve terrorism insurance solutions and financial resilience to terrorism. After the attacks, coverage became prohibitively expensive, if offered at all. In response, the U. Since then, it has been renewed four times: , , , and The current reauthorization is slated to expire Dec. TRIA requires insurers to make terrorism coverage available to commercial policyholders, but it does not require insureds to purchase it.
Background: Despite the terrorist attacks on the World Trade Center in and the Oklahoma City bombing in , insurers did not view domestic or international terrorism as a risk that should be considered when underwriting commercial insurance policies because:. Historic losses from terrorism were relatively small, and there was little data available to estimate future losses. Acts of terrorism are intentional acts designed to maximize damages and are not accidental insurable risks.
Attacks are geographically concentrated in one area, making it difficult to spread the risk and increasing the chance of insurance company bankruptcies.
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