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Federal Terrorism Reinsurance: An Update |
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January 2005 |
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Enacted in response to the events of September 11, 2001, the Terrorism Risk Insurance Act (TRIA) created a temporary federal reinsurance program for terrorism insurance. The program had two main aims: to limit insurance companies' risks of financial loss from terrorist attacks and to increase the availability of terrorism coverage for property owners. TRIA is scheduled to expire on December 30, 2005, and the Congress has been considering proposals to extend the terrorism reinsurance program.
This Congressional Budget Office (CBO) paper--prepared at the request of the Senate Budget Committee--analyzes the TRIA program and assesses changes in insurance markets since the law's enactment in November 2002. The paper builds on two previous CBO reports: Federal Reinsurance for Disasters (September 2002) and Federal Reinsurance for Terrorism Risks (October 2001). In keeping with CBO's mandate to provide objective, impartial analysis, this paper makes no recommendations.
David Torregrosa of CBO's Microeconomic and Financial Studies Division wrote the paper under the direction of Marvin Phaup and Roger Hitchner. Perry Beider, Megan Carroll, Kim Cawley, Ufuk Demiroglu, Robert Dennis, Richard Farmer, Arlene Holen, Kim Kowalewski, Mark Lasky, Julie Middleton, Robert Murphy, Elizabeth Robinson, Natalie Tawil, Derek Trunkey, and Melissa Zimmerman of CBO provided helpful comments on earlier drafts, as did Jeffrey R. Brown of the University of Illinois at Urbana-Champaign, Ron Feldman of the Federal Reserve Bank of Minneapolis, Lucy Hoffman and C. Christopher Ledoux of the Department of the Treasury, Rade T. Musulin of the Florida Farm Bureau Insurance Companies, consulting actuary Richard Roth Jr., and Kent Smetters of the University of Pensylvania's Wharton School. Steve Atkins of Pool Re, Robert Hartwig of the Insurance Information Institute, Cynthia Lamar of the Reinsurance Association of America, Ann Lavie of Insurance Services Office Inc., Steve Lundin of Marsh Inc., and Mario Ugoletti of the Treasury's Terrorism Risk Insurance Program supplied data and other information. (The assistance of such external participants implies no responsibility for the final product, which rests solely with CBO.)
Christian Spoor edited the report, and John Skeen proofread it. Roger Hitchner took the cover photograph. Maureen Costantino designed the cover and prepared the paper for publication. Lenny Skutnik produced the printed copies, and Annette Kalicki and Simone Thomas prepared the electronic versions for CBO's Web site.
Douglas Holtz-Eakin
Director
January 2005
Figures |
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1. |
Premium for Terrorism Coverage as a Percentage of the Premium for Property Insurance |
2. |
Median Annual Premium for Terrorism Coverage |
3. |
Percentage of Companies Purchasing Terrorism Coverage |
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Boxes |
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1. |
Losses Excluded Under TRIA |
2. |
Terrorism Insurance for Commercial Mortgages |
3. |
State Regulations That Affect Terrorism Insurance |
4. |
Does Low Coverage Signal a Market Failure? |
5. |
Diversification as an Alternative to Insurance |
6. |
Mutual Reinsurance Pools |
7. |
CBO's Estimate of the Costs of the Terrorism Insurance Backstop Extension Act of 2004 |
8. |
Estimated Economic Effects of TRIA's Expiration |
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