TERRORISM RISK

INSURANCE

Market Challenges 

May Exist for Current 

Structure and 

Alternative 

Approaches 

Report to Congressional Committees

January 2017

GAO-17-62

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-17-62, a report to 

congressional committees

January 2017

TERRORISM RISK INSURANCE

Market Challenges May Exist for Current Structure 

and Alternative Approaches

Why GAO Did This Study

After the terrorist attacks of September 

11, 2001, insurers generally stopped 

covering terrorism risk because losses

could be too high relative to the 

premiums they could charge. Congress 

enacted TRIA to share losses from a 

certified act of terrorism between 

insurers and the government, address 

market disruptions, and help ensure

widespread availability and affordability 

of terrorism coverage. TRIA does not 

include an up-front federal charge for 

the government’s share of potential 

losses. The act mandates that, when 

private industry’s losses are below a 

certain amount, the federal 

government recoups some or all of the 

federal share of losses through 

policyholder surcharges.

The Terrorism Risk Insurance Program 

Reauthorization Act of 2015 includes a 

provision for GAO to review alternative

funding approaches for TRIA. Among 

other things, this report examines (1) 

how insurers manage their terrorism 

exposure and federal recoupment of 

losses, (2) how alternative funding 

approaches could be designed and 

implemented, and (3) the potential 

effects of these approaches as well as 

the current structure. To assess these 

funding approaches, GAO reviewed 

related studies, analyzed several

terrorism loss scenarios for each 

funding approach to estimate potential 

effects on market participants, and

interviewed industry participants.

Treasury and NAIC provided technical 

comments on a draft of this report, 

which GAO incorporated as 

appropriate. GAO also incorporated 

technical comments received from 

selected third parties, as appropriate. 

What GAO Found

Under the Terrorism Risk Insurance Act’s (TRIA) current structure, insurers 

manage their terrorism exposure to cover their share of losses and not the 

federal share of losses, which may be recouped from policyholders after an

event. Specifically, insurers do not assume the risk of the federal share of 

potential losses and, thus, do not consider the potential federal share of losses in 

how they manage their terrorism risk exposure and price coverage. Many 

insurers include a nominal charge for terrorism risk coverage, if they charge for it 

at all. Most insurers manage their exposure by limiting the amount of coverage 

they provide in certain geographic areas. Under the current structure, in some 

scenarios federal losses must be recouped through premium surcharges on 

policyholders with TRIA-eligible insurance coverage after a certified terrorism 

event. However, depending on the size of the terrorism event and the aggregate 

premiums of affected insurers, the federal government may not be required to 

recoup all of its losses. To date, no terrorism events have been certified under 

TRIA.

Designing and implementing alternatives to TRIA’s current funding structure, 

such as a federal terrorism risk insurance charge or set-aside of insurer funds, 

would require trade-offs among various policy goals and involve complexities.

For example, 

Federal charge. A charge on insurers or policyholders could either (1) be a riskbased charge intended to help pay for the federal share of potential losses, 

replacing the current recoupment structure, or (2) be a charge, or fee, paid to the 

Treasury for the promise of payment of the federal share of loses with 

recoupment in place to cover the actual losses. A federal charge could help 

cover potential losses, but determining a price based on risk would be difficult.

Terrorism set-asides. An insurer set-aside to explicitly address terrorism 

exposure through liabilities, capital, or assets could be designed as (1) loss 

reserves for future terrorism losses, (2) separate or additional capital 

requirements for terrorism risk, or (3) separate assets that only could be used for 

terrorism losses. A set-aside of insurer funds could help cover insurers’ potential 

losses but some approaches would be complex to implement due to implications 

related to current accounting practices and state laws.

TRIA’s current recoupment structure and some alternative approaches could 

increase prices for policyholders and have various effects on market participants 

and the federal government. GAO’s analysis indicated that the current structure 

and some alternative approaches could affect the price of coverage and

policyholder decisions to purchase terrorism coverage. In addition, one set-aside 

approach could restrict the flexibility with which insurers can use assets

(generally, for a variety of risks) and thus hamper risk management. Under each 

option, federal fiscal exposure exists. For example, a charge to cover the federal 

share of losses may be insufficient to cover losses in the near term. However, the 

design of an alternative approach can, in part, mitigate the magnitude of these

effects. For example, lengthening recoupment time frames, charging a broad 

group of policyholders, or allowing flexibility in applying a set-aside could help 

mitigate the effects.

View GAO-17-62. For more information, 

contact Daniel Garcia-Diaz at (202) 512-8678 

or garciadiazd@gao.gov.
Page i GAO-17-62 Terrorism Risk Insurance

Letter 1

Background 6

Insurers Use Various Tools to Manage Their Terrorism Risk 

Exposure and May Charge Premiums for Coverage Although 

They Face Pricing Challenges 17

Federal Share of Terrorism Losses and Recoupment 

Requirements Depend on Event Size and Aggregate Premium 

Base of Affected Insurers 26

Alternative Funding Options Pose Trade-offs and Complexities 34

Both TRIA’s Current Funding Structure and Alternative Funding 

Options Could Adversely Affect the Market, but Some Factors 

Could Help Mitigate the Effects 45

Agency Comments 60

Appendix I Objectives, Scope, and Methodology 61

Appendix II Estimating the Government Share of Losses under the TRIA 

Program 76

Appendix III Information on Pricing Structure of Selected State and Federal 

Insurance or Insurance-like Programs 82

Appendix IV Accounting Practices and Some Domestic and International Set-Aside 

Approaches 92

Appendix V Additional Potential Effects of Recoupment and Alternative 

Funding Options 102

Appendix VI Extent to Which an Economic Subsidy Exists within the Terrorism 

Risk Insurance Act 112

Contents
Page ii GAO-17-62 Terrorism Risk Insurance

Appendix VII GAO Contact and Staff Acknowledgments 118

Tables

Table 1: Selected Provisions in the Terrorism Risk Insurance Act 

and Its Reauthorizations, 2002–2015 13

Table 2: Selected TRIA Characteristics Relevant to Recoupment, 

If the Event Occurred in 2016-2020 34

Table 3: Framework of Pricing Objectives and Related 

Characteristics of Potential Federal Charge Structures 36

Table 4: Overview of Four Set-Aside Approaches We Identified 40

Table 5: Differences in Mandatory Recoupment Factors 

Dependent on the Year of Loss for a $40 Billion Terrorism 

Event 52

Table 6: Two Insurer Pricing Methods for Illustration of Potential 

Effects of Price Increases 72

Table 7: Estimated Federal Share of Losses for Different Sizes of 

Terrorism Events and Subsets of Insurers with Losses in 

2016 (dollars in billions) 81

Table 8: Information on Participation in Seven Selected Programs 84

Table 9: Highlights of Funding Sources for Seven Selected 

Programs 87

Table 10: Highlights of Operations and Oversight Functions for 

Seven Selected Programs 89

Table 11: Comparison of Potential Market Effects of Recoupment 

Examples 103

Table 12: Comparison of Potential Market Effects of a Federal 

Charge by Policyholder Charge Group Using Average 

Demand Elasticity 107

Table 13: Government Interventions That Could Produce an 

Economic Subsidy and Their Application to TRIA 114

Figures

Figure 1: Loss Sharing under the Terrorism Risk Insurance Act, as 

of 2016 9

Figure 2: Funding Mechanisms in the Terrorism Risk Insurance 

Program under the 2015 Reauthorization of TRIA 11

Figure 3: Sample Insurance Company Balance Sheet 20

Figure 4: Initial Loss-Sharing Amounts under Terrorism Risk 

Insurance Act for Hypothetical 2016 Terrorism Events 
Page iii GAO-17-62 Terrorism Risk Insurance

Affecting a Premium Base Equal to That of Top 10 

Insurers 28

Figure 5: Initial Loss-Sharing Amounts under Terrorism Risk 

Insurance Act for Hypothetical $50 Billion Terrorism 

Event Occurring in 2016 and Affecting Various Premium 

Bases 30

Figure 6: Potential Mandatory and Discretionary Recoupment 

Amounts under 2015 Reauthorization of Terrorism Risk 

Insurance Act for Different Event Sizes and Subsets of 

Affected Insurers, 2016 32

Figure 7: Direct Earned Premiums from Categories of 

Property/Casualty Lines of Business and Insurer Market 

Share, 2014 78

Figure 8: Example of Loss Sharing under TRIA 80

Figure 9: Overview of Insurer Set-Asides Identified in Six 

Countries 98

Abbreviations

FASB Financial Accounting Standards Board

GAAP generally accepted accounting principles

Marsh Marsh and McLennan Companies, Inc.

NAIC National Association of Insurance Commissioners

NBCR nuclear, biological, chemical, or radiological

weapons

NCCI National Council on Compensation Insurance

PAYGO pay-as-you-go

SAP statutory accounting principles

Treasury Department of the Treasury

TRIA Terrorism Risk Insurance Act of 2002 and its 

reauthorizations

TRIM Terrorism Risk Insurance Modernization Act of 

2014

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Page 1 GAO-17-62 Terrorism Risk Insurance

441 G St. N.W.

Washington, DC 20548

January 12, 2017

Chairman

Committee on Banking, Housing, and Urban Affairs

United States Senate

Ranking Member

Committee on Banking, Housing, and Urban Affairs

United States Senate

Chairman

Committee on Financial Services

House of Representatives

Ranking Member

Committee on Financial Services

House of Representatives

The terrorist attacks of September 11, 2001, which resulted in reported 

total insured losses of roughly $44 billion (2015 dollars), drastically 

changed the way insurers viewed the risk of terrorism.1 After September 

11, insurers generally stopped covering terrorism risk because they 

determined that the risk of loss was unacceptably high relative to the 

premiums they could charge. In November 2002, Congress enacted the 

Terrorism Risk Insurance Act of 2002 (TRIA) to help ensure the continued 

availability and affordability of commercial property/casualty insurance for 

terrorism risk and to address concerns that the lack of terrorism insurance 

could have significant effects on the economy.2

TRIA requires the Department of the Treasury (Treasury) to administer a 

program in which the federal government would share some of the losses 

 1

Insurance Information Institute, accessed on September 21, 2016, 

http://www.iii.org/facts_statistics/terrorism.html. 

2

Pub. L. No. 107-297, 116 Stat. 2322 (2002). TRIA was reauthorized in 2005, 2007, and 

2015. See Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-144, 119 

Stat. 2660 (2005); Terrorism Risk Insurance Program Reauthorization Act of 2007, Pub. L. 

No. 110-160, 121 Stat. 1839 (2007); and Terrorism Risk Insurance Program 

Reauthorization Act of 2015, Pub. L. No. 114-1, 129 Stat. 3 (2015). In this report, we 

collectively refer to the original act and its reauthorizations as TRIA.

Letter
Page 2 GAO-17-62 Terrorism Risk Insurance

with private insurers in the event of a certified act of terrorism.3 Insurers 

can charge their policyholders premiums for the insurer’s potential share 

of losses. However, the federal government does not charge premiums 

for its potential share of losses before an event occurs. Rather, TRIA 

includes a provision that allows Treasury to recoup some of or all the 

federal share of losses after a certified terrorism event. To date, no 

terrorism events have been certified under TRIA.

Policymakers and insurance industry representatives have continued to 

debate the role of the federal government in supporting terrorism risk 

insurance. The program originally was intended to be temporary (3 

years), but was extended and modified three times––in 2005, 2007, and 

2015. Over this period, the reauthorizations have reduced federal 

responsibility for losses and increased private-sector responsibility for 

losses. Proponents of TRIA believe that the program provides a layer of 

protection the private market would not be willing to provide without a 

federal program in place. Others believe TRIA exposes the federal 

government to insurance losses on private properties and provides free 

reinsurance for private insurers because it does not require up-front funds 

for the losses that would be covered by the federal government.

The Terrorism Risk Insurance Program Reauthorization Act of 2015 

includes a provision for GAO to review the effects and viability of 

alternative funding options. This report examines (1) how insurers 

manage their terrorism risk exposure and price terrorism risk insurance; 

(2) the federal government’s recoupment requirements and how the 

federal share of terrorism losses would be affected in different scenarios; 

(3) how alternative funding approaches could be designed and 

implemented; and (4) the potential effects of the approaches.

 3

TRIA states that the Secretary of the Treasury, in consultation with the Secretary of 

Homeland Security and the Attorney General of the United States, shall determine 

whether an event should be certified as an act of terrorism, based on certain criteria. An 

act cannot be certified if the aggregate property/casualty insurance losses resulting from 

the act do not exceed $5 million. The procedures for making the act of terrorism 

determination were issued by Treasury on December 7, 2016 as an interim final rule. In 

this report, we refer to the potential federal share of losses as the losses the federal 

government would cover before recoupment if a certified terrorism event occurred. 

Similarly, we refer to the potential share of insurers’ losses as the aggregate losses 

affected insurers would be responsible for covering before recoupment.
Page 3 GAO-17-62 Terrorism Risk Insurance

To address these objectives, we reviewed TRIA and its amendments in 

2005, 2007, and 2015, and implementing regulations.4 We also reviewed

prior GAO work on this topic.5 We interviewed officials and reviewed 

reports from Treasury, the National Association of Insurance 

Commissioners (NAIC), the Congressional Budget Office, and 

Congressional Research Service.6 We also interviewed and reviewed 

relevant reports from academic researchers and several industry 

participants, including insurers, reinsurers, state regulators, 

representatives from insurance trade associations, a rating agency, and 

insurance and reinsurance brokers.7 In all interviews, we asked 

participants about practices under the current program funding structure, 

the feasibility of the alternative funding options, and the importance of key 

pricing objectives and set-aside design factors we identified. We also 

asked participants about the potential effects on insurers and reinsurers, 

state regulators, policyholders, and the federal government of the current 

program’s recoupment mechanism and alternative funding options.

To describe insurers’ practices for managing their terrorism exposure and 

pricing terrorism risk insurance, we reviewed NAIC guidance on terrorism 

premium disclosures for policyholders, and information about applicable 

 4

Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322 (2002); 

Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-144, 119 Stat. 2660 

(2005); Terrorism Risk Insurance Program Reauthorization Act of 2007, Pub. L. No. 110-

160, 121 Stat. 1839 (2007); and Terrorism Risk Insurance Program Reauthorization Act of 

2015, Pub. L. No. 114-1, 129 Stat. 3 (2015); and 31 C.F.R. Part 50.

5

GAO, Terrorism Risk Insurance: Comparison of Selected Programs in the United States 

and Foreign Countries, GAO-16-316 (Washington, D.C.: Apr. 12, 2016); and Terrorism 

Insurance: Treasury Needs to Collect and Analyze Data to Better Understand Fiscal 

Exposure and Clarify Guidance, GAO-14-445 (Washington, D.C.: May 22, 2014).

6

Department of the Treasury, Federal Insurance Office, Report on the Overall 

Effectiveness of the Terrorism Risk Insurance Program (Washington, D.C.: June 2016);

President’s Working Group on Financial Markets, The Long-Term Availability and 

Affordability of Insurance for Terrorism Risk (Washington, D.C.: April 2014); 

Congressional Budget Office, Federal Reinsurance for Terrorism Risk in 2015 and 

Beyond, Working Paper 2015-04 (Washington, D.C.: June 2015); and Congressional 

Research Service, Terrorism Risk Insurance: Issue Analysis and Overview of Current 

Program, R42716 (Washington, D.C.: July 23, 2014).

7

Marsh and McLennan Companies, Inc., 2015 Terrorism Risk Insurance Report (June 

2015); Wharton Risk Management and Decision Processes Center, University of 

Pennsylvania, TRIA and Beyond: Terrorism Risk Financing in the U.S. (Philadelphia, 

Penn.: August 2005); and Erwann Michel-Kerjan, Paul Raschky, and Howard Kunreuther, 

“Corporate Demand for Insurance: New Evidence from the U.S. Terrorism and Property 

Markets,” The Journal of Risk and Insurance, vol. 82, no. 3 (2015).
Page 4 GAO-17-62 Terrorism Risk Insurance

insurance tax laws and insurance accounting standards. In this report, the 

information on insurers’ practices reflects statements from 6 insurers, 

including 4 of the top 10 insurers, and statements from industry 

participants. These statements are not generalizable.

To assess the extent to which the federal share of losses could be 

recouped, we conducted analyses of the federal and insurer shares of 

losses in various scenarios and how the federal share of losses would be 

apportioned between TRIA’s mandatory and discretionary recoupment 

provisions. 

To examine how alternative funding approaches could be designed and 

implemented, we considered two broad funding options, each of which 

could utilize various approaches in relation to purpose and design. First, 

we reviewed two ways a federal terrorism risk insurance charge could be 

structured: (1) as a premium-like charge to help pay for the federal share 

of potential losses, or (2) as a backstop charge, or fee, paid to the 

Treasury for the promise of payment of the federal share of losses, or 

backstop. In addition, we developed a pricing framework based on prior 

GAO work on government fees and interviewed industry participants. We 

also assessed how the objectives of the pricing framework are expressed 

in premiums or premium-like charges in selected federal and state 

programs and in charges for government-provided backstops provided in 

the national terrorism risk insurance programs of two selected countries. 

Programs were selected to illustrate a range of approaches for structuring 

and collecting charges. Second, we selected programs or proposals to 

identify key design factors and implementation considerations for 

policymakers if they implemented a requirement or incentives for insurer 

terrorism set-asides.8 Programs or proposals were selected to illustrate 

variation among the design factors. To describe the practices, laws, and 

rules the federal government could take into account in relation to a setaside, we reviewed documentation on the selected approaches and 

sources describing relevant accounting standards, and tax laws. We also 

collected information on selected countries that allow insurers to establish 

set-asides to cover future losses. We identified the countries for review 

through external outreach efforts with international entities, literature 

review, and questionnaire and interview responses.

 8

For the purposes of this report, we use the term set-aside to refer to a variety of 

approaches that insurers could use to consider or account for terrorism exposure in their 

capital, assets, or liabilities. Such approaches do not always involve establishing 

segregated assets dedicated solely to covering terrorism exposure. 
Page 5 GAO-17-62 Terrorism Risk Insurance

To assess the potential effects of recoupment and alternative funding 

approaches, we interviewed industry participants and analyzed insurance 

data from SNL Financial, annual terrorism risk insurance premium 

estimates from A.M. Best, and estimates of the percentage of commercial 

property insurance premiums represented by terrorism risk insurance by 

Marsh and McLennan Companies, Inc. (Marsh).9 Specifically, we 

assessed the potential effects of recoupment of the federal share of 

losses, a federal terrorism risk insurance charge, and terrorism set-asides 

on insurers and reinsurers, state regulation, policyholders, and the federal 

government. Using data and a number of informed assumptions, we 

illustrated the potential effects on policyholder prices and participation 

and insurer volume of premium under recoupment and the alternative 

funding approaches. The scenarios and potential effects are illustrative; 

they are not specific determinations of market effects or federal fiscal 

exposure.10 We determined that the data used in this report were 

sufficiently reliable for providing illustrative examples of potential effects. 

We also examined whether, and to what extent, the program provides an 

economic subsidy and illustrated the potential size of any subsidy. In this 

report, we define an economic subsidy as a payment or benefit from the 

government to private market participants, for which the government 

receives no commensurate benefit. The responses from industry 

participants may or may not be representative of all participants in the 

commercial property/casualty market, but their experiences and views 

offer insights directly into this group of insurers. Appendixes I, II, V, and 

VI provide more detailed information on our methodology.

We conducted this performance audit from January 2015 to January 

2017, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

 9

As of 2016, SNL Financial was a part of S&P Global Market Intelligence; however, for 

this report we refer to the data as originating from SNL Financial.

10We have defined fiscal exposures as responsibilities, programs, and activities that may 

legally commit or create expectations for future federal spending based on current policy, 

past practices, or other factors. As we previously reported, TRIA creates an explicit fiscal 

exposure, because the federal government is legally required to make payments 

(reimbursements to insurers) in the event of a certified terrorist attack. See GAO-14-445.

For more information on risks, including terrorism, that create fiscal exposures, see 

http://www.gao.gov/fiscal_outlook/federal_fiscal_outlook/overview#t=3.
Page 6 GAO-17-62 Terrorism Risk Insurance

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

From an insurance standpoint, measuring and predicting terrorism risk is 

challenging. The difficulties of measuring and predicting losses 

associated with terrorism risks stem from factors including lack of 

experience with similar attacks, difficulty in predicting terrorists’ intentions, 

and the potentially catastrophic losses from terrorist attacks.11 To 

underwrite insurance—that is, decide whether to offer coverage and at 

what price—insurers consider both the likelihood of an event (frequency) 

and the amount of damage it would cause (severity). Although insurers 

increasingly have used sophisticated modeling tools to assess terrorism 

risk, from a statistical perspective little data exist on which to base 

estimates of future losses in terms of frequency or severity, or both.12

Reinsurers (insurers for insurers) follow an approach similar to that of 

insurers for pricing risk exposures and charging premiums based on that 

risk and, therefore, face similar challenges in pricing terrorism risks.

Congress passed TRIA in 2002 to address some of the challenges the 

insurance industry and businesses faced after the September 11 attacks, 

when coverage for terrorism risk generally became unavailable. The 

goals of TRIA are to (1) protect consumers by addressing market 

disruptions and ensuring the continued widespread availability and 

affordability of commercial property/casualty insurance for terrorism risk; 

and (2) allow for a transitional period for the private markets to stabilize, 

resume pricing of such insurance, and build capacity to absorb any future 

losses, while preserving state insurance regulation and consumer 

protections.

As required by TRIA, insurers must make terrorism coverage available to 

commercial policyholders, although commercial policyholders are not 

required to buy it.13 TRIA requires an insurer to make coverage for 

 11See GAO-14-445.

12Insurance Information Institute, Terrorism Risk and Insurance (August 2013). 

13Insurance lines of business are divided into two parts: (1) property/casualty and (2) life 

and health. Property/casualty insurance is further divided into personal and commercial 

lines. For example, personal lines include automobile, homeowners, and renters 

insurance for individuals. The major commercial lines include multiple perils, fire, liability, 

and workers’ compensation. TRIA only applies to certain commercial property/casualty 

lines of insurance.

Background
Page 7 GAO-17-62 Terrorism Risk Insurance

terrorism losses available that does not differ materially from the terms, 

amounts, and other coverage limitations applicable to losses arising from 

events other than acts of terrorism. For example, an insurer offering $100 

million in commercial property coverage must offer $100 million in 

coverage for property damage from a certified terrorist event. As 

discussed in greater detail later in this report, insurers can charge a 

separate premium to cover their terrorism risk, although some include the 

coverage in their base rates for all-risk policies.14 Neither insurers nor the 

federal government charges for the government’s coverage of terrorism 

risk under TRIA, but the government may recoup at least some of its

losses following a terrorism event.

For eligible lines, TRIA covers insured losses resulting from an act of 

terrorism, which is defined, in part, as a “violent act or an act that is 

dangerous” to human life, property, or infrastructure.15 The act is silent 

about losses from attacks with nuclear, biological, chemical, or 

radiological weapons (NBCR).16

Initial loss sharing. In the event of a certified act of terrorism, TRIA’s 

loss-sharing structure requires that insurers pay claims on covered 

terrorism losses and that Treasury reimburse individual insurers for 

 14Before September 11, 2001, insurers generally did not exclude or separately charge for 

coverage of terrorism risks. After September 11 (and prior to TRIA), insurers started 

including substantial charges to cover terrorism risk, or excluded the coverage with the 

exception of workers’ compensation. (States require that workers’ compensation 

insurance cover terrorism risk and do not permit exclusions.)

15TRIA-eligible lines are commercial lines of property/casualty insurance, including excess 

insurance, workers’ compensation insurance, and directors’ and officers’ liability 

insurance. Subject to certain exceptions, eligible commercial lines also include the 

following (as listed in NAIC’s Exhibit of Premiums and Losses): aircraft (all perils), allied 

lines, boiler and machinery, commercial multiperil (liability and nonliability), fire, inland 

marine, ocean marine, other liability, products liability, and workers’ compensation. The 

law excludes reinsurance, personal property/casualty, crop, and private mortgage 

insurance; commercial automobile, burglary and theft, and professional liability insurance; 

and health and life insurance.

16GAO, Terrorism Insurance: Status of Coverage Availability for Attacks Involving Nuclear, 

Biological, Chemical, or Radiological Weapons, GAO-09-39 (Washington, D.C.: Dec. 12, 

2008).

Public-Private Loss 

Sharing under TRIA
Page 8 GAO-17-62 Terrorism Risk Insurance

losses that exceed a specified amount.17 For federal compensation to be 

paid, aggregate industry insured losses from certified acts must exceed a 

certain amount (program trigger). For calendar year 2016, this amount 

was $120 million.18 An individual insurer with terrorism losses in excess of 

a deductible (20 percent of its previous year’s direct earned premiums in 

TRIA-eligible lines) may make a claim to Treasury for payment of the 

federal share of compensation for its insured losses. As shown in figure 1, 

Treasury would reimburse the insurer for a certain percentage of its 

losses (84 percent for calendar year 2016) above the deductible, and the 

insurer would be responsible for the remaining portion (16 percent). 

Annual coverage for losses is limited (capped) so that aggregate industry 

insured losses in excess of $100 billion are not covered by private 

insurers or the federal government.19

 17TRIA has been described as a reinsurance program. While TRIA has some attributes of 

a reinsurance contract, it does not meet all the elements of traditional private reinsurance 

because the federal government does not collect a premium from insurers for the federal 

share of potential losses. Like a traditional private reinsurance contract, TRIA establishes 

the percentage of losses for a “ceding company” (in this case, the insurance companies 

providing terrorism risk coverage) and under what circumstances the losses are 

reimbursed by the “reinsurer” (in this case, the federal government through TRIA). 

However, unlike traditional private reinsurance, TRIA does not involve the transfer of risk 

in exchange for a premium. Instead, there is a transfer of risk in exchange for a 

recoupment mechanism.

18The 2015 reauthorization annually increases the required amount of aggregate insured 

losses to trigger the program by $20 million, starting from $100 million in 2015 and 

increasing to $200 million by 2020. See Pub. L. No. 114-1, § 103(3), 129 Stat. 3, 4 

(codified at 15 U.S.C. § 6701 n. § 103(e)(1)(B)).

19Insurers remain liable for amounts up to their deductible, even if the $100 billion cap is 

reached. 
Page 9 GAO-17-62 Terrorism Risk Insurance

Figure 1: Loss Sharing under the Terrorism Risk Insurance Act, as of 2016
Page 10 GAO-17-62 Terrorism Risk Insurance

Recoupment. The federal share of losses may be recouped after a 

terrorist event through premium surcharges. As previously discussed, 

Treasury reimburses an insurer for a certain percentage of its losses 

above its deductible. And, if insurers’ aggregate losses are below a 

specified amount, Treasury may be required to recoup federal losses 

through post-event premium surcharges. Figure 2 shows the TRIA 

funding mechanism before and after a terrorism event. Specifically, the 

program includes a provision for mandatory recoupment of at least a 

portion of the federal share of losses if the aggregate sum of all insurers’

deductibles and co-shares are below an amount prescribed by TRIA—

known as the industry aggregate retention amount.20 Under mandatory 

recoupment, the insurers must impose and remit to Treasury a premium 

surcharge on all policies in TRIA-eligible lines until total industry 

payments reach 140 percent of any mandatory recoupment amount.21

Treasury establishes the amount of the mandatory recoupment 

surcharge. The collection timeframes for mandatory recoupment range 

from 1 year and 9 months to about 6.5 years, depending on when the 

terrorism event occurs.22

 20Mandatory recoupment under TRIA does not relate to mandatory spending with regard 

to the federal budget. The industry aggregate retention amount in 2016 was the lesser of 

$31.5 billion and the total of insurers’ and federal shares of terrorism losses in the 

calendar year. This amount is increased by $2 billion each year until it reaches $37.5 

billion. See table 1.

21The legislative and congressional records do not include any substantive discussion of 

the purpose of the 40 percent mandatory recoupment scaling factor. However, according 

to the Congressional Budget Office, the scaling factor would address lost federal tax 

revenue as policyholders deducted recoupment charges from their income taxes and 

provide some compensation to the government for bearing risk. See Congressional 

Budget Office, Federal Reinsurance for Terrorism Risk in 2015 and Beyond.

22For any act of terrorism that occurs on or before December 31, 2017, the deadline for 

mandatory recoupment is September 30, 2019. For any act occurring between January 1 

and December 31, 2018, 35 percent of any required amounts must be collected by 

September 30, 2019, and the remainder by September 30, 2024. For any act occurring on 

or after January 1, 2019, the deadline is September 30, 2024. 15 U.S.C. § 6701 n. §

103(e)(7)(E)(i).

Requirements and Considerations for 

Establishing a Recoupment Surcharge

According to TRIA and regulations, the 

amount of any surcharge must be based on a 

percentage of the premium amount charged 

for TRIA-eligible commercial property/casualty 

insurance coverage under a specific policy. 

Treasury may take several factors into 

consideration when establishing the 

surcharge amount. The factors can include 

the total dollar amount to be recouped as a 

percentage of the industry’s aggregate annual 

direct written premium; the economic impact 

on urban commercial centers, including on 

rents and insurance premiums, and the 

availability of lease space and commercial 

insurance in urban areas; and risk factors 

related to rural areas and smaller commercial 

centers. To help determine recoupment 

amounts, Treasury may issue a data call for 

insurer deductible and insured loss 

information. If an insurer determines that the 

administrative cost of collecting the surcharge 

would exceed the actual amount collected, the 

insurer may satisfy the obligation by omitting 

the actual collection and remitting to Treasury 

the amount due. Beyond these requirements 

and considerations, Treasury does not have a 

plan or single methodology for determining a 

recoupment surcharge. According to agency 

officials, setting a post-event surcharge would 

be based on the parameters of the specific 

terrorism event, such as the size of the federal 

share of losses, location of the event, and 

length of the collection period.

Legend: TRIA = Terrorism Risk Insurance Act

Treasury = Department of the Treasury

Source: TRIA and regulations and interviews with agency 

officials. | GAO-17-62
Page 11 GAO-17-62 Terrorism Risk Insurance

Figure 2: Funding Mechanisms in the Terrorism Risk Insurance Program under the 2015 Reauthorization of TRIA

a

In some terrorism events, the federal government may not be required to recoup its share of losses.
Page 12 GAO-17-62 Terrorism Risk Insurance

When federal assistance exceeds the mandatory recoupment amount, 

TRIA allows for discretionary recoupment.23 Under the discretionary 

recoupment provision, Treasury may recoup additional amounts based on 

the ultimate cost to taxpayers of no additional recoupment, economic 

conditions in the marketplace, the affordability of commercial insurance 

for small and medium-sized businesses, and other factors Treasury 

considers appropriate.24 Treasury also sets the surcharge for 

discretionary recoupment, but the increase to TRIA-eligible premiums 

must not exceed 3 percent per calendar year.25

Changes in TRIA reauthorizations. As shown in table 1, the TRIA 

reauthorizations have changed several loss-sharing provisions of the 

program. Over time, the reauthorizations have reduced federal 

responsibility for losses and increased private-sector responsibility for 

losses. The 2015 reauthorization requires further incremental decreases 

in the federal share of losses over 5 years. In addition, the 2015 

reauthorization requires insurers in the program to submit information to 

Treasury about the coverage they write for terrorism risk, including the 

lines of insurance with exposure to such risk, the premiums earned on 

such coverage, and the participation rate for such coverage.

 23Discretionary recoupment under TRIA does not relate to discretionary spending with 

regard to the federal budget.

24Following the initial determination of recoupment amounts, Treasury will recalculate any 

mandatory or discretionary recoupment amount as necessary and appropriate, and at 

least annually, until a final recoupment amount for the year is determined. To determine 

whether any additional amount will be recouped, Treasury also will compare any 

recalculated amount to amounts already remitted or to be remitted to Treasury for a 

previously established policy surcharge.

25Unlike mandatory recoupment, discretionary recoupment has no specified collection 

time frame.
Page 13 GAO-17-62 Terrorism Risk Insurance

Table 1: Selected Provisions in the Terrorism Risk Insurance Act and Its Reauthorizations, 2002–2015 

Terrorism Risk 

Insurance Act of 2002 

(Pub. L. No. 107-297)

Terrorism Risk 

Insurance Extension Act 

of 2005 (Pub. L. No. 109-

144)

Terrorism Risk 

Insurance Program 

Reauthorization Act of 

2007 (Pub. L. No. 110-

160)

Terrorism Risk 

Insurance Program

Reauthorization Act of 

2015 (Pub. L. No. 114-1) 

Program trigger

(dollar amount)

5 milliona 50 million (2006)

100 million (2007)

100 millionb 100 million in 2015 

increasing by 20 million 

annually until it reaches 

200 million in 2020 

Insurer deductible

(percentage)

7 (2003)c

10 (2004)

15 (2005)

17.5 (2006)

20 (2007)

20b 20 

Co-share

(percentage)

Insurers: 10

Government: 90

Insurers: 10

Government: 90 (2006)

Insurers: 15

Government: 85 (2007)

Insurers: 15

Government: 85b

Insurers: 15 in 2015 

increasing annually by 1 

percentage point until it 

reaches 20 in 2020

Government: 85 in 2015 

decreasing annually by 1 

percentage point until it 

reaches 80 in 2020 

Industry aggregate 

retention

(dollar amount)

Lesser of (a) the 

aggregate amount of 

insured losses for all 

insurers during the 

calendar year and (b) 10 

billion (2002/2003)

12.5 billion (2004)

15 billion (2005)

Lesser of (a) the 

aggregate amount of 

insured losses for all 

insurers during the 

calendar year and (b) 25 

billion (2006)

27.5 billion (2007)

Lesser of (a) the 

aggregate amount of 

insured losses for all 

insurers during the 

calendar year and (b) 27.5 

billionb

Lesser of (a) the 

aggregate amount of 

insured losses for all 

insurers during the 

calendar year and (b) 29.5 

billion in 2015 increasing 

annually by 2 billion until it 

equals 37.5 billion in 2019

Beginning in calendar 

year 2020, the amount will 

become the lesser of (a) 

the aggregate amount of 

insured losses for all 

insurers during the 

calendar year and (b) the 

annual average of the 

sum of insurer deductibles 

for all insurers 

participating in the 

program for the prior 3 

calendar years, as 

determined by the 

Secretary of the Treasury 

by regulation 
Page 14 GAO-17-62 Terrorism Risk Insurance

Terrorism Risk 

Insurance Act of 2002 

(Pub. L. No. 107-297)

Terrorism Risk 

Insurance Extension Act 

of 2005 (Pub. L. No. 109-

144)

Terrorism Risk 

Insurance Program 

Reauthorization Act of 

2007 (Pub. L. No. 110-

160)

Terrorism Risk 

Insurance Program

Reauthorization Act of 

2015 (Pub. L. No. 114-1) 

Mandatory 

recoupment 

percentage, including 

surcharge

(percentage)

100 of the difference 

between the industry 

aggregate retention 

amount and the 

aggregate amount of 

insurers’ uncompensated 

insured lossesd

100 of the difference 

between the industry 

aggregate retention 

amount and the aggregate 

amount of insurers’

uncompensated insured 

losses

133 of the difference 

between the industry 

aggregate retention 

amount and the aggregate 

amount of insurers’

uncompensated insured 

losses

140 of the difference 

between the industry 

aggregate retention 

amount and the aggregate 

amount of insurers’

uncompensated insured 

losses 

Program cap

(dollar amount)

100 billion 100 billion 100 billionb 100 billion 

Source: Terrorism Risk Insurance Act. | GAO-17-62

Note: We use Terrorism Risk Insurance Act to refer to the Terrorism Risk Insurance Act of 2002 and 

its amendments in 2005, 2007, and 2015. See Pub. L. No. 107-297, 116 Stat. 2322 (2002); Pub. L. 

No. 109-144, 119 Stat. 2660 (2005); Pub. L. No. 110-160, 121 Stat. 1839 (2007); and Pub. L. No. 

114-1, 129 Stat. 3 (2015).

a

TRIA as initially enacted in 2002 did not include a specific program trigger, but an act of terrorism 

could not be certified without more than $5 million in property/casualty insurance losses resulting from 

the act. Without a certified act of terrorism, TRIA is not activated.

b

These provisions were unchanged by the 2007 act.

c

From enactment of the Terrorism Risk Insurance Act of 2002 on November 26, 2002, through 

December 31, 2002, the insurer deductible was set at 1 percent.

d

Insurers’ uncompensated losses are those losses that are not reimbursed by the federal government 

under TRIA.

Insurance in the United States is primarily regulated at the state level.26

State regulators license agents, review insurance products and premium 

rates, and examine insurers’ financial solvency and market conduct. In 

addition, through the NAIC, state insurance regulators (of the 50 states, 

the District of Columbia, and the U.S. territories) establish standards and 

best practices, conduct peer reviews, and coordinate their regulatory 

oversight. For issues that involve a national standard or require uniformity 

among all the states, the NAIC develops and distributes model insurance 

laws and regulations for consideration among its member states.

 26The federal government retains the authority to regulate insurance, but has given 

primary responsibility for insurance regulation to the states in accordance with the 

McCarran-Ferguson Act of 1945. See Pub. L. No. 79-5, ch. 20, 59 Stat. 33 (1945) codified 

as amended at 15 U.S.C. §§ 1011-1015. Nevertheless, the federal government is involved 

in many areas relating to the insurance sector, including operation of the National Flood 

Insurance Program and crop insurance program. In addition, the Board of Governors of 

the Federal Reserve System supervises insurers designated by the Financial Stability 

Oversight Council.

Regulation of Insurance
Page 15 GAO-17-62 Terrorism Risk Insurance

Generally, state law requires insurers to file rates (and to file insurance 

forms) with state regulators who review the rates to ensure they are not 

excessive, inadequate, or unfairly discriminatory. States vary with regard 

to the timing and depth of reviews of insurers’ rates and contractual 

language. Many state laws have filing or review exemptions (or both) that 

apply to large commercial policyholders. State insurance regulators do 

not perform rate or form reviews for these entities because it is presumed 

that large businesses have a better understanding of insurance contracts 

and pricing than the average personal-lines consumer and as such are 

able to effectively negotiate price and contract terms with insurers.

Capital requirements, accounting standards, and other tools help state 

regulators, insurers, and other entities monitor and mitigate potential risks 

and assess insurers’ financial strength.

• Risk-based capital requirements: State regulators require insurance 

companies to maintain specific levels of capital to continue to conduct 

business.27 Regulators determine the minimum amount of capital 

appropriate for an insurer to support its overall business operations, 

taking into consideration its size and risk profile. Most U.S. 

jurisdictions have adopted statutes, regulations, or bulletins that are 

substantially similar to NAIC’s Risk-Based Capital for Insurers Model 

Act, according to NAIC, and also use formulas that NAIC has 

developed to establish a minimum capital requirement based on the 

types of risks to which a company is exposed. NAIC has separate 

models for different lines of insurance.

• Own risk and solvency assessments: Starting in 2015, state 

regulators began requiring large- and medium-size U.S. insurance 

groups to begin regularly conducting own risk and solvency 

assessments and submitting an annual written report to either the 

insurer group’s lead state or state of domicile, depending upon if the 

assessment is prepared on a group or legal entity basis.28 The 

assessments are internal processes undertaken by insurers or 

 27For this report, we define capital as the excess of an insurance company’s assets above 

its liabilities. It provides a cushion to an insurer against insolvency resulting from any 

unexpected or underestimated losses. Insurers are generally free to manage their capital 

as long as they satisfy external solvency and liquidity requirements and internal 

assessment of capital adequacy. 

28NAIC’s Risk Management and Own Risk and Solvency Assessment Model Act (no. 505) 

details the requirements for completing the annual own risk and solvency assessment and 

provides guidance and instructions for filing the associated summary report.
Page 16 GAO-17-62 Terrorism Risk Insurance

insurance groups to assess the adequacy of their risk management 

and current and prospective solvency positions under normal and 

severe stress scenarios.

• Enterprise risk-management practices: Insurance companies use 

these practices to obtain an enterprise-wide view of their risks and 

help management engage in risk-based decision making. Enterprise 

risk management generally has two goals: (1) to identify, evaluate, 

and quantify risks; and (2) to ensure that the organization actively 

implements risk-treatment strategies and manages appropriate risk 

levels. Examples of specific enterprise risk-management practices 

include identifying and categorizing risks, establishing well-defined 

risk tolerances, assessing risk mitigation with cost-benefit analyses, 

and conducting stress tests and other risk-modeling analyses.

Insurance companies must report much of this information annually in 

their summary reports for own risk and solvency assessments.

• Accounting standards and financial reporting: Insurers must 

report their financial holdings on an individual legal entity basis to the 

regulator in their state of domicile, using statutory accounting 

principles (SAP). According to documentation from NAIC, SAP are 

designed to assist state insurance departments in the regulation of the 

solvency of insurance companies. The ultimate objective of solvency 

regulation is to ensure that policyholder, contract holder, and other 

legal obligations are met when they come due and that companies 

maintain capital and surplus at all times and in such forms as required 

by statute to provide a margin of safety. SAP stress the measurement 

of ability to pay claims in the future. In addition to SAP, insurance 

groups may report financial holdings information using generally

accepted accounting principles (GAAP), which in the United States 

are promulgated by the Financial Accounting Standards Board 

(FASB) and are designed to provide decision-useful information to 

investors and other users of financial reporting.29 SAP and GAAP

recognize certain items differently and therefore may result in different 

reported capital and net income amounts. Unless otherwise noted, 

references in this report to accounting for or recording liabilities refers 

to SAP.

• Credit ratings: A credit rating is generally intended to measure the 

likelihood of default for an issue or issuer, such as an insurer. To 

 29In the United States, FASB establishes GAAP, a set of accounting standards, principles 

and best practices for the preparation of financial statements. Publicly owned companies 

in the United States are required to follow GAAP.
Page 17 GAO-17-62 Terrorism Risk Insurance

determine an appropriate rating, credit rating agencies determine the 

financial strength of insurance companies and their ability to meet 

ongoing obligations to policyholders by analyzing companies’ balance 

sheets, operating performance, and business profile.30

Insurers we interviewed stated that they manage their terrorism exposure 

using several tools, and all said they generally charge premiums for 

terrorism risk coverage although data to accurately price terrorism risk are 

lacking. Insurers’ practices for managing their exposure and pricing 

terrorism risk coverage are intended to cover their share of losses under 

TRIA (their deductibles and coshares). Insurers do not consider in their 

pricing the potential federal share of losses, which may be recouped after 

an event.

 30Ratings are typically assigned using letter designations such as AAA, AA, A, BBB, with 

higher grades usually representing a lower risk of default.

Insurers Use Various 

Tools to Manage 

Their Terrorism Risk 

Exposure and May 

Charge Premiums for 

Coverage Although 

They Face Pricing 

Challenges
Page 18 GAO-17-62 Terrorism Risk Insurance

Based on interviews we conducted in our previous work and our work for 

this report, insurers manage their terrorism exposure by establishing 

geographic risk limits, considering potential terrorism losses when 

assessing capital adequacy, and purchasing reinsurance.

Location-based risk limits. In our 2008 report, we found that the 

insurers we interviewed determined the amount of terrorism coverage 

they would be willing to provide in defined geographic areas, such as 

financial districts where many large buildings are located or specific parts 

of cities considered at high risk of attack.31 We also found that some 

insurers used models available from risk modeling firms to estimate the 

severity of potential attack scenarios to determine internal limits on the 

aggregate coverage they would offer in defined areas (aggregation limits).

For example, they would limit their aggregate exposure in 250-foot, 500-

foot, or quarter-mile circles around certain landmarks or areas where the 

insurer had high concentrations of risk.

Officials from two insurers we interviewed for this report discussed how 

they manage their terrorism exposure using aggregation limits. For 

example, one insurer stated that it manages its exposure based on 

estimated potential losses at more than 200 identified landmark locations 

spanning its U.S. exposure base. The insurer told us that it calculates its

loss estimates for a conventional terrorism event that causes a building 

collapse at a single location. As part of this calculation, it told us that it 

considers the portion of potential losses that would be covered by the 

insurer, its reinsurer, and the federal government in setting an internal 

limit for terrorism exposure in each location.

Considering terrorism risk in managing and assessing capital. Most 

insurers we interviewed also stated they manage their terrorism risk by 

considering their terrorism risk exposure as part of external requirements 

or internal assessments related to capital adequacy. Insurers’ capital 

generally is intended to be available for purposes such as unexpected 

losses and expanding the business and is not segregated for specific

purposes (see fig. 3). Insurers are generally free to manage their capital 

as long as they satisfy external solvency and liquidity requirements as 

well as internal assessments. State regulators require insurance 

companies to maintain specific levels of capital (risk-based capital 

 31See GAO, Terrorism Insurance: Status of Efforts by Policyholders to Obtain Coverage, 

GAO-08-1057 (Washington, D.C.: Sept. 15, 2008). 

Insurers May Establish 

Location-Based Risk 

Limits, Consider Terrorism 

Risk in Capital Adequacy 

Assessments, and 

Purchase Reinsurance
Page 19 GAO-17-62 Terrorism Risk Insurance

requirements), but their capital calculations do not specifically address 

terrorism risk exposure.32 However, rating agencies may assess insurers’

terrorism risk exposure specifically as an indicator of financial strength. 

For example, A.M. Best’s ratings evaluation methodology for terrorism 

risk includes calculating appropriate levels of capital for insurers with 

material terrorism risk exposure.33

 32As previously discussed, most U.S. jurisdictions have adopted statutes, regulations, or 

bulletins that are substantially similar to NAIC’s Risk-Based Capital for Insurers Model Act, 

according to NAIC, and also use formulas that NAIC has developed to establish a 

minimum capital requirement based on the types of risks to which a company is exposed.

33A.M. Best provides news, credit ratings, financial data products, and other services for 

the insurance industry. A.M. Best’s rating evaluation methodology for terrorism risk also 

includes conducting stress tests to quantify the impact that a large, insured terrorism loss 

could have on a primary insurer’s capitalization if coverage under TRIA were not available. 

It also assesses the capital position of primary insurers whose largest direct terrorism risk 

exposures do not trigger the minimum threshold for coverage under TRIA. 
Page 20 GAO-17-62 Terrorism Risk Insurance

Figure 3: Sample Insurance Company Balance Sheet

In their own internal assessments of capital adequacy, insurers may 

decide to exceed what is required. Most U.S. insurers hold several times 

more capital than states require. In addition, although not required under 

NAIC’s risk-based capital calculations, five of the six insurers we 

interviewed stated that they specifically measure their terrorism risk 
Page 21 GAO-17-62 Terrorism Risk Insurance

exposure in determining the appropriate amount of capital to maintain, 

including three insurers which indicated that they specifically consider 

their terrorism risk exposure due to rating agency assessments. One 

insurer explained that its capital calculations include estimates for its 

potential deductible and copayments under the current TRIA structure.

Three insurers we interviewed stated they also consider terrorism risk in 

their internal enterprise risk-management assessments or their own risk 

and solvency assessments—two internal processes insurers use to 

monitor and mitigate potential risks. Because own risk and solvency 

assessments are a recent requirement from state regulators applicable to 

large- and medium-size insurers, few insurers and regulators we 

interviewed had experience with them at the time of our review. For 

example, one state regulator stated that it had reviewed some insurers’

filings for the assessments, which discussed risk management for 

multiple terrorism events, while another state regulator had not yet seen 

terrorism risk addressed specifically in insurers’ filings.

Insurers may consider terrorism risk exposure in their assessments of the 

adequacy of capital, but they do not set aside funds specifically for 

potential future terrorism losses in their assets or liabilities. Insurers’

assets are available for potential covered losses and generally are not 

segregated or restricted for limited uses. However, in some 

circumstances insurers may segregate or restrict their assets for specific 

purposes such as for collateral. None of the insurers we interviewed 

indicated doing so for potential terrorism losses. Insurers generally 

account for actual or expected claims by establishing loss reserves as 

liabilities on their balance sheet. As with all future losses, insurers cannot 

create loss reserves for potential terrorism losses before an event occurs. 

Specifically, accounting standards for recording insurance liabilities state 

that insurers may create a loss reserve only for a covered event that has 

occurred and for which the cost of the event is estimable.34 No liability 

exists without the occurrence of a covered event. Insurance and state 

 34Statement of Statutory Accounting Principles no. 55 establishes the principles for 

recording liabilities for paid and unpaid losses and loss adjustment expenses for property 

casualty companies. See also Financial Accounting Standards Board Accounting 

Standards Codification 450-20 and 944. Furthermore, federal tax laws only allow tax 

deductions to insurance companies for an increase to loss reserves that result from 

events that have already occurred. See 26 U.S.C. §832(b)(5) and (c)(4); 26 C.F.R. § 

1.832-4(b). In general, insurers may deduct the discounted value of estimated losses that 

have been incurred and that they will be required to pay under insurance policies currently 

in force.
Page 22 GAO-17-62 Terrorism Risk Insurance

regulatory officials we interviewed confirmed that insurers do not include 

estimated potential future losses for terrorism or other potential 

catastrophic events in loss reserves.

Purchasing reinsurance. Five of the six insurers we interviewed 

purchase reinsurance to help manage their terrorism exposure.35 Most of 

these insurers used a portion of the terrorism premiums they collected to 

purchase the reinsurance.36 As we previously reported, primary insurers 

may purchase reinsurance for potential terrorism losses up to the 

difference between what they are willing to cover in a terrorism event and 

the sum of their TRIA deductible and co-share under the program.37 Four 

of the six insurers we interviewed said they purchased treaty reinsurance 

coverage, which usually covers a part or a percentage of a book of an 

insurer’s business across multiple risks.38 According to a reinsurance 

broker we interviewed, the majority of terrorism reinsurance is sold along 

with other property/casualty coverage. One insurer also stated that on 

rare occasions it purchased facultative reinsurance (which covers 

individual policies) for specific risks or unique cases. Finally, another 

insurer we interviewed stated it purchased stand-alone terrorism risk 

reinsurance—coverage for terrorism risks only—for all policies with 

terrorism coverage.39

 35Reinsurance—insurance for insurers—is generally defined as the transfer of risk by 

which one party (a reinsurer), in consideration of a premium paid, agrees to pay the 

incurred losses of a primary insurer (the reinsured) for all or part of the loss the insurer 

may sustain under the policy or policies it has written. 

36Most insurers we interviewed stated they tracked premiums collected by risk and thus 

could distinguish terrorism risk premiums used to purchase reinsurance. One insurer 

tracked premiums by line of business. When there are no losses, any additional premiums 

attributable to terrorism risk flow into capital, according to two insurers we interviewed. 

37See GAO-08-1057.

38Two basic types of reinsurance contracts exist—treaty and facultative. In a treaty 

reinsurance contract, the reinsurer and insurer agree on which class(es) of underlying 

policies of the insurer’s to underwrite. In a facultative reinsurance contract, the reinsurer 

and insurer agree on individual underlying policies. 

39According to a reinsurance broker we interviewed, terrorism risk reinsurance pricing is 

largely based on whether the company has exposure in large metropolitan areas and on 

its retention amount (the maximum losses the insurer will carry on its own). According to 

the broker, sufficient terrorism risk reinsurance capacity does not exist in metropolitan 

areas and reinsurance pricing can be high compared to rural areas.
Page 23 GAO-17-62 Terrorism Risk Insurance

Insurers we interviewed acknowledged the difficulty of pricing terrorism 

risk and attributed it to the lack of data on terrorism risk. We previously 

found that insurers’ primary concern with respect to covering terrorism 

risks was limiting the amount of their exposures and that pricing was 

secondary.40 For most insurance products, insurers typically estimate the 

frequency and severity of an insurable risk based on data from past 

events to help calculate premiums that are commensurate with their risk 

exposure. However, as previously discussed, terrorism risk insurance is 

challenging to price because the frequency and severity of terrorism 

events are difficult to predict and quantify. As we concluded in prior work, 

because the frequency and severity of terrorism events are difficult to 

predict, the limits established in TRIA (which cap the potential severity of 

losses to insurers) make underwriting the risk and determining a price for 

terrorism coverage easier for insurers.41 However, one insurer and one 

reinsurer we interviewed expressed concern that primary insurers do not 

charge premiums sufficient to reflect their terrorism risk exposure.

The charge for terrorism risk coverage generally represents a small 

percentage of the overall commercial property/casualty premium, if 

insurers explicitly charge for it at all. According to insurers we interviewed, 

terrorism risk insurance is generally provided in conjunction with 

 40See GAO-14-445. 

41See GAO-14-445. 

Although Data to 

Accurately Price Terrorism 

Risk Insurance Are 

Lacking, Insurers That 

Charge Premiums for 

Their Share of Potential 

Losses May Use Loss 

Models and Factors Such 

as Location

Additional Data on Terrorism Risk 

Insurance Are Forthcoming

During the time of our data collection, limited 

data were available on terrorism risk 

insurance. However, Treasury and NAIC 

collected data in 2016. In response to the 

2015 TRIA reauthorization, Treasury began 

collecting data on the terrorism risk insurance 

market. In June 2016, Treasury issued its 

initial report on the effectiveness of TRIA 

based on a voluntary data call concerning the 

pricing of terrorism coverage, among other 

items. In addition, NAIC is in the process of 

analyzing data it has received for workers 

compensation related to terrorism risk 

exposure and received data on other TRIAeligible commercial lines in the fall of 2016, 

according to agency officials.

Treasury issued regulations in December 

2016 formalizing the procedures for data 

collection required by the 2015 TRIA 

reauthorization. The regulations go into effect 

on January 17, 2017.

Legend: TRIA = Terrorism Risk Insurance Act

NAIC = National Association of Insurance 

Commissioners

Source: GAO. | GAO-17-62
Page 24 GAO-17-62 Terrorism Risk Insurance

commercial property/casualty policies.42 For most TRIA-eligible lines, five 

of the six insurers we interviewed told us that they generally charge a 

percentage of overall property/casualty premiums for their share of 

terrorism risk coverage under TRIA.43 A report from Marsh found that 

from 2012 to 2015 policyholders paid between 3 percent and 5 percent of 

their total property premium for terrorism risk coverage.44 According to 

Treasury’s 2016 report, on average, reporting insurers that charged for 

terrorism risk insurance charged about 2.6 percent of the total policy 

premium for terrorism risk coverage and the percentage charged varied 

from 0.7 percent to 7.1 percent, depending on the line of insurance.45

However, according to Treasury’s 2016 report, although an explicit 

premium is charged for terrorism risk coverage in the majority of cases, 

about 23 percent of reporting insurers did not identify explicit terrorism 

risk premiums for such coverage.46 The report stated that insurers may 

not explicitly charge for terrorism risk coverage for reasons such as lack 

of any cognizable terrorism risk in certain regions or under certain policies 

or to ease administrative burden.47 An official from an insurance broker 

 42Terrorism risk coverage also may be provided through standalone policies that solely 

address terrorism-related risk and do not cover losses arising from other perils. Five of the 

six insurers we interviewed did not provide standalone terrorism risk coverage. One 

insurer we interviewed stated that it provides standalone terrorism coverage only in limited 

circumstances. Treasury reported similar trends in standalone terrorism risk policies. 

According to its 2016 report, only about 2.5 percent of the total terrorism risk premiums 

reporting insurers collected was associated with standalone terrorism risk policies. 

However, Treasury notes that the reported data likely understate the total proportion of the 

market addressed by stand-alone policies because of the lack of information from the type 

of insurers that issue such policies. See Report on the Overall Effectiveness of the 

Terrorism Risk Insurance Program (June 2016).

43As previously discussed, neither insurers nor the federal government charges for the 

potential federal share of terrorism losses before such losses occur. Four of the six 

insurers we interviewed said they use language in an NAIC model bulletin to disclose that 

the premium they charge does not include any charges for the portion of loss the federal 

government may cover under TRIA. 

44Marsh (of Marsh and McLennan Companies, Inc.) is one of the largest business 

insurance brokers in the United States. Marsh’s data consist solely of property policies 

and represent their clients. They cannot be generalized to the entire market. Marsh, 

2016Terrorism Risk Insurance Report.

45See Report on the Overall Effectiveness of the Terrorism Risk Insurance Program (June 

2016).

46See Report on the Overall Effectiveness of the Terrorism Risk Insurance Program (June 

2016). For this report, Treasury obtained data on a voluntary basis from insurers that 

represented about 41 percent of direct earned premiums in TRIA-eligible lines in 2015.

47Later in this report, we discuss administrative burden that may be associated with 

upfront charges such as terrorism risk premiums.
Page 25 GAO-17-62 Terrorism Risk Insurance

we interviewed also stated that some insurers do not include an additional 

charge for terrorism coverage in many of their policies.

While one insurer we interviewed charges a flat rate for terrorism risk 

coverage—that is, a premium rate per dollar of coverage that did not vary 

with location or other risk factors—four of the six insurers we interviewed 

consider location as a risk factor and thus charged policyholders located 

in densely populated areas a higher rate for the coverage. For example, 

one insurer stated it uses a model from the Insurance Services Office that 

uses a risk classification system that places urban centers into one of 

three tiers of risk classes.48 The insurer then enters its own terrorism risk 

exposure information into the model to price terrorism risk coverage.

According to insurers we interviewed, other risk factors insurers consider 

to price terrorism risk coverage include building occupancy rates; 

industry; and proximity to airports, federal buildings, and subways. For 

example, one insurer stated it created a range for terrorism risk insurance

pricing in which risks are slotted into low, medium, and high codes based 

on industry sectors to determine the starting point for pricing. Once 

assigned to a pricing slot, the insurer assesses risk-based factors such as 

location and occupancy. Depending on the number of high-risk 

characteristics that apply, the insurer will select a specific price from the 

range.

Terrorism risk pricing for workers’ compensation lines of insurance—

which cover an employer’s liability for medical care and physical 

rehabilitation of injured workers and helps to replace lost wages of injured 

workers—is more standardized when compared to other TRIA-eligible 

lines. For workers’ compensation lines, insurers in 38 states use rates 

developed by the National Council on Compensation Insurance (NCCI).49

According to NCCI, to help set workers’ compensation premium rates that 

include terrorism risk, NCCI uses information from modeling firms. These 

 48The Insurance Services Office is a source of information covering a range of personal 

and commercial lines of insurance. The company provides, among other things, statistical, 

actuarial, and claims information. Company representatives told us their data for 

commercial lines represent approximately two-thirds of the U.S. domestic industry’s 

premium volume. These data represent the majority of commercial property/casualty lines 

(except workers’ compensation) and primarily includes business written in the admitted 

market (that is, insurance policies or products purchased from companies or agents 

admitted or licensed to sell in a state). 

49NCCI gathers data, analyzes industry trends, and prepares objective insurance rate 

recommendations.
Page 26 GAO-17-62 Terrorism Risk Insurance

firms select various scenarios (different weapons, locations, damages, 

and frequencies), estimate the amount of damage to human life and the 

amount of losses under each scenario, and assign probabilities to each 

scenario. For workers’ compensation lines of insurance in general, NCCI 

representatives stated that they typically set rates using actual data on 

the number, types, and costs of workplace injuries. However, the paucity 

of data about actual terrorism events—and the workplace injuries that 

could result—necessitates the use of modeling techniques using various 

assumptions to estimate potential losses from terrorism events.

According to NCCI officials, NCCI sets one rate for terrorism risk in each 

of the 38 states it manages (that is, rates do not vary within a state for 

other factors such as location, company size, or industry). Rates can vary 

across states because of the perceived risk of terrorism being higher in 

one state than another. Each state also may impose local surcharges on 

the NCCI rate for that state. States that do not rely on NCCI either use a 

state rating agency to set rates for terrorism risk, or require employers to 

obtain workers’ compensation insurance from a compulsory state 

fund. State rating agencies operate similarly to NCCI in setting one rate 

for terrorism risk insurance for the entire state.

Our analyses showed that the federal government (initially) may sustain a 

greater share of losses in more catastrophic terrorism events, and in 

some scenarios recoupment may not be required. TRIA requires Treasury 

to reimburse affected insurers for a certain percentage of their losses 

above their individual deductibles and Treasury may recoup some or all of 

its losses through post-event premium surcharges on all TRIA-eligible 

policyholders. The federal share of losses depends on the size of the 

terrorism event and the aggregate direct earned premiums in TRIAeligible lines among affected insurers (premium base). In addition, 

recoupment may be mandatory, discretionary, or a combination 

depending on the size of the event and the premium base. Finally, 

because the 2015 reauthorization incrementally shifts a greater share of 

losses from the federal government to insurers from 2016 to 2020, the 

date of the terrorism event also affects how losses would be shared and 

how the federal share of losses would be apportioned between 

mandatory and discretionary recoupment provisions.

Federal Share of 

Terrorism Losses and 

Recoupment 

Requirements 

Depend on Event 

Size and Aggregate 

Premium Base of 

Affected Insurers
Page 27 GAO-17-62 Terrorism Risk Insurance

As shown in figure 4 and consistent with the manner in which the program 

is structured, our analyses showed that the initial government share of 

losses (amounts the federal government would reimburse insurers and 

prior to any recoupment from policyholders) would be greater following 

events with more total insured losses.50 Using a number of informed 

assumptions, we analyzed loss scenarios for hypothetical terrorism 

events in 2016 with varying amounts of total insured losses ($25 billion, 

$50 billion, $75 billion, and $100 billion) and affecting varying subsets of 

insurers.51 An individual insurer’s losses are the sum of its deductible and 

co-share. Under TRIA, an insurer’s individual deductible is calculated 

based on its direct earned premium in TRIA-eligible lines of insurance. 

For our analyses, we constructed insurers’ aggregate deductibles, which 

are equal to the sum of 20 percent of each affected insurer’s previous 

year’s direct earned premiums in TRIA-eligible lines (premium base).52

We used direct earned premiums of the top 4, top 10, top 20, and all 

TRIA-eligible insurers as proxies to represent various-sized premium 

bases.53 For more information on these scenarios and others, see 

appendix II.

 50According to Treasury’s 2016 report, higher participation rates increase the likelihood 

that losses from a terrorism event will be covered by private capital from commercial 

insurers. See Report on the Overall Effectiveness of the Terrorism Risk Insurance 

Program (June 2016). Analyses we conducted for additional scenarios resulted in similar 

trends as illustrated in figure 4. For more information, see appendix II.

51See appendixes I and II for more information on our analyses, including the assumptions 

we used. 

52For our analysis, we assume all affected insurers incurred losses equal to or exceeding 

their individual deductibles. Using this assumption, we constructed aggregate insurer 

deductible amounts for the purposes of our analyses. 

53The direct earned premium associated with insurers—rather than the number of 

insurers—is important because direct earned premium determines the aggregate insurer 

deductible. For example, an aggregate insurer deductible for a different subset of insurers 

would equal the aggregate insurer deductible for the top four insurers’ if the total of their 

direct earned premiums were also equal.

Event Size, Deductibles, 

and Premium Base Drive 

the Initial Federal Share of 

Losses
Page 28 GAO-17-62 Terrorism Risk Insurance

Figure 4: Initial Loss-Sharing Amounts under Terrorism Risk Insurance Act for 

Hypothetical 2016 Terrorism Events Affecting a Premium Base Equal to That of Top 

10 Insurers

Notes: The initial loss sharing amounts depicted reflect federal reimbursements to private insurers 

and do not account for the amounts Treasury may recoup under the Terrorism Risk Insurance Act, as 

amended (TRIA). The direct earned premium associated with the insurers (premium base) rather than 

the number of insurers is important because prior-year direct earned premium determines the 

aggregate insurer deductible. In this example, we used the direct earned premiums of the top 10 

TRIA-eligible insurers as a proxy for a premium base. The total of direct earned premium for a 

different subset of insurers’ could equal the direct earned premiums of the top 10 insurers. The 

dashed line represents the aggregate insurer deductible associated with the top 10 insurers.

Additionally, our analyses showed that the initial proportion of losses that 

would be borne by the federal government and insurers depends, in part, 

on the amount of losses from the terrorism event relative to aggregate 

deductibles.

• The federal government would not bear the cost of any losses if 

the total losses were less than insurers’ aggregate deductibles.

For example, in an event that affected insurers with a premium base 

equal to that of top 10 insurers and resulted in $5 billion in total 

losses, insurers likely would sustain all losses, because insurers’

losses likely would fall below their respective deductibles.
Page 29 GAO-17-62 Terrorism Risk Insurance

• Losses in excess of the insurers’ deductibles would be shared 

between insurers and the federal government. For example, in an 

event that affected insurers with a premium base equal to that of the 

top 10 insurers and resulted in $50 billion in total losses, insurers and 

the federal government would share the losses above the insurers’

deductibles. In this example, insurers’ deductibles would not cover all 

losses.

• As total losses increase above the insurers’ deductibles, the 

government share of losses increases at a higher rate than the 

insurers’ share of losses. Because the federal co-share is much 

larger (84 percent in 2016) than the insurer co-share (16 percent in 

2016), the initial federal share of losses is much higher than insurers’

share of losses in events with higher total losses. For example, in an 

event that affected insurers with a premium base equal to that of the 

top 10 insurers and resulted in $75 billion or $100 billion in losses, the 

government share of losses would be much larger than the insurers’

share.

In addition, our analyses showed that as losses are shared by insurers 

representing a larger premium base, the government share would 

decrease. This occurs, in part, because as the aggregate premiums of 

affected insurers increase, the aggregate insurers’ deductible also 

increases. For example, as illustrated in figure 5, in an event that resulted 

in $50 billion in losses, the portion of the losses covered by the federal 

government decreases as the aggregate premium base among the 

affected insurers increases.
Page 30 GAO-17-62 Terrorism Risk Insurance

Figure 5: Initial Loss-Sharing Amounts under Terrorism Risk Insurance Act for 

Hypothetical $50 Billion Terrorism Event Occurring in 2016 and Affecting Various 

Premium Bases

Notes: The initial loss-sharing amounts depicted reflect federal reimbursements to private insurers 

and do not account for the amounts Treasury may recoup under the Terrorism Risk Insurance Act, as 

amended (TRIA). The direct earned premium associated with the insurers (premium base) rather than 

the number of insurers is important because prior-year direct earned premium determines the 

aggregate insurer deductible. We used the top 4, top 10, top 20, and all TRIA-eligible insurers as 

proxies to represent various-sized premium bases. For example, the total of direct earned premium 

for a different subset of insurers could equal the direct earned premiums of the top 4 insurers.

a

The premium base represents the percentage of TRIA-eligible direct earned premiums in 2014.
Page 31 GAO-17-62 Terrorism Risk Insurance

The federal share of losses that could be recouped may fall under the 

mandatory provision, the discretionary provision, or both. As illustrated in 

figure 6, our analyses showed that the proportion of mandatory and 

discretionary recoupment amounts depends on the total amount of 

terrorism losses (event size), the subset of insurers that sustained losses, 

and whether insurers’ losses were more or less than the industry 

aggregate retention amount.54 General recoupment scenarios and 

examples from our analyses are described below.

• The federal government may be required to recoup its total share 

of losses. If the total losses from the terrorism event were less than 

the industry aggregate retention amount, all government losses must 

be recouped under the mandatory recoupment provision. For 

example, in an event that resulted in $25 billion in losses regardless of 

the premium base of affected insurers, all recoupment would be 

mandatory because the total losses would be below the industry 

aggregate retention amount ($31.5 billion in 2016). The amount 

recouped would be the difference between total losses and the 

insurers’ share of losses.

• The federal government may not be required to recoup any of its 

losses. If insurers’ share of losses exceeded the industry aggregate 

retention amount, all government losses would fall under the 

discretionary provision and equal the difference between all losses or 

the maximum loss cap (whichever was lower) and the insurers’ share 

of losses. For example, our analyses showed that all recoupment 

would be discretionary for an event where all insurers were affected 

because the aggregate insurer deductible would exceed the industry 

aggregate retention amount.

• The federal government may be required to recoup only a portion 

of its losses. If total losses exceeded the industry aggregate 

retention amount and insurer losses were less than the retention 

amount, the government share of losses would fall under both the 

mandatory and discretionary provisions. The mandatory portion would 

be the difference between the retention amount and the insurers’

losses. The discretionary portion would be the difference between 

 54The industry aggregate retention amount in 2016 would be the lesser of $31.5 billion 

and total of insurers’ and federal shares of losses in the calendar year. The annual 

increase in industry aggregate retention amount from 2015 to 2020 would result in 

increasing portions of federal losses that would be mandatorily recouped and decreasing 

portions of losses that could be discretionarily recouped for events with the same amount 

of losses. 

Recoupment of Federal 

Losses Could Be 

Mandatory, Discretionary, 

or a Mixture of Both 

Depending on Event Size 

and Premium Base
Page 32 GAO-17-62 Terrorism Risk Insurance

total losses or the maximum loss cap (whichever was lower) and the 

aggregate industry retention amount. For example, when affected 

insurers had an aggregate premium base equal to that of the top 4 or 

top 10 insurers and the total losses exceeded $31.5 billion ($50 

billion, $75 billion, or $100 billion in total losses), recoupment would 

be split between mandatory and discretionary because the insurers’

losses were less than the industry aggregate retention amount but the 

total losses exceeded the aggregate retention amount.

Figure 6: Potential Mandatory and Discretionary Recoupment Amounts under 2015 Reauthorization of Terrorism Risk 

Insurance Act for Different Event Sizes and Subsets of Affected Insurers, 2016

Notes: The mandatory recoupment amounts depicted do not include the 40 percent mandatory 

recoupment scaling factor. The direct earned premium associated with the insurers rather than the 

number of insurers is important because prior-year direct earned premium determines the aggregate 

insurer deductible. We used the top 4, top 10, and top 20, and all TRIA-eligible insurers as proxies to 

represent various-sized premium bases. For example, the total of direct earned premium for a 

different subset of insurers could equal the direct earned premiums of the top 4 insurers.

As figure 6 illustrates, our analyses also showed patterns in the portions 

of losses to be recouped under the mandatory and discretionary 

provisions. Losses recouped under the mandatory provision decreased 

as the aggregate premiums base of insurers with losses increased. Of the 

event sizes that we analyzed, events with $40-50 billion in losses 
Page 33 GAO-17-62 Terrorism Risk Insurance

generally resulted in the highest mandatory recoupment across the 

premium bases.

55 The discretionary recoupment amount increased as the 

size of the event increased, and in very large events could exceed $60 

billion. Discretionary recoupment generally was not affected by the 

aggregate premium base of affected insurers. For example, for all insurer 

subsets, the discretionary portion of recoupment increased with the event 

size, but the size of the discretionary portion for each event size generally 

would be the same whether the affected insurers’ aggregate premium 

base was equal to that of the top 4, top 10, or top 20 insurers.56

In addition to the total amount of losses and the aggregate premium base 

of insurers with losses, the date of a terrorism event would affect how 

losses would be shared after a terrorism event and how federal losses 

would be apportioned between recoupment provisions. Specifically, the 

2015 reauthorization of TRIA incrementally shifts a greater share of 

losses from the federal government to insurance companies in 2016-

2020, as shown in table 2.57 For example, for loss sharing, the increases 

in the program trigger will increase the total insured losses that must 

occur before the government would incur any losses. In addition, the 

increase in insurer co-share will decrease the federal share for losses 

above the insurers’ aggregate deductible. For federal losses apportioned 

between mandatory and discretionary recoupment, the industry 

aggregate retention increases by $2 billion per year. This change 

potentially shifts a portion of the federal share of losses from the 

discretionary recoupment provision to the mandatory provision.

 55In some cases, the mandatory recoupment amount exceeded $20 billion, including the 

40 percent mandatory recoupment scaling factor.

56If all insurers were affected, the federal share of losses would be smaller because the 

industry share of losses would be larger, resulting in a smaller discretionary recoupment 

amount.

57Pub. L. No. 114-1 § 102, 103(3), 129 Stat. 3, 4 (2015).

Loss Sharing and 

Recoupment Amounts 

Also Affected by Date of 

Terrorism Event
Page 34 GAO-17-62 Terrorism Risk Insurance

Table 2: Selected TRIA Characteristics Relevant to Recoupment, If the Event Occurred in 2016-2020

Characteristic

Year

2016 2017 2018 2019 2020

Program trigger (dollars in 

millions)

120 140 160 180 200

Insurer co-share (percentage) 16 17 18 19 20

Industry aggregate retention

(dollars in billions)a

31.5 33.5 35.5 37.5 Average amount of 

insurers’ deductibles 

for the prior 3 years

Deadline for collecting 

mandatory portion of 

recoupment

Sept. 30, 2019 Sept. 30, 2019 35 percent by Sept. 30, 

2019 and the remainder 

by Sept. 30, 2024

Sept. 30, 2024 Sept. 30, 2024

Effective time frame to collect 

mandatory portion of 

recoupmentb

2 years and 9 

months

1 years and 9 

months

35 percent in 9 months, 

the remainder in 5 years

4 years and 9 

months

3 years and 9 

months

Source: GAO analysis of the Terrorism Risk Insurance Act (TRIA) at 15 U.S.C. § 6701 note. | GAO-17-62

a

If total insurers’ losses (sum of deductibles and co-shares) exceed the industry aggregate retention 

amount, no mandatory recoupment would occur.

b

To determine the effective time frame, we assumed Treasury would begin collecting the surcharge in 

the January following the event.

The differing mandatory recoupment collection time frames from 2016 to 

2020 could affect potential premium increases due to recoupment 

surcharges. While discretionary recoupment surcharges must not 

increase annual TRIA-eligible premiums by more than 3 percent, 

mandatory recoupment surcharges in part would be determined by the 

deadlines for collecting mandatory recoupment. For example, our 

analyses showed potentially large surcharges resulting from events that 

occurred in 2017 (the year with the shortest collection time frame).

The two alternative funding options we analyzed would require trade-offs 

and present complexities. First, the option of a federal charge for 

terrorism risk insurance could be collected to pay for the federal share of 

potential losses or to cover the cost of the federal guarantee under TRIA.

Second, the option of insurer set-asides—through which insurers would 

more explicitly address their terrorism exposure through their capital, 

assets, or liabilities—could be used to help cover insurers’ share of 

potential terrorism losses or both insurers’ and the federal government’s 

share of potential losses.

Alternative Funding 

Options Pose Tradeoffs and Complexities
Page 35 GAO-17-62 Terrorism Risk Insurance

Depending on the approach, a federal terrorism insurance charge may 

help promote some pricing objectives but could involve significant 

limitations and trade-offs. Based on our prior work on designing and 

assessing federal user fees, other government-collected funds, and userbased taxes, we identified pricing objectives and characteristics that could 

have some applications for policymakers in considering various 

approaches for a federal charge for terrorism risk insurance, as shown in 

table 3.58 Using four pricing objectives (promoting economic efficiency, 

equity, revenue adequacy, and limiting administrative burden), we 

evaluated two approaches for a voluntary or required federal charge for 

terrorism risk insurance:

Premium-like charge: A charge that would be intended to help pay for 

the federal share of potential losses and could replace the current 

recoupment provision. Such a charge could be an amount based on risk 

using insurance principles or it could be designed as a flat rate or vary 

based on insurer or insured characteristics.59

Backstop charge: A charge or fee paid to the Treasury for the promise 

of payment of the federal share of losses, or backstop. Such a charge 

could be determined in a variety of ways, but it would not necessarily be 

based on insurance principles. In addition, recoupment could still be in 

place to cover the federal share of losses as the charge would not be 

intended to be adequate to cover potential losses.60

Policymakers may face tradeoffs among the pricing objectives as no 

single design will satisfy all parties on all dimensions, and the level of 

importance different policymakers may place on different objectives will 

vary, depending on how they value the characteristics of each.

 58See, GAO, Federal User Fees: A Design Guide, GAO-08-386SP (Washington, D.C.: 

May 29, 2008); and Federal User Fees: Fee Design Options and Implications for 

Managing Revenue Instability, GAO-13-820 (Washington, D.C.: Sept. 30, 2013).

59For examples of how selected federal and state programs structure charges to achieve 

pricing objectives, see appendix Ill.

60In prior work, we reviewed and compared the structures of selected foreign terrorism risk 

insurance programs. The programs in Australia and the United Kingdom each pay a 

charge to their governments for their backstops. See GA0-16-316.

A Federal Charge for 

Terrorism Risk Insurance 

Would Involve Significant 

Trade-offs
Page 36 GAO-17-62 Terrorism Risk Insurance

Table 3: Framework of Pricing Objectives and Related Characteristics of Potential Federal Charge Structures 

Objectives: Characteristics:

Promote economic efficiency 1. charges participants according to their level of risk

2. charges participants according to their insurable value

3. takes into account mitigation activities

4. makes participation in program mandatory

Promote equity 1. takes fairness into account by charging a similar price to participants with similar characteristics

2. takes fairness into account by considering the ability of participants to pay

Promote revenue adequacy 1. is designed to cover the intended share of losses over time

2. has access to other sources of funding if accumulated receipts from charges are inadequate

3. has ongoing sources of funding or standing authority to obtain funds that may mitigate revenue 

shortfalls

4. has a process in place to assess and recommend pricing adjustments as necessary

Limit administrative burden 1. collects charges directly by the program or through a third party

2. has a process in place to ensure funds are properly remitted

3. considers the frequency of collecting charges

Source: GAO analysis. | GAO-17-62

Note: The order in which the characteristics are listed does not indicate level of importance. Also, not 

all the characteristics may be feasible, desirable, or applicable to a terrorism insurance program.

Economic efficiency. A premium-like charge could address risk and 

insurable value—characteristics of promoting economic efficiency—but 

would be difficult to price. Specifically, a premium-like charge could be 

based on existing premiums that policyholders paid insurers.61 However, 

this approach has some limitations because the existing, underlying 

premiums are not accurately priced according to risk. As we previously 

discussed, insurers lack data to accurately price terrorism risk insurance 

and may charge a nominal percentage of the underlying commercial 

property/casualty premium. Four industry associations, three insurers, an 

insurance broker, and a state regulator said a reliable method or model to 

estimate manmade catastrophes like terrorism events is currently not 

available and representatives questioned how the federal government 

 61Under either approach, charges could be collected from the insurers, policyholders, or 

both.
Page 37 GAO-17-62 Terrorism Risk Insurance

could set risk-based prices to promote economic efficiency in the absence 

of a viable method to estimate terrorism risk.62

Taking into account risk mitigation activities—another characteristic of 

economic efficiency—would be challenging to incorporate into a premiumlike charge. Three insurers stated that, due to the unpredictable nature of 

potential terrorism events, risk-mitigation measures could be more costly 

than beneficial because terrorists might change tactics in response to 

mitigation efforts. One of the insurers further noted that mitigation efforts 

would be less effective at an individual insurer or policyholder level than 

at a national level, and a state regulator said the federal government is 

the primary body for taking mitigation actions such as through national 

security. While mitigation efforts may be difficult to incorporate into the 

premium pricing process for terrorism risk, an insurer said it takes certain 

mitigation efforts into consideration when making decisions to accept a 

client. For example, the insurer said that 24-hour guard service, perimeter 

fencing, and intrusion detection devices are some mitigation efforts 

considered in the decision.

In contrast, a backstop charge does not need to be closely tied to an 

estimate of each participant’s terrorism risk exposure or risk-mitigation 

activities. For example, a backstop charge would only need to cover the 

cost of its administration rather than potential losses and, therefore, does 

not need to be risk-based.

Equity. With either a premium-like charge or backstop charge, 

policymakers may need to consider trade-offs between fairness and 

affordability. Industry stakeholders noted challenges in structuring a 

federal charge for terrorism risk to promote the characteristics of equity 

(fairness), which involve the extent to which the pricing structure (1) 

provides similar treatment to participants with similar levels of risk, and (2) 

considers affordability. One insurer stated that to achieve equity, all 

participants with similar levels of terrorism risk should be charged similar 

rates. Two other insurers and a state regulator cautioned that prices 

needed to be affordable to maintain participation rates and support a 

thriving market that offers coverage for terrorism risk. One insurer pointed 

 62Unlike natural catastrophes such as hurricanes, humans can alter the frequency and 

severity of manmade catastrophes such as terrorism. Natural catastrophes occur 

randomly, lending these catastrophes to traditional methods of modeling that insurers use 

to help price premiums. Applying traditional modeling methods is more challenging 

because they lack randomness.
Page 38 GAO-17-62 Terrorism Risk Insurance

out that affordability is important to consider because it was a factor in the 

withdrawal of insurers and reinsurers from offering terrorism coverage 

after the September 11 terrorist attacks.63 One state insurance regulator 

said an affordability goal could be problematic to the extent it competes 

with the goal of each participant paying their fair share, and another state 

regulator said that an equitable charge would be more achievable if 

collected after a terrorism event—as currently structured under TRIA’s 

recoupment provision—when more information would be known about the 

amount of losses.

Revenue adequacy. If policymakers wanted to focus on raising adequate 

revenue to cover expected losses over time, a premium-like charge might 

be a better option than a backstop charge. However, some industry 

stakeholders we interviewed stated that a charge that could generate 

enough revenue to cover the federal share of losses would be costprohibitive. An annual charge would need to be very high to accumulate 

enough funds over time to cover very large losses which, an insurer 

surmised, could drive down take-up rates and require other sources of 

funds, such as surcharges or taxes. Also as discussed, industry 

associations, insurers and others we interviewed said that determining a 

price that would provide adequate revenues to pay for the federal share 

of potential losses would be difficult because estimating terrorism 

frequency and loss is not possible with any statistical accuracy. In 

contrast, a backstop charge approach would not be intended to cover 

expected losses.

Administrative burden. If policymakers focused on reducing 

administrative burden, a backstop charge might result in lower 

administrative costs than a premium-like charge. Industry stakeholders 

generally held similar views that a premium-like charge would bring about 

higher levels of administrative burden than the current program—that is, 

the responsibilities of program staff or third parties to collect and process 

the charge and oversee the effort. Officials from the Congressional 

Budget Office and the Congressional Research Service cautioned that 

collecting and managing federal charges from the more than 1,000 

commercial property/casualty insurers would entail a large resource 

 63Similarly, we reported that insurers generally stopped covering terrorism risk after 

September 11, 2001, because they determined that the risk of loss was unacceptably high 

relative to the premiums policyholders would view as affordable. See GAO, Terrorism 

Insurance: Rising Uninsured Exposure to Attacks Heightens Potential Economic 

Vulnerabilities, GAO-02-472T (Washington, D.C.: Feb. 27, 2002).
Page 39 GAO-17-62 Terrorism Risk Insurance

commitment from the federal government. According to our interviews, if 

such a charge was implemented, increases in staff and expertise would 

be required to collect, manage, and oversee the charges. Officials from 

Treasury estimated that a program that collected an upfront charge would 

necessitate an additional 15-20 more full-time staff to collect the charges 

and audit primary insurers—up from the three staff that would be needed 

to administer third-party service contracts following a certified terrorism 

event. The officials said more staff could be needed to operate on an 

independent board and to manage the collection and investment of the 

funds. According to one insurer, pricing a federal charge as a flat rate on 

premiums across all TRIA-eligible insurance lines and including it on 

policyholders’ statements similar to premium taxes would be transparent 

and easily audited and thus may require less administrative burden than a 

variable rate. Two insurers emphasized that the current method—

recouping the federal share of losses after a terrorism event—is the least 

burdensome, with relatively low administrative costs to Treasury.

In contrast, under the backstop charge approach, administrative burden 

may be less than a premium-like charge because staff and operations 

would not be needed to estimate losses and set a corresponding pricing 

structure.

Another alternative funding method for TRIA—designing and 

implementing an insurer set-aside—could be complex because of existing 

state laws and insurance accounting standards, among other reasons. An 

insurer set-aside could be designed to help cover insurers’ share of 

potential terrorism losses, the federal government’s share of potential 

losses, or both. Insurer set-asides could be structured in at least three 

ways: (1) loss reserves for events that have not yet occurred, (2) separate 

capital requirements for terrorism risk exposures, or (3) segregated 

assets that only can be used for a specific purpose such as potential 

terrorism losses.64 We identified four proposals or current programs with 

insurer set-aside approaches to illustrate ways a potential set-aside could 

be designed, according to the three structures (see table 4). These 

 64The 2015 reauthorization of TRIA directed GAO to review capital reserves as an 

alternative approach for funding potential terrorism losses. In response, we assessed setaside approaches that build on current industry practices through which insurers would 

more explicitly address their terrorism exposure through their capital, assets, or liabilities, 

as capital reserves for specific uses do not exist in current industry practices in the United 

States. 

Depending on Approach, 

Implementing Terrorism 

Set-Asides Could Be 

Complex
Page 40 GAO-17-62 Terrorism Risk Insurance

approaches also varied in participation requirements, target amounts, and 

use of the set-asides.

Table 4: Overview of Four Set-Aside Approaches We Identified

Program name/ 

proposal Description Structure Participation

Target amounts and 

time frames Use

National Association 

of Insurance 

Commissioners 

(NAIC) Catastrophe 

Reserve Proposal

Property/casualty 

insurers could set aside 

funds for potential 

natural catastrophe 

losses under proposed 

tax laws and accounting 

standards

Loss reserves 

(tax deduction) 

without specific 

segregation of 

assets

Voluntary Formula-based annual 

maximum set-aside 

amount for each 

participating insurer 

Specified industry-wide 

target and time frame

Insurer share of 

potential losses

Available for 

multiple perils and 

solvency purposes

Austria’s Terrorism 

Risk Insurance 

Program

Allows insurers to set 

aside funds to cover 

program deductibles on 

potential terrorism 

losses

Loss reserves 

(tax deduction)

Voluntary Market share-based setaside amount for each 

participating insurer

Specified industry-wide 

target and pace

Insurer share of 

potential lossesa

NAIC Catastrophe 

Risk Weight

When fully 

implemented, would 

require insurers to 

include estimates of 

potential natural 

catastrophe losses in 

their risk-based capital 

calculations

Included in riskbased capital 

calculation 

without specific 

segregation of 

assets

Will be reported 

to and assessed 

by NAIC as part 

of risk-based 

capital 

requirements 

Mandatory (when 

fully 

implemented)

Amounts determined by 

individual insurer’s risk 

profile 

Available for 

hurricanes, 

earthquakes,

solvency 

purposes, and 

other uses

Selected Aspects 

from Legislative 

Proposals for a 

Terrorism Risk 

Insurance Act (TRIA) 

Reserve Fundb

Insurers could set aside 

a portion of their 

terrorism premiums for 

potential terrorism 

losses 

Set-aside with 

segregated 

assets

Must be 

maintained in 

segregated 

accounts in 

fiduciary capacity 

on behalf of 

Secretary of the 

Treasury

Mandatory (in 

one proposal)

Specific set-aside amount 

for individual insurers (in 

one proposal)

Insurer and 

federal share of 

potential losses

Source: GAO interviews and analysis of program documents and legislative proposals. | GAO-17-62

a

Based on available documents and interviews with knowledgeable representatives, it was not clear if 

the set-asides in the Austrian program and legislative proposals could be used for other perils or 

solvency purposes. Furthermore, we do not know whether Austria requires specific segregation of 

assets.

b

We reviewed two legislative proposals (which were developed by the House Financial Services 

Committee) entitled the Terrorism Risk Insurance Revision Act of 2005 and Terrorism Risk Insurance 

Modernization (TRIM) Act of 2014. For the purposes of our report, we combined aspects of both 

proposals and discuss them collectively. The aspects discussed appear in at least one or both 
Page 41 GAO-17-62 Terrorism Risk Insurance

proposals. The proposals also addressed other aspects of the TRIA program. The TRIM Act of 2014 

was not widely circulated in Congress because it was never introduced as a bill. The second proposal 

was introduced in November 2005. (H.R. 4314, 109th Cong. (1st Sess. 2005)). The legislative 

proposals would direct insurers to hold a portion of their terrorism premiums in fiduciary capacity on 

behalf of the Department of the Treasury (Treasury). To the extent Treasury used the segregated 

assets to cover the federal share of terrorism losses, we assumed these assets would not be part of 

an insurer’s taxable income. Although the proposals referenced capital reserves, we interpreted the 

proposals to require a set-aside with segregated assets as capital reserves for specific uses do not 

exist in current industry practices in the United States.

The first two ways an insurer set-aside could be structured, establishing 

(1) loss reserves for events that have not yet occurred and (2) separate 

capital requirements for terrorism risk exposures, might not involve a 

formal or legal segregation and limitation of assets dedicated for a 

particular purpose, as illustrated in the following examples.

• The NAIC catastrophe reserve proposal uses loss reserves for events 

that have not yet occurred. Under this proposal, a participating 

insurer’s set-aside would be structured as a separate liability on its 

balance sheet—distinct from loss reserves for events that have 

already occurred—without specific segregation of assets. In addition, 

the set-side could be available to cover losses from multiple types of 

perils.

• The NAIC catastrophe risk weight uses capital requirements. In 2013, 

insurers began testing a weighted measure in their minimum riskbased capital determinations, taking into account earthquake and 

hurricane risks to determine a target amount of capital to maintain that 

would preserve their solvency following a natural catastrophe.65

Insurers’ capital is not limited to covering losses from hurricanes and 

earthquakes.

A third way of structuring an insurer set-aside involves segregation of 

assets for a specific purpose and is illustrated by proposals by House 

members to build segregated insurer set-asides for terrorism losses to 

help stabilize the marketplace following a terrorism event.66 Under these 

 65According to NAIC officials, they are in the initial data collection and testing phase and 

expect to fully implement the catastrophe risk weight by 2017.

66The legislative proposals—which were developed by the House Financial Services 

Committee and entitled the Terrorism Risk Insurance Revision Act of 2005 and Terrorism 

Risk Insurance Modernization (TRIM) Act of 2014—also addressed other aspects of the 

TRIA program. For the purposes of our report, we combined aspects of both proposals 

and discuss them collectively although some aspects do not appear in both proposals. 

The TRIM Act of 2014 was a draft outline and was never introduced as a bill. The second 

proposal was introduced in November 2005. (H.R. 4314, 109th Cong. (1st Sess. 2005)). In 

addition, we interpreted the proposals to require a set-aside with segregated assets.
Page 42 GAO-17-62 Terrorism Risk Insurance

proposals, insurers could set aside a portion of terrorism risk premiums 

collected from policyholders as specifically segregated assets to be used 

only for potential terrorism losses. We discuss these approaches and 

examples of set-asides used in other countries in more detail in appendix 

IV.

Implementing a set-aside for TRIA could be complex. Specifically, a loss 

reserve similar to NAIC’s catastrophe reserve proposal could involve a 

significant departure from existing insurance statutory accounting 

standards. Implementing set-asides also could involve revisions of state 

insurer solvency laws, and federal tax law changes (for example, to 

provide a tax deduction). In addition, a catastrophe risk-weight approach 

would involve significant data and model development.

Accounting practices. The four proposals and programs use a range of 

structures. One approach, in particular, would have implications for 

current practices related to statutory accounting for insurance losses. 

Specifically, an approach similar to the NAIC catastrophe reserve 

proposal—in which insurers would create loss reserves for events that 

have not yet occurred—would be contrary to the current general basis for 

recording insurance losses under SAP.67 As previously discussed, SAP 

states that insurers only may create loss reserves for an event that has 

occurred and for which the cost of the event is estimable. Implementing 

an approach for potential terrorism losses similar to the NAIC catastrophe 

reserve proposal would involve NAIC modifications of SAP to allow 

insurers to maintain loss reserves for events that have not yet occurred.

In addition, using some of the set-aside approaches may affect the total 

amount of assets that an insurer holds to support its ability to pay current 

and future claims.

• Under a structure in which insurers would establish loss reserves for 

events that have not yet occurred (similar to the NAIC catastrophe 

reserve proposal), an insurer’s assets would remain available for all 

types of insured risks. However, initially establishing such new loss 

reserves would reduce capital. If, as a result, the insurer’s capital 

would fall below the minimum capital requirements, the insurer would 

need to raise additional funds to continue to meet capital 

 67Insurers must report their financial holdings to the regulator in their state of domicile 

using SAP, which measure the ability of an insurer to pay claims and are designed to 

assist state insurance regulators in overseeing the solvency of insurance companies.
Page 43 GAO-17-62 Terrorism Risk Insurance

requirements. However, most U.S. insurers hold several times more 

capital than states require. If the insurer’s capital still exceeded 

minimum capital requirements even after establishing such new loss 

reserves, creating a loss reserve for events that have not yet occurred 

might have no immediate impact on the amount of assets an insurer 

holds.

• Under a structure that would establish separate capital requirements 

for terrorism risk exposures similar to NAIC’s catastrophe risk weight, 

an insurer’s assets also would remain available for all types of insured 

risk. If an insurer holds several multiples of the minimum required 

capital, an additional minimum capital component might have no 

immediate impact on the amount of capital an insurer holds.

• A structure in which insurers would be required to establish 

segregated assets that could be used only for a specific purpose such 

as potential terrorism losses (similar to the legislative proposals) 

would limit such assets from being used for other types of insured 

risks. One state regulator and two insurers raised concerns that 

segregating assets for potential terrorism losses could prevent such 

assets from being used to pay for other losses. In addition, holding 

assets that are specifically segregated for terrorism losses may 

require insurers to raise additional capital. However, if an insurer 

holds several multiples of the minimum required capital, the 

segregation of assets might have no immediate impact on the amount 

of assets the insurer already holds.

State laws. The complexity of implementing set-asides also could include 

revising state laws to recognize or account for how to treat the assets in 

the event states needed to oversee and resolve insolvent insurers. For 

instance, accommodating a set-aside with segregated assets might 

require amending NAIC’s model laws and later adoption and enactment 

by the states. Furthermore, two state regulators pointed out that 

implementing a set-aside with segregated assets for potential terrorism 

losses could affect state oversight related to laws and practices for 

insurers that become insolvent. For example, the two state regulators 

pointed out that policymakers should consider if funds in the TRIA setaside would become part of state receivership procedures to pay nonTRIA claims of insolvent insurers.

Federal tax laws. Some set-aside approaches also may have 

implications for federal tax laws. For example, current federal tax rules do 

not allow insurers to deduct potential losses. However, providing 

preferential tax treatment for potential terrorism losses—in conjunction 
Page 44 GAO-17-62 Terrorism Risk Insurance

with changes to SAP that would allow such reserves—could provide 

incentives for insurers to establish related loss reserves. Such revisions 

would need to incorporate limitations to prevent overestimation of

potential loss reserves, as an overstatement of loss, if allowed, would 

improperly decrease the amount of taxable income.

In addition, policymakers also would need to clarify the tax implications 

related to a set-aside with segregated assets. For example, policymakers 

would need to clarify whether amounts added to segregated assets would 

receive favorable tax treatment (such as tax credits or reductions to 

taxable income).68 The two legislative proposals we considered were not 

clear on the specific amounts available for insurers to use or if any 

amount contributed to the set-aside would receive favorable tax 

treatment.

Data and model development. Implementing any of the terrorism setaside approaches, particularly a risk weight as part of insures’ risk-based 

capital calculation requirements—similar to NAIC’s existing catastrophic 

risk weight—would require historical and reliable data on terrorism losses. 

It would also require models to estimate potential losses, which could 

take several years to develop, test, and implement if data were available. 

For example, NAIC officials said that detailed property location data and 

the ability to reasonably model losses helped in the creation of the 

catastrophe risk weight, a process that took more than 10 years.

Similar types of information would be needed to develop target amounts 

and time frames for set-asides or a risk weight for terrorism risk. While 

insurers increasingly have used sophisticated modeling tools to assess 

terrorism risk, little data exist on which to base estimates of future losses 

in terms of frequency or severity, or both.69 NAIC officials told us that they 

have begun high-level discussions to consider adding a terrorism risk 

weight and weights for other risks. Although they expect that they could 

shorten the development time frame because of their experience 

developing the catastrophe risk weight, such an approach remained a 

challenge because of the difficulties of measuring and predicting losses 

associated with terrorism risks.

 68We did not explore the tax treatment of income earned by the amounts that were 

contributed to the set-aside in any of the approaches. This would be another implication to 

consider.

69Insurance Information Institute, Terrorism Risk and Insurance, August 2013.
Page 45 GAO-17-62 Terrorism Risk Insurance

TRIA’s current recoupment mechanism and alternative funding options 

could affect affordability and participation for policyholders, the flexibility 

of the use of insurers’ assets, and the exposure and role of the federal 

government. We examined the potential effects of TRIA’s current 

recoupment provisions and the alternative funding options of a federal 

charge for terrorism risk insurance and set-aside approaches as follows.

• Recoupment of federal share of losses (current TRIA structure).

Following a certified terrorism event, Treasury recoups federal losses 

through premium surcharges on all policyholders with TRIA-eligible 

insurance line coverage.

• Federal charge for terrorism risk insurance. A federal charge on 

insurers or policyholders structured as either (1) a premium-like 

charge intended to help pay for the federal share of potential losses 

and replace the current recoupment provision, or (2) a backstop 

charge paid to the Treasury for the promise of payment of the federal 

share of losses with recoupment still in place to cover the federal 

share of losses.

• Terrorism set-asides. Insurers would be permitted or required to 

establish terrorism set-asides, potentially using one of the different 

types of set-aside approaches discussed in the previous section: (1) 

loss reserves for future terrorism losses, without segregating assets 

(similar to NAIC proposal); (2) separate or additional capital 

requirements for terrorism risk, without segregating assets (similar to 

catastrophe risk weight); or (3) segregated assets that could only be 

used for terrorism losses (similar to legislative proposals).70 We 

assumed the terrorism set-aside approaches would retain TRIA’s 

recoupment provision, but analyzed set-asides and recoupment 

independently of each other.

 70Insurers’ share of losses would be covered under the approaches used in the NAIC 

proposal and Austrian program, and both the federal and insurers’ shares of losses would 

be covered under the approach used in the legislative proposals. Although we discussed a 

terrorism risk weight that would be similar to the catastrophe risk weight earlier in the 

report, we did not analyze this option because many stakeholders considered the option 

redundant with the insurers’ current practices.

Both TRIA’s Current 

Funding Structure 

and Alternative 

Funding Options 

Could Adversely 

Affect the Market, but 

Some Factors Could 

Help Mitigate the 

Effects
Page 46 GAO-17-62 Terrorism Risk Insurance

We present illustrative estimates of potential market impacts that 

recoupment and a federal terrorism charge could have on the price of 

TRIA-eligible insurance line coverage, policyholder participation in 

purchasing TRIA-eligible insurance line coverage, and the volume of 

TRIA-eligible insurance written. The lack of data on the terrorism risk 

insurance market and the low frequency of terrorism events (certified or 

otherwise) relative to other catastrophic events make estimating potential 

market effects challenging. For example, our analysis of the size of 

effects was limited by the lack of data on prices and participation rates 

and uncertainty about insurer and policyholder reactions to recoupment 

and alternative funding options. As such, our numerical estimates of 

market effects rely on a number of informed assumptions (see app. I). 

Also, the results we discuss throughout this objective are based on 

average elasticity estimates (see app. V for results for the high and low 

elasticity estimates).71 Elasticities could be affected by factors such as 

location of policies.

Our numerical estimates also are necessarily uncertain and speculative. 

A terrorism event could affect the demand or supply of insurance and 

thus affect premium rates and insurers’ volume of business. Actual 

market effects likely will differ depending on factors including insurer and 

policyholder behavior and federal actions for all options, and specifically 

for recoupment, the timing of the terrorism event, the amount of losses, 

and the subset of insurers affected. In addition to the potential effects we 

estimated, it is possible there could be no or minimal effects on the price 

that businesses pay for TRIA-eligible insurance, policyholder 

participation, or the volume of insurance written, as we note throughout 

this report. Finally, there are limitations on how the potential effects of the 

alternative funding options can be compared to the potential effects of 

recoupment because recoupment would occur only after an event, while 

the effects of the alternative funding would occur regardless of whether 

an event occurred.

In this section, we discuss the most significant potential effects of 

recoupment and the alternative funding options on policyholders, 

insurers, and the federal government. See appendix V for more 

information about our analysis and additional results, including effects on 

reinsurers and state regulators. Generally, the magnitude of potential 

 71Elasticity is the degree to which businesses might purchase less insurance coverage in 

response to a price increase.

Limitations to Illustrating 

Potential Effects of TRIA’s 

Recoupment Structure 

and Alternative Funding 

Options on Insurance 

Markets
Page 47 GAO-17-62 Terrorism Risk Insurance

effects varies for recoupment by the amount of losses caused by the 

terrorism event, the proportion of losses borne by insurers and the federal 

government, and the length of the collection period.72 The magnitude of 

potential effects for the alternative funding options varies by the design 

and the implementation.

Recoupment surcharges and alternative funding options could increase 

prices for policyholders; thereby, decreasing affordability and participation 

rates. According to Treasury’s 2016 report, if reporting insurers charged 

for terrorism risk coverage, they charged between 0.7 percent and 7.1 

percent of the total policy premium depending on the TRIA-eligible line of 

coverage, and the participation rates among policyholders was about 70 

percent.73 We estimated potential effects on prices, policyholder 

participation, and insurers’ net premium revenue of (1) recoupment 

surcharges or (2) a federal charge in specific scenarios.74 We used two 

potential pricing methods that rely on different assumptions about 

insurers’ pricing strategies in reaction to a recoupment surcharge or 

 72In some scenarios, there may be no recoupment. 

73See Department of the Treasury, Federal Insurance Office, Report on the Overall 

Effectiveness of the Terrorism Risk Insurance Program, (Washington, D.C.: June 2016).

74Net premium revenue refers to direct earned premiums net of the recoupment surcharge 

or federal charge for terrorism risk insurance. For recoupment, premium increase 

estimates would vary with the size of an event, the year in which it took place, the 

premium bases of the affected insurers, and Treasury’s methodology for setting 

mandatory recoupment. Also, we did not consider variations in the effects of the options 

on participation rates by location, size of the insurer, industry covered by the insurance, or 

the extent to which some policyholders may be required to purchase terrorism risk 

coverage. However, we used a range of elasticities (the degree to which businesses might 

purchase less insurance coverage in response to a price increase) that may capture some 

of these differences.

Some Options Could 

Decrease Affordability and 

Participation, but Longer 

Time Frames or Broader 

Application Could Help 

Mitigate Effects

Decreases in Affordability and 

Participation
Page 48 GAO-17-62 Terrorism Risk Insurance

federal charge.75 Under one method (the percentage load method), we 

assumed that insurers fully pass through to policyholders a percentage 

increase in premium rates that may be specified by Treasury or future 

legislation. Under another method (the revenue target method), we 

assumed that insurers have the incentive to attempt to increase prices to 

collect as much additional direct earned premiums as possible up to the 

annual collection or target amount.76 Using these two methods, we 

estimated price and participation changes that could result from (1) 

recoupment and (2) a premium-like charge. For example

• For terrorism events that result in mandatory recoupment amounts 

exceeding $20 billion, when using the percentage load method, we 

estimated that recoupment surcharges would increase TRIA-eligible 

insurance line prices by about 3 percent and could decrease 

policyholder participation by about 2 percent on average. When using 

the revenue target method, we estimated that premiums could 

increase by about 8 percent on average and participation could 

decrease by about 5 percent on average.77 After the recoupment 

collection period, policyholders could see price decreases.

• Using multiple assumptions, we estimated the effects of a premiumlike charge directly imposed only on policyholders with terrorism risk 

coverage. Specifically, when using the percentage load method, we 

 75Note that another potential insurer pricing strategy would be to absorb a recoupment 

surcharge or pre-event charge. Under this pricing strategy, there would be no effect on 

pricing and therefore no effect on participation.

76See appendix I for more information about these two methods.

77In this scenario, a terrorism event in 2019 produces $40 billion in losses, and the 

insurers’ share would not exceed the aggregate industry retention amount. Some 

terrorism events could result in no mandatory recoupment, such as events in which 

insurers would bear all the losses or very large events in which the insurers’ share of 

losses exceeded the industry aggregate retention amount. We used two different methods 

to estimate some potential effects (beyond the possibility of no or minimal effect) on prices 

and participation rates. These numbers represent the average results of each method. For 

more information on our analytical methods and the results, see appendix V. The terrorism 

risk and TRIA-eligible insurance market reactions may be more uncertain because a 

terrorism event could affect the demand or supply of insurance, and thus affect premium 

rates and volume of business. While policyholders’ demand for terrorism risk insurance 

may increase after a terrorism event, demand for TRIA-eligible insurance likely would be 

less affected. On the supply side, a terrorism event could decrease the availability of 

TRIA-eligible and terrorism risk coverage because of insurers’ reduced capital (due to 

losses) and a potential upward reassessment of the probability of a future event. However, 

industry participants have indicated that a terrorism event could increase availability of 

terrorism risk coverage because as premiums increased, new sources of capital could 

enter the market.
Page 49 GAO-17-62 Terrorism Risk Insurance

estimated that terrorism risk insurance prices would increase by about 

16 percent and participation on average could decrease by about 10 

percent. When using the revenue target method, we estimated that 

prices on average would need to increase by about 43 percent to 

collect the target amount, which could result in an average 

participation decrease of about 27 percent.78

Set-aside approaches that result in the need for insurers to raise 

additional capital to cover other types of insured risks may result in price 

increases and participation decreases. In particular, the approach in the 

legislative proposals may result in price increases for two reasons: (1) a 

portion of insurers’ terrorism risk premiums would be shifted to a 

segregated asset account that could only be used for potential terrorism 

losses, and insurers might increase prices if, as a result, they needed to 

raise additional capital to cover other insured losses; or (2) depending on 

the size and timing of a terrorism event, some of the segregated assets 

might be used to pay for some of or all the federal share of losses, so that 

not all the premiums collected would necessarily be available to cover the 

insurer’s own share of losses.

The potential size of any price increase may depend on such factors as

• the cost of raising any additional capital,

• the perceived likelihood of events resulting in payments towards the 

federal share of losses,

• the perceived likelihood and timing of any recoupment payments, and

 78In this scenario, we estimated the annual charge by using the cost of private reinsurance 

in the international market as it is sold to nationwide programs and an estimate of the total 

U.S. direct earned premium from terrorism risk insurance (5 percent of direct earned 

premiums for TRIA-eligible insurance), and assumed a modest charge for collection. For 

more information, see appendix V. Note that in this scenario, the effect is much larger 

because fewer policyholders would be affected (see the mitigating factors discussion). 

Additionally, using a lower estimate for direct earned premiums from terrorism risk 

insurance would increase the estimated impact from of a federal charge. These estimates 

are uncertain and actual effects likely would differ depending on policyholder behavior. For 

example, declines in participation likely would be constrained due to state or lender 

requirements to maintain terrorism risk coverage.
Page 50 GAO-17-62 Terrorism Risk Insurance

• the perceived likelihood that the federal government would reimburse 

insurers whose assets contributed to covering the federal share of 

losses.79

Other set-aside approaches that do not require segregation of assets may 

have a minimal impact, if any, on pricing. An insurer only would pay for its 

own losses, and its assets would remain available for all types of insured 

risks. If the insurer already had enough capital to meet required 

standards, an additional reserve or capital requirement might have no 

impact on the amount of capital it needed to hold, as discussed earlier.

Price increases from recoupment surcharges or alternative funding 

options could vary by the extent to which insurers passed costs to 

policyholders and by insurer size. Two stakeholders stated that insurers 

likely would pass recoupment surcharges to policyholders, but other 

stakeholders pointed out that some insurance companies could choose to 

absorb the cost to maintain competitive prices.80 Stakeholders’ opinions 

varied on whether insurers would pass on the federal charge to 

policyholders. Treasury officials said that insurers would want to pass the 

cost of a charge to policyholders, but market forces would dictate the 

extent to which they could. Another stakeholder said that most insurers 

likely would absorb the cost of a charge by spreading it across all the 

lines of business they wrote. This amount could be categorized as a 

general expense and might not be a significant addition to a premium 

rate. Additionally, the stakeholder said that the rate increase attributed to 

this expense likely would be too small to attract state regulators’ scrutiny 

and policyholders would not notice the additional cost. Small insurers 

might be less able to absorb the cost and, consequently, more likely to 

pass the cost to their policyholders, according to one stakeholder.

 79The potential change in price due to an approach similar to the legislative proposals 

cannot be estimated without additional information about factors such as the extent to 

which insurers’ set-asides would be used to cover the federal share of losses and the cost 

of any additional capital insurers might need to raise. Under the legislative proposals’

approach, if Treasury used insurers’ set-asides to offset the federal share of losses, 

Treasury would reimburse the companies for such amounts after the federal share of 

terrorism losses had been recouped.

80The recoupment surcharge must be paid by the policyholder (unless the cost of 

collecting the surcharge exceeds the amount, in which case, the insurer may directly pay 

the surcharge to Treasury). However, some insurers may choose to effectively absorb the 

federally imposed recoupment surcharge by other policy price reductions to offset the 

recoupment amount billed.
Page 51 GAO-17-62 Terrorism Risk Insurance

Declines in policyholder participation from recoupment surcharges or 

alternative funding options could vary by industry and other factors. For 

example, any reduction in participation among commercial property 

builders likely would be constrained due to lender requirements to 

maintain terrorism risk coverage as a condition of financing development 

projects. Furthermore, state requirements to maintain workers’

compensation coverage (from which terrorism risk cannot be excluded) 

generally could moderate the reductions in policyholder participation.

Our estimates indicated that longer time frames and broader application

could help mitigate the potential adverse effects on policyholders of a 

recoupment surcharge, especially since the 2015 TRIA reauthorization 

increases the potential amount of funds that the government could collect

through mandatory recoupment.81 Mandatory recoupment deadlines 

(ranging from 1 year and 9 months to 6 years and 9 months after a 

terrorism event) were introduced in the 2007 and continued in the 2015 

reauthorizations of TRIA.82 Longer mandatory recoupment collection 

periods could result in smaller price increases and impacts on affordability 

compared to shorter time frames.

Table 5 shows differences that the collection time (determined by the date 

of an event) can have on the required annual collection amount and the 

potential increase in premiums following a terrorism event resulting in $40 

billion of losses.83 We estimated that the mandatory recoupment that 

would follow an event of that size occurring in 2017 could lead to a larger 

increase in TRIA-eligible commercial property/casualty premiums than an 

event of equal size occurring in 2019. For example, when using the 

percentage load method, we estimated prices would increase about 6 

percent. When using the revenue target method, we estimated that prices 

 81The 2015 TRIA reauthorization increased two mandatory recoupment variables—the 

aggregate industry retention amount by $2 billion per year from 2015 to 2019, and the 

mandatory recoupment scaling factor from 33 percent to 40 percent.

82These deadlines were developed in response to a Senate rule enforcing a requirement 

that direct spending or receipts legislation be deficit neutral over certain periods of time. 

Specifically, the Senate pay-as-you-go, or PAYGO, rule generally requires that any 

legislation projected to increase direct spending or reduce revenues also must include 

equivalent amounts of direct spending cuts, revenue increases, or a combination of the 

two so that the legislation does not increase the on-budget deficit over a 6-year period and 

an 11-year period. Without such offsetting provisions, the legislation would require the 

support of at least 60 Senators to waive the rule.

83An event resulting in a $40 billion loss would be slightly smaller than the September 11, 

2001, losses. 

Mitigating Factors
Page 52 GAO-17-62 Terrorism Risk Insurance

on average could increase about 17 percent.84 These estimates are about 

two times the increase resulting from the case with a longer collection 

time for an event occurring in 2019.85 See appendix V for more 

information on this analysis.

Table 5: Differences in Mandatory Recoupment Factors Dependent on the Year of Loss for a $40 Billion Terrorism Event

Loss occurs in 2017 Loss occurs in 2019

Mandatory recoupment amounta (dollar amount) 26.4 billion 30.8 billion

Required time to collectb 1 year, 9 months 4 years, 9 months

Annual amount to collect (dollar amount) 13.2 billion 6.2 billion

Potential percentage increase in premiums for TRIA-eligible 

coverage (increased prices by specified percentage method)c 6 3 

Potential average percentage increase in premiums for TRIA-eligible 

coverage (increased prices to collect target amounts method)c 17 8

Source: GAO analysis of 15 U.S.C. § 6701 note, and SNL Financial’s direct earned premium data. | GAO-17-62

a

Although the insurers and event size are the same the mandatory recoupment amount is different 

because the current Terrorism Risk Insurance Act (TRIA) increases the industry aggregate retention 

amount by $2 billion per year between 2015 and 2019. This example assumes the top four insurers 

incur losses in the event and therefore pay deductibles and co-shares.

b

To determine the effective time frame, we assumed Treasury would begin collecting the surcharge in 

January following the event.

c

These results represent different assumptions about insurance market pricing methodologies in 

reaction to the mandatory recoupment amount. Additionally, we assumed an average price elasticity 

of -0.63 for the demand of commercial property/casualty insurance premiums. See appendix I for 

more information. Any such estimation of potential increases in premiums is subject to significant 

uncertainty, and actual premium changes could fall outside (above or below) any estimated potential 

range. Two stakeholders stated that insurers would pass mandatory recoupment surcharges to 

policyholders, but it is possible the insurers could chose to effectively absorb the recoupment 

surcharge by reducing the price of other policies to offset recoupment amounts billed.

According to Treasury officials, minimizing disruption to the terrorism risk 

insurance market and maintaining affordability are key considerations for 

how they would determine a recoupment surcharge amount under TRIA’s 

mandatory recoupment provision. They said that longer recoupment time 

 84Under TRIA, a recoupment surcharge would be assessed on all TRIA-eligible coverage.

85These premium increase estimates would vary with both the size of an assumed event 

and the year in which it took place. Furthermore, any such estimation of potential 

increases in premiums is subject to significant uncertainty, and actual premium changes 

could fall outside (above or below) any estimated potential range. Due to the changes in 

the 2015 TRIA reauthorization, the underlying amount of losses to recoup between 2017 

and 2019 increased by about $4 billion. Therefore, a larger amount would be recouped for 

the 2019 event with less impact to affordability than for the 2017 event.
Page 53 GAO-17-62 Terrorism Risk Insurance

frames could give them more flexibility in considering affordability than 

shorter time frames.

Our analysis also indicated that designing a federal charge for terrorism 

risk insurance to apply to a broad group of policyholders could mitigate 

potential price increases.86 Specifically, price increases could be 

significantly smaller if the charge were imposed on insurers that could 

spread the cost among a wide range of policyholders. For example, if 

insurers spread the charge among policyholders with TRIA-eligible lines, 

when using the percentage load methods, we estimated that prices would 

increase by 0.8 percent, and participation on average could decrease by 

0.5 percent. When using the revenue target amount method, we 

estimated that prices on average could increase by 2.1 percent and 

participation on average could decrease by 1.3 percent.87 Similarly, if 

insurers spread the federal charge among policyholders of all 

property/casualty lines, when using the percentage load method, we 

estimated prices would increase by 0.3 percent and participation on 

average could decrease by 0.2 percent. When using the revenue target 

amount method, we estimated that prices on average could increase by 

0.8 percent and participation on average could decrease by 0.5 percent.

These changes were significantly smaller than changes we estimated 

from a charge imposed on policyholders with terrorism risk coverage. In 

that scenario, when using the percentage load method, we estimated that 

terrorism risk coverage prices would increase by about 16 percent, and 

participation on average could decrease by about 10 percent. When using 

the revenue target amount method, we estimated that prices on average 

could increase by 43 percent and participation on average could 

decrease by 27 percent. See appendix V for more details. Although 

applying a federal charge to a larger group of policyholders could reduce 

potential market disruptions by decreasing the impacts on price and 

 86A federal charge for terrorism risk insurance, or insurers’ pricing reaction to a federal 

charge for terrorism risk insurance, could be applied across any of at least three different 

premium bases: as an addition to all property/casualty premiums; as an addition to just 

TRIA-eligible premiums; or as an addition to the terrorism risk portion of any premium. We 

separately modeled each of these three possibilities.

87Insurance premiums are generally charged only to policyholders purchasing the 

coverage. However, the recoupment mechanism under TRIA applies post-event charges 

to policyholders with TRIA-eligible coverage regardless of whether the policyholder carries 

terrorism risk coverage. The same concept could be applied to a federal charge.
Page 54 GAO-17-62 Terrorism Risk Insurance

participation, it also could create a cross-subsidy and might not be 

equitable.88

Because restricting the use of assets could hamper risk management, 

insurers likely would be more affected by the government requiring the 

type of set-aside involving segregated assets for potential terrorism 

losses than the other set-aside approaches. Insurers, state regulators, 

and NAIC officials we interviewed stated they were concerned with 

requiring segregated assets for potential terrorism losses because the 

funds might not be available for other types of losses. Industry 

stakeholders, including insurers, state regulators, and representatives 

from insurance trade associations, also stated that having the flexibility to 

use funds for a variety of purposes is an important tool for managing the 

risks of their various lines of business and related business operations.

If required to be restricted for terrorism losses, assets that otherwise 

would be available to cover losses from any line of business would be 

reduced and insurers might need to raise additional capital to meet 

external requirements or internal assessments of capital adequacy. 

Insurers, state regulators, and NAIC officials also said that while 

segregated assets might help ensure solvency following a terrorism 

event, they could decrease the likelihood of solvency following more 

common events, such as natural catastrophes, and representatives of an 

association said that the impact could be greater on insurers with less 

capital.

The set-aside approaches we reviewed that did not involve segregated 

assets (loss reserves or risk-based capital requirements for potential 

 88A cross-subsidy could exist in the sense that all property/casualty policyholders would 

subsidize the subset of policyholders who had purchased terrorism risk coverage.

Requiring an Insurer SetAside for Terrorism Risk 

Could Hamper Risk 

Management, but 

Broadening the Use for 

Additional Purposes Could 

Help Mitigate These 

Effects

Restrictions on Flexibility of 

Assets

Mitigating Factors
Page 55 GAO-17-62 Terrorism Risk Insurance

terrorism losses) would continue to allow insurer loss reserves or capital 

to be available to pay claims for other lines of insurance, which could 

mitigate the potential adverse effects on insurers. For example, under the 

NAIC proposal for recording reserves for future potential natural 

catastrophe losses, loss reserves would not be limited to one type of loss. 

Rather, the reserves would be available to pay claims for any type of 

catastrophic loss—man-made or natural. Under the NAIC proposal, the 

reserves also would be available to insurers to pay claims to protect their 

solvency if needed, subject to certain criteria. Another approach we 

reviewed—establishing separate capital requirements for terrorism 

losses—would not limit the use of insurer capital. NAIC has been 

implementing a similar approach for natural catastrophe risk to better 

measure an insurer’s ability to remain solvent following a catastrophic 

loss.

Recoupment and alternative funding options result in federal fiscal 

exposure; however, some factors could mitigate the exposure.

• First, the federal government risks significant explicit fiscal exposure 

after a terrorism event because it is statutorily required to make 

payments (reimbursements to insurers) if losses exceed insurers’

deductibles following a certified event under TRIA.89 This exposure 

exists until the federal share of losses is recouped. However, if 

Treasury opted not to fully exercise the program’s recoupment 

provisions, an implicit fiscal exposure would remain.90 By statute, the 

federal government must recoup any mandatory portion of losses 

 89Explicit fiscal exposures include payments the government is legally required to make 

either immediately or in the future.

90Implicit exposures include implied commitments embedded in the government’s current 

practices or the public’s expectations about the role of government.

All Funding Options Result 

in Federal Fiscal Exposure 

and the Alternative 

Funding Options Could 

Require Expanding 

Federal Capabilities

Fiscal Exposure and Mitigating 

Factors
Page 56 GAO-17-62 Terrorism Risk Insurance

following a terrorism event but can choose not to recoup any 

discretionary portion of losses, which represents a fiscal exposure.

Much of the estimated recoupment amounts resulting from larger, 

catastrophic losses would be considered discretionary under TRIA’s 

provisions, and could exceed $60 billion. Because the program 

mandates a 3 percent cap on the increase of premium rates in TRIAeligible lines for the discretionary portion of recoupment, we estimate 

that in an extreme case Treasury might need to collect a premium 

surcharge for as long as 28 years to fully recoup the discretionary 

portion of losses. The effects of a protracted period of premium 

surcharges could be a factor in Treasury’s determination of whether to 

pursue discretionary recoupment in such a scenario. In addition, the 

weakened economic environment that resulted after the September 

11, 2001, terrorism events suggests that an event large enough to 

trigger TRIA likely would result in a weakened economic environment. 

As such, one insurer questioned whether the federal government 

would follow through with mandatory or discretionary recoupment. As 

we previously discussed, mandatory recoupment could lead to large 

price increases, especially in shorter collection time frames, which 

could affect the political will to carry out recoupment.

Our analysis indicates that the program could provide an economic 

subsidy to the extent that the federal government is not expected to 

recoup all of its losses. As we explain in appendix VI, we assess the 

presence of a subsidy on the basis of whether and to what extent the 

federal government would be expected to recoup its losses, 

regardless of whether a terrorism event or recoupment occurred.91

Using various assumptions and taking into account several limitations, 

we analyzed the potential size of any subsidy by estimating the 

 91The presence and size of a subsidy, as we have defined it for our purposes, does not 

equate to the fiscal exposure that exists under TRIA. The fiscal exposure, as we have 

defined it, exists because the federal government is required to make payments 

(reimbursements to insurers) when losses exceed insurers’ deductibles following a 

certified terrorism event. For the purposes of our report, we generally define an economic 

subsidy as the full or partial payment (or the full or partial absence of a payment) by the 

government for an action that benefits private market participants. Under TRIA, the federal 

government does not charge for its share of potential losses before a terrorism event 

occurs but may recoup its losses after the event through premium surcharges. Given 

TRIA’s recoupment provisions, we based our subsidy assessment on expectations about 

the extent to which the government would recoup potential losses. We analyzed the size 

of any subsidy by estimating forgone premiums to reflect the value of the federal terrorism 

risk insurance coverage provided under TRIA without knowledge of whether and to what 

extent claims would occur.
Page 57 GAO-17-62 Terrorism Risk Insurance

annual forgone federal terrorism risk insurance premiums. We 

estimated the annual economic subsidy amount could be as high as 

$1.6 billion, if the government were not expected to recoup any of its 

losses.92 However, if the federal government were expected to recoup 

all of its losses as described in TRIA, the economic subsidy amount 

would be $0 (no subsidy). For more information on our subsidy 

analysis, see appendix VI.

• Second, a premium-like charge also could affect federal fiscal 

exposure but including a recoupment provision could mitigate such 

effects. A premium-like charge could reduce federal fiscal exposure if

sufficient funds were collected to pay for losses. However, if terrorism 

losses exceeded funds collected from the charge and no recoupment 

provision was in place, the federal government would need to cover 

the difference. For example, it could take many years to accumulate 

sufficient funds to cover potential losses, and if the federal share of 

losses from a terrorism event exceeded the collected funds, the 

financial exposure to the federal government could be higher than 

under the current program in the absence of recoupment. However, 

the federal fiscal exposure could be mitigated if recoupment were to 

remain a part of the program, providing a mechanism by which the 

federal government could recover losses that exceeded the funds 

collected from a premium-like charge.

• Third, implementing a premium-like charge could result in increased 

prices for terrorism risk or TRIA-eligible insurance, which in turn could 

lead to decreased participation in private insurance and, therefore, 

fewer private funds available to fund recovery. However, a backstop 

charge (with recoupment to cover the actual federal share of losses) 

might result in lower price increases on policyholders and have less 

effect on affordability and policyholder participation.

• Finally, we found that implementation of some terrorism set-aside 

approaches likely would have minimal impacts on federal fiscal 

exposure due to losses and others could increase federal fiscal 

exposure by allowing deductions for taxes before a terrorism event 

 92To determine a potential size for any subsidy, we made assumptions about the 

likelihood of federal recoupment, the value of insurance coverage, and the private 

reinsurance market. We estimated forgone premiums using the cost of private reinsurance 

purchased for other national programs. Rates for this type of reinsurance have been fairly 

stable across countries and generally ranged from 2 percent to 3 percent of coverage. We 

used an average cost of coverage of 2.5 percent and assumed that the government 

annually would purchase coverage for a maximum payout. See appendix VI for a fuller 

discussion.
Page 58 GAO-17-62 Terrorism Risk Insurance

occurs. Set-aside approaches that do not involve segregated assets 

might have minimal impact on federal fiscal exposure.93 However, to 

the extent that a segregated assets approach could be designed to 

cover the federal share of losses, it could reduce federal fiscal 

exposure. Additionally, officials from NAIC, Treasury, and state 

regulators expressed concerns that insurers could overstate any preevent loss reserves or segregated assets for terrorism risk in an 

attempt to reduce their tax exposure. This could increase federal fiscal

exposure. The overall net impact of a segregated assets approach is 

unclear.

Alternative funding options could represent a major change to the federal 

role in the terrorism risk market and entail administrative costs. Under the 

current program, Treasury generally has a passive role in the insurance 

market but becomes active following a terrorism event. With a federal 

charge, the government would potentially take on administrative 

responsibilities (such as collecting and managing funds) before an event 

occurred. In an April 2016 report on terrorism risk insurance programs in 

other countries, we found that the costs for carrying out these 

responsibilities were generally a small percentage of the programs’

overall income.94 Similarly, the administrative costs to the federal 

government of implementing a federal charge could be low and funded by 

the charge collected. A set-aside approach also could involve some 

administrative costs for data collection. As NAIC officials pointed out, the 

data required to implement a set-aside requirement—for example, to 

reliably estimate a set-aside target amount—do not currently exist. In 

addition, in a segregated assets set-aside approach—which would 

require insurers to set aside funds that could be used for both their share 

and the federal share of terrorism losses—the federal government would 

need to determine the appropriate amount of the segregated assets that 

would be held for the federal share of losses.95

 93In the event of a certified terrorism event, we assumed the loss-sharing arrangement 

under the set-aside approaches would be similar to TRIA’s current structure in which the 

government would recoup all or some of its losses through policyholder surcharges.

94See GAO-16-316.

95In the legislative proposals, insurers would set aside a percentage of their TRIA 

premiums for terrorism losses. After a terrorism event, affected insurers would use the setasides to pay their portion of losses as well as any potential federal share. The 

government would recoup and reimburse the companies that used set-asides to pay the 

federal portion of losses. Companies without losses could use set-asides to pay their 

recoupment surcharges. 

Expanding the Federal Role
Page 59 GAO-17-62 Terrorism Risk Insurance

Pricing a premium-like charge could present significant challenges for the 

federal government, partly because Treasury has limited data on 

collected terrorism premiums, amounts of coverage, or location of 

coverage.96 In addition, setting an appropriate amount to charge or an 

appropriate target amount to collect could present significant challenges 

to Treasury because of the difficulty of estimating the magnitude and 

frequency of terrorism events. By using data and modeling, other nations’

terrorism risk insurance programs have developed methods to address 

limitations related to estimating the frequency and severity of terrorism 

events.97 Specifically, some programs use data on premiums collected, 

coverage amounts, and location in pricing the charge under their 

programs. For example, some programs base their charges on the 

amount of coverage or the terrorism risk premium that is charged by the 

primary insurers. Such programs also use models with specific terrorism 

event scenarios and frequencies. Alternatively, a backstop charge might 

require less data and be less challenging to implement. For example, the 

United Kingdom Treasury collects a backstop charge to reflect the 

potential cost of capital, which may present fewer data challenges than 

collecting a risk-based charge. Specifically, as we found in our April 2016 

report on terrorism risk insurance programs in other countries, the 

program in the United Kingdom annually pays a backstop charge to the 

United Kingdom Treasury for access to an unlimited line of credit should it 

be needed to cover policyholder claims. According to a United Kingdom 

Treasury official, this charge is intended to reflect the potential cost of 

capital to the government for backing this liability.

Additionally, in pricing a premium-like charge, the government would face 

decisions about which participants to charge and would need to consider 

whether the charge was affordable. For example, our analyses indicated 

that the government would need to charge a larger set of policyholders 

than those purchasing terrorism risk coverage (similar to its current 

 96We previously recommended that Treasury collect and periodically assess data on the 

terrorism risk insurance market to inform oversight of the program. See GAO-14-445. 

Treasury has begun collecting data on the terrorism risk insurance market in response to 

the 2015 TRIA reauthorization and, in June 2016, issued its initial report on the 

effectiveness of TRIA based on a voluntary data call. Insurers that participated in the 

voluntary data call represented about 41 percent of the TRIA-eligible market in 2015, 

according to Treasury’s report. See Report on the Overall Effectiveness of the Terrorism 

Risk Insurance Program (June 2016). In addition, Treasury issued regulations in 

December 2016 formalizing the procedures for continuous data collection required by the 

2015 TRIA reauthorization. The regulations go into effect on January 17, 2017.

97See GAO-16-316.
Page 60 GAO-17-62 Terrorism Risk Insurance

recoupment methodology) to avoid potentially steep percentage 

increases in prices. Furthermore, as one stakeholder stated, an 

affordable federal charge only on policyholders that purchased terrorism 

risk coverage would not go far in helping the federal government 

accumulate funds for its share of losses (because of the potential size of 

the federal share under TRIA). Pricing a premium-like charge that is 

equitable, and provides adequate revenue could involve trade-offs 

between participation and covering expected losses.

We provided a draft of this report for review and comment to Treasury, 

including the Federal Insurance Office, and NAIC. Treasury and NAIC 

provided technical comments, which we incorporated as appropriate. In 

addition, we provided relevant sections to NCCI, selected state programs 

(California Earthquake Authority; Florida Hurricane Catastrophe Fund; 

and Property/Casualty Insurance Security Fund, New York), and relevant 

government officials in selected countries (Austria, Australia, Canada, 

Finland, France, and Mexico) for their technical review. We incorporated 

technical comments we received from these entities, as appropriate.

We are sending copies of this report to the appropriate congressional 

committees, Treasury, NAIC, and other interested parties. In addition, the 

report will be available at no charge on the GAO website at 

http://www.gao.gov.

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. Key contributors to this report are listed in 

appendix VIII.

Daniel Garcia-Diaz

Director, Financial Markets

 and Community Investment

Agency Comments 
Appendix I: Objectives, Scope, and 

Methodology

Page 61 GAO-17-62 Terrorism Risk Insurance

The objectives of our report were to examine (1) how insurers manage 

their terrorism risk exposure and price terrorism risk insurance; (2) the 

federal government’s recoupment requirements and how the federal 

share of terrorism losses would be affected in different scenarios; (3) how 

alternative funding approaches could be designed and implemented; and 

(4) the potential effects of the approaches.

To address these objectives, we reviewed the Terrorism Risk Insurance 

Act of 2002 (TRIA), Terrorism Risk Insurance Extension Act of 2005, 

Terrorism Risk Insurance Program Reauthorization Acts of 2007 and 

2015, implementing regulations, and congressional records.1 We also 

reviewed prior GAO work on this topic.2 We interviewed officials from the 

Department of the Treasury (Treasury), National Association of Insurance 

Commissioners (NAIC), Congressional Budget Office, and Congressional 

Research Service and reviewed relevant reports.3 We also interviewed 

and reviewed reports from academic researchers and several industry 

participants to obtain information for all our objectives, including insurers, 

reinsurers, state regulators, representatives from insurance trade 

associations, a rating agency, and insurance and reinsurance brokers.4

 1

Terrorism Risk Insurance Act of 2002, Pub. L. No. 107-297, 116 Stat. 2322 (2002); 

Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-144, 119 Stat 2660 

(2005); Terrorism Risk Insurance Program Reauthorization Act of 2007, Pub. L. No. 110-

160, 121 Stat. 1839 (2007); Terrorism Risk Insurance Program Reauthorization Act of 

2015, Pub. L. No. 114-1, 129 Stat. 3 (2015); and 31 C.F.R. Part 50.

2

GAO, Terrorism Insurance: Treasury Needs to Collect and Analyze Data to Better 

Understand Fiscal Exposure and Clarify Guidance, GAO-14-445 (Washington, D.C.: May 

22, 2014), and Terrorism Risk Insurance: Comparison of Selected Programs in the United 

States and Foreign Countries, GAO-16-316 (Washington, D.C.: Apr. 12, 2016). 

3

Department of the Treasury, Federal Insurance Office, Report on the Overall 

Effectiveness of the Terrorism Risk Insurance Program (Washington, D.C.: June 2016); 

President’s Working Group on Financial Markets, The Long-Term Availability and 

Affordability of Insurance for Terrorism Risk (Washington, D.C.: April 2014); 

Congressional Budget Office, Federal Reinsurance for Terrorism Risk in 2015 and 

Beyond, Working Paper 2015-04 (Washington, D.C.: June 2015); and Congressional 

Research Service, Terrorism Risk Insurance: Issue Analysis and Overview of Current 

Program, R42716 (Washington, D.C.: July 23, 2014). 

4

Marsh and McLennan Companies, Inc., 2015 Terrorism Risk Insurance Report (June 

2015) and 2016 Terrorism Risk Insurance Report (July 2016); Wharton Risk Management 

and Decision Processes Center, University of Pennsylvania, TRIA and Beyond: Terrorism 

Risk Financing in the U.S. (Philadelphia, Penn.: August 2005); and Erwann Michel-Kerjan, 

Paul Raschky, and Howard Kunreuther, “Corporate Demand for Insurance: New Evidence 

from the U.S. Terrorism and Property Markets,” The Journal of Risk and Insurance, vol. 

82, no. 3 (2015). 

Appendix I: Objectives, Scope, and 

Methodology

Document Review and 

Interviews
Appendix I: Objectives, Scope, and 

Methodology

Page 62 GAO-17-62 Terrorism Risk Insurance

Specifically, we obtained information from six insurers, four reinsurers, 

and four state regulators. In all interviews, we asked participants about 

practices under TRIA’s current structure, the feasibility of the alternative 

funding options, the importance of key pricing objectives and set-aside 

design factors we identified, and the potential effects on different 

stakeholders of the alternative funding options and recoupment under the 

current program. We initially contacted 12 insurers—7 from among the 

largest U.S. commercial property/casualty insurers in TRIA-eligible lines 

of business according to SNL Financial’s insurance data and 5 additional 

small and mid-sized insurers recommended by insurance brokers and 

trade associations.5 Due to scheduling challenges and a lack of response 

from some insurers, we ultimately interviewed 6 insurers, including 4 from 

among the largest in TRIA-eligible lines. We determined that the 

information we obtained from these 6 insurers was sufficient for the 

purposes of our reporting objectives.6 To select reinsurers, we reviewed 

Treasury’s 2014 reinsurance report (which listed the top 50 global 

reinsurers of the reinsurance market) and Marsh and McLennan 

Companies, Inc.’s (Marsh) 2014 terrorism report (which listed stand-alone 

property terrorism risk reinsurers and insurers involved in the terrorism 

risk insurance market).7 We selected the top 2 reinsurers from each 

report and obtained suggestions from an industry association. To select 

state regulators, we identified states that are members of NAIC’s 

Terrorism Insurance Working Group, have cities considered to be at highrisk for terrorism, have top insurers headquartered there, or were 

 5

TRIA-eligible lines are commercial lines of property/casualty insurance, including excess 

insurance, workers’ compensation insurance, and directors’ and officers’ liability 

insurance. Subject to certain exceptions, eligible commercial lines also include the 

following (as listed in NAIC’s Exhibit of Premiums and Losses): aircraft (all perils), allied 

lines, boiler and machinery, commercial multiperil (liability and nonliability), fire, inland 

marine, ocean marine, other liability, products liability, and workers’ compensation. The 

law excludes personal property/casualty, crop, and private mortgage insurance; 

commercial automobile, burglary and theft, and professional liability insurance; and health 

and life insurance. S&P Global Market Intelligence is a leading provider of financial data, 

news, and analytics. The data sourced in this report is from S&P Global Market 

Intelligence’s SNL Financial database of publicly filed financial and insurance regulatory 

information, which includes information it purchases from NAIC.

6

Practices may vary widely among insurers. The six insurers we interviewed included four 

of the top 10 insurers and represented 17 percent of the market as measured by direct 

earned premiums in TRIA-eligible lines in 2014. 

7

Department of the Treasury, Federal Insurance Office, The Breadth and Scope of the 

Global Reinsurance Market and the Critical Role Such Market Plays in Supporting 

Insurance in the United States (Washington, D.C.: December 2014); and Marsh and 

McLennan Companies, Inc., 2014 Terrorism Risk Insurance Report (April 2014). 
Appendix I: Objectives, Scope, and 

Methodology

Page 63 GAO-17-62 Terrorism Risk Insurance

recommended by NAIC officials. From these states, we selected 

California, Illinois, Massachusetts, Rhode Island, and New York. Due to 

scheduling conflicts, we held interviews with four of the five state 

regulators, which we determined were sufficient for the purposes of our 

reporting objectives. Our selections did not represent the views and 

practices of other insurers, reinsurers, or states not included.

To describe current practices for managing terrorism risk exposure and 

pricing terrorism risk insurance, we interviewed selected insurers, NAIC 

and Treasury officials, brokers, and insurance associations about how 

insurers manage their terrorism risk, determine the terrorism risk 

premium, what that premium covers, how premiums are managed, and 

the extent to which insurers maintain funds to cover potential terrorism 

losses. We also reviewed NAIC guidance on terrorism risk premium 

disclosures for policyholders and information about insurance accounting 

standards and applicable insurance company tax laws. To describe how 

insurers and the federal government would pay for and recoup their share 

of losses, we reviewed laws and regulations related to how claims would 

be paid to policyholders and how insurers would be reimbursed for the 

federal share of losses.

To determine the extent to which the federal government could recoup its 

share of terrorism losses, we first conducted analyses on how losses 

would be shared between the federal government and insurers in various 

scenarios, using insurance market data as described below.8 For more 

information about how the government and insurers would share losses 

under TRIA, see appendix II. Second, using the program’s recoupment 

structure, we analyzed how the federal share would be apportioned 

between mandatory and discretionary recoupment in various scenarios.

To examine methods the federal government could consider if it were to 

implement a federal charge for terrorism risk, we developed a pricing 

 8

Our illustrative, scenario-based analyses are distinctly different than the projections 

included in the President’s Budget for Treasury. This budget includes projections of 

average annual payments (reimbursements to insurers) which rely on estimates of annual 

average losses. In contrast, our analyses illustrate the potential reimbursements to 

insurers that would be required in hypothetical scenarios of terrorism events of different 

sizes, occurring in specific years, and affecting various numbers of insurers.

Current Practices

Recoupment

Federal Charge
Appendix I: Objectives, Scope, and 

Methodology

Page 64 GAO-17-62 Terrorism Risk Insurance

framework and interviewed industry participants. To develop the pricing 

framework, we adapted economic principles and concepts from our prior 

work on assessing user fees, other government-collected funds, and 

user-based taxes to develop a framework of four pricing objectives 

(promoting economic efficiency, equity, and revenue adequacy, and 

limiting administrative burden) and related characteristics.9 We reviewed 

standard insurance pricing principles, such as actuarial standards of 

practice, but we did not rely on these standards to develop the framework 

because from a statistical perspective, existing data on terrorism events 

are not sufficient to meet some of the basic principles of insurance theory. 

To validate our pricing framework we obtained feedback on the four 

pricing objectives from stakeholders in the insurance industry, including 

insurers and reinsurers. We also interviewed insurers and state regulators 

to gain some insight about the importance and feasibility of the pricing 

objectives in relation to developing a charge for terrorism risk and the 

extent to which trade-offs among the objectives might exist. 

We also assessed seven selected state and federal catastrophic or 

insurance programs as well as two foreign terrorism risk insurance 

programs to observe the implementation of these objectives. The seven 

state and federal programs were selected to illustrate a range of 

approaches for structuring and collecting premiums and methods for 

managing and ensuring adequate funding is available to cover program 

costs. They also cover a variety of risks, including natural catastrophes, 

and have varying types of participants such as borrowers, pensioners or 

insurance policyholders, and sources of funding. We used publicly 

available information to make our assessments of the seven programs. 

We did not use all the programs to illustrate each pricing objective 

because the information was not publicly available, and some programs 

offered clearer examples than others. See appendix III for more 

information about the seven federal and state programs we reviewed. 

Based on our recent work on national terrorism risk insurance programs, 

we identified terrorism risk insurance programs in two countries, Australia 

and the United Kingdom, in which a charge is paid to the government for 

the benefit of a government backstop.10 We used documents and 

 9

See GAO, Federal User Fees: A Design Guide, GAO-08-386SP (Washington, D.C.: May 

29, 2008); and Federal User Fees: Fee Design Options and Implications for Managing 

Revenue Instability, GAO-13-820 (Washington, D.C.: Sept. 30, 2013).

10See GAO-16-316. 
Appendix I: Objectives, Scope, and 

Methodology

Page 65 GAO-17-62 Terrorism Risk Insurance

interviews from our prior work to observe the implementation of the 

pricing objectives in the charge component of the programs.

To examine approaches the federal government could consider if it were 

to require or provide incentives for insurers to maintain terrorism setasides for potential terrorism losses, we reviewed prior GAO work on 

designing fees and selected programs or proposals to identify key design 

factors and implementation considerations (such as, accounting practices 

and state laws) policymakers could consider if they implemented such an 

approach.

11 We selected four proposals or current programs with setaside approaches that illustrate variation among the design factors. For 

example, we selected some approaches that require participation and 

others that are voluntary. In addition, the approaches reflect different 

structures, including loss reserves (liabilities), insurers’ levels of capital, 

and segregation of assets. We selected

• an NAIC proposal,

• Austria’s terrorism risk insurance program,

• a combination of congressional proposals, and

• a catastrophe risk weight approach.

Two of the four approaches applied to potential terrorism losses 

specifically, while the other two were for potential natural catastrophe 

losses. For the two natural catastrophe set-aside approaches, we 

consulted with relevant stakeholders about their application to potential 

terrorism losses, and for our work, found their application to potential 

terrorism losses appropriate. To describe the practices, laws, and rules 

the federal government could take into account, we reviewed 

documentation on the selected approaches and sources describing 

relevant accounting standards and laws. We also interviewed insurers, 

reinsurers, and state regulators on the approaches and reviewed 

documentation on the process for making changes to accounting 

standards. See appendix IV for more information on the selected 

proposals and current programs with set-aside approaches. Appendix IV 

also includes information on selected countries that allow insurers to 

establish set-asides to cover future losses. The countries were identified 

for review through external outreach efforts with international entities, 

literature review, and questionnaire and interview responses.

 11See GAO-08-386SP and GAO-13-820. In both reports, we discuss how reserves (setasides) can be used to manage revenue instability for user fee programs. 

Insurer Set-Asides
Appendix I: Objectives, Scope, and 

Methodology

Page 66 GAO-17-62 Terrorism Risk Insurance

To assess the potential effects of recoupment of the federal share of 

losses, a federal charge for terrorism risk insurance, and terrorism setasides on policyholders, insurers, the federal government, state 

regulators, and reinsurers, we interviewed market participants. 

Additionally, for recoupment and a federal charge, we quantified the 

potential effects on policyholder price, participation, and insurers’ direct 

earned premiums. We also assessed the extent to which TRIA provides a 

subsidy and estimated the size of any subsidy. As we describe below, to 

conduct our analyses, we used U.S. property/casualty insurance market 

data, estimates of U.S. terrorism risk premiums, information on 

international reinsurance rates, models from various alternative funding 

approaches, and economic literature. We also describe inherent 

uncertainties related to our estimates and the informed assumptions we 

used in our analyses. See the remainder of this appendix for more details.

Using U.S. insurance market data and industry estimates: To 

determine the direct earned premiums associated with the TRIA-eligible 

insurance lines and market share of subsets of insurers (top 4, top 10, top 

20, and all) in 2014, we analyzed 2014 insurance data on direct earned 

premiums from SNL Financial.12 We used the top 4, top 10, and top 20, 

and all TRIA-eligible insurers as proxies to represent different sized 

premium bases. The direct earned premium associated with the insurers 

rather than the number of insurers is important because prior year direct 

earned premium determines the aggregate insurer deductible. For 

example, the total of direct earned premium for a different subset of 

insurers’ could equal the direct earned premiums of the top 4 insurers. To 

assess the reliability of SNL Financial’s data, we reviewed prior GAO 

assessments of the data and performed electronic testing. We 

determined that the data used in this report were sufficiently reliable for 

the purposes of our reporting objectives. To project the annual change in 

the size of the TRIA-eligible market from 2015 to 2018, we used 

estimations of terrorism risk premiums from 2004 through 2013 from A.M. 

Best. We found the data sufficiently reliable for this purpose. We 

calculated the annual change to be an increase of 2 percent. To estimate 

the percentage of TRIA-eligible premiums that was paid for terrorism risk 

insurance, we used estimates of the percentage of commercial property 

insurance premiums paid for terrorism risk insurance from Marsh and 

Treasury. We found the data sufficiently reliable for this purpose. We 

used peer-reviewed, published information on the price elasticity of 

 12We used SNL Financial’s direct earned premium data for 2014 (as of July 14, 2015). 

Potential Effects
Appendix I: Objectives, Scope, and 

Methodology

Page 67 GAO-17-62 Terrorism Risk Insurance

corporate demand for insurance that we determined to be reliable and 

suitable for illustrating potential effects of recoupment and alternative 

approaches.13 Specifically, we used low and high premium elasticity of 

demand for commercial property/casualty insurance of -0.43, and -0.82 

respectively. We calculated average elasticity of -0.63 from the high and 

low values. We used elasticity of demand for commercial 

property/casualty insurance rather than for corporate demand for 

terrorism risk insurance, which ranges from -0.31 to -0.71, because most 

premium adjustments would be imposed on commercial property/casualty 

policyholders. Although we did not analyze variations in the effects of the 

options by location, size of the insurer, industry covered by the insurance, 

or the extent to which some policyholders might be required to purchase 

terrorism risk coverage, we used a range of elasticities that may capture 

some of these differences.

Estimating potential effects of recoupment: To show the potential 

upper range of effects of recoupment on TRIA-eligible policyholder price 

and participation, and insurers’ direct earned premium after a terrorism 

event, we estimated effects of (1) a large mandatory recoupment amount, 

(2) the shortest time frame for collecting the mandatory recoupment 

amount (which would result in an upper range effect), and (3) a large

discretionary recoupment amount (to show the longest collection time 

frame).

• To illustrate potential effects of a very large mandatory recoupment

amount, we used an event resulting in $40 billion of insured losses 

under TRIA that occurred in 2019 (year with the maximum industry 

aggregate retention) that affected a small set of insurers—insurers 

with a prior-year premium base equal to that of the top four insurers of 

TRIA-eligible lines ($49 billion in 2018).

• To maximize potential market effects of a very large mandatory 

recoupment amount, we used the same event size and group of 

insurers (direct earned premiums of $47 billion in 2016), but an event 

date of 2017 because the effective collection time frame for 

mandatory recoupment is the shortest (1 year 9 months), assuming 

collection starts in the January after the event.

 13Elasticity of demand is the degree to which businesses might purchase less insurance 

coverage in response to a price increase. See Michel-Kerjan, Raschky, and Kunreuther, 

“Corporate Demand for Insurance,” 505–530. 
Appendix I: Objectives, Scope, and 

Methodology

Page 68 GAO-17-62 Terrorism Risk Insurance

• To illustrate potential effects of a very large discretionary recoupment 

amount, we used an event size of $100 billion in 2019 affecting 

insurers with a prior-year premium base equal to that of the top 10 

TRIA-eligible insurers—direct earned premium of $87 billion in 2018.

Estimating potential effects of a federal terrorism risk insurance 

charge: To estimate the potential effects of a federal charge for terrorism 

risk insurance on all property/casualty, TRIA-eligible, and terrorism risk 

policyholder price and participation, and insurers’ direct earned 

premiums, we constructed annual federal charges using (1) reinsurance 

rates and (2) frequency models.

• We used the amount estimated in our size of subsidy analysis as 

discussed below to calculate the increase in premium in 2016 for 

three different policyholder bases (all property/casualty policyholders, 

with prior-year direct earned premium of $572 billion in 2015; TRIAeligible policyholders, with prior-year direct earned premium of $205 

billion in 2015; and policyholders making actual payments for 

terrorism risk insurance under TRIA, estimated as 5 percent of TRIAeligible prior-year direct earned premiums, or $10 billion in 2015).14

• We used the maximum total government share of losses and 

assumed event frequencies of 20, 50, and 100 years to calculate the 

 14Although data are limited and estimates vary, we determined that using 5 percent of 

TRIA-eligible premiums as an estimate of terrorism risk premiums is reasonable for the 

purposes of estimating potential effects of a federal terrorism risk insurance charge. In 

2014, we reported that businesses paid no more than approximately 5 percent of their 

total property premium for terrorism coverage since 2011. See GAO-14-445. We based 

this estimate on a review of Marsh data, which solely represented its clients and was not 

representative of the entire market. However, we determined Marsh’s data were the most 

readily available data on pricing at the time of our data collection. See Marsh and 

McLennan Companies, Inc., Market Update 2013 Terrorism Risk Insurance Report (May 

2013). For this report, we reviewed Marsh’s 2016 report and Treasury’s 2016 report on the 

effectiveness of TRIA, which both used limited data on terrorism risk insurance pricing in 

2015. See Marsh and McLennan Companies, Inc., 2016 Terrorism Risk Insurance Report 

(July 2016) and Report on the Overall Effectiveness of the Terrorism Risk Insurance 

Program (June 2016). Based on data obtained from its clients, Marsh reported that 

businesses paid 4 percent or 5 percent of overall property premiums for terrorism 

coverage in 2014 and 2015. Based on data obtained from insurers that participated in its 

voluntary data call (representing about 41 percent of the premiums in TRIA-eligible lines in 

2015), Treasury calculated that if an insurer charged for terrorism risk insurance, the cost 

on average was about 2.6 percent of the total policy premium and the percentage charged 

varied from 0.7 percent to 7.1 percent, depending on the line of insurance. We determined 

that 5 percent was a reasonable figure for our purposes because it fell within the range of 

percentages reported by both Marsh and Treasury. Using a lower estimate, such as 

Treasury’s 2.6 percent would increase the estimated market impact from of a federal 

charge applied to terrorism risk premiums.
Appendix I: Objectives, Scope, and 

Methodology

Page 69 GAO-17-62 Terrorism Risk Insurance

increase in premium for the three different policyholder bases (all 

property/casualty, TRIA-eligible, and terrorism risk premiums).

Potential effects of insurer terrorism set-asides: We did not quantify 

the potential effects of insurers’ terrorism set-asides on TRIA-eligible 

policyholder price and participation, and insurers’ direct earned premium, 

because the approaches we chose were not expected to require 

significant changes in these measures. We considered the following setaside approaches:

• The NAIC proposal specifies a set-aside buildup time frame of 20 

years, with a targeted accumulation amount of $40 billion.

• The Austrian program specifies a set-aside build-up time frame of 10 

years and a maximum total reserve amount equal to the potential 

share of losses—an estimated $35 billion for all U.S. insurers.15

• One of the U.S. legislative proposals directs insurers to annually set 

aside 50 percent of terrorism risk premiums to cover future losses, but 

does not specify a reserve buildup time frame or a target reserve 

amount. We considered target reserve amounts of $43.6 billion (20 

percent of estimated TRIA-eligible premiums in 2018) and $100 billion 

(the maximum for the total losses covered under the program).16

Finally, although TRIA’s current recoupment provision would remain in 

place under the terrorism set-asides option, we assess recoupment and 

set-asides independently of each other.

Reflecting uncertainties in estimates of potential effects: While we 

calculated some illustrative estimates of potential market impacts, such 

numerical estimates are necessarily uncertain and speculative. None of 

the alternative funding options exist in the United States. Sources of 

uncertainty are explained below.

 15According to the Austrian representative, the Austrian program increased its insurers’

deductible (overall target amount) from $60 million to $90 million (from €50 million to €75 

million) in January 2013. The time frame was increased to 15 years to allow insurers 

additional time to accumulate increased program deductibles.

16The legislative proposals entitled the Terrorism Risk Insurance Revision Act of 2005 and 

the Terrorism Risk Insurance Modernization (TRIM) Act of 2014 would direct insurers to 

hold a portion of their terrorism premiums in fiduciary capacity on behalf of Treasury. The 

TRIM Act of 2014 was never introduced as a bill. The second proposal was introduced in 

November 2005. (H.R. 4314, 109th Cong. (1st sess. 2005)). 
Appendix I: Objectives, Scope, and 

Methodology

Page 70 GAO-17-62 Terrorism Risk Insurance

• Recoupment has not been tested because the United States has not 

experienced a terrorism event large enough to have triggered TRIA. 

Furthermore, the methodology for setting post-event recoupment 

surcharges would be based on a number of factors and parameters of 

the specific terrorism event.

• Our analysis is limited by the lack of data on the current insurance 

market, particularly prices and the participation rate.17

• The reactions of insurers and policyholders in the TRIA-eligible 

insurance market to government actions (imposing a recoupment 

surcharge or a federal charge for terrorism risk insurance or requiring 

insurers to establish terrorism set-asides) is uncertain.

• We researched and found reliable estimates for elasticity of demand 

for commercial property/casualty insurance.18 However, we did not 

research other market dynamics related to insurers’ pricing behavior 

in response to recoupment or an alternative funding requirement, or 

insurers’ underwriting capacity following a terrorism event. We also 

did not research changes in businesses’ need for terrorism risk or 

property/casualty insurance before or after a terrorism event.

In the case of recoupment, the terrorism risk and TRIA-eligible insurance 

market reactions may be more uncertain because a terrorism event could 

affect the demand or supply of insurance, and thus affect premium rates 

and insurers’ volume of business. While policyholders’ demand for 

terrorism risk insurance may increase following a terrorism event, 

demand for TRIA-eligible insurance likely would be less affected. At the 

same time, although TRIA requires insurers to make terrorism risk 

insurance available, a terrorism event could lead to price increases by 

participating insurers based upon their reassessment of the likelihood of 

future events, and thus depress demand. Such insurers may be reluctant 

to devote additional capital to potential terrorism losses. However, 

industry participants have indicated that a terrorism event could increase 

the availability of terrorism risk coverage because as premiums 

increased, new sources of capital could enter the market.

 17See GAO-14-445.

18We used the price elasticities of demand for commercial property/casualty insurance 

rather than terrorism risk insurance because, in general, the cost would be recovered from 

or imposed on all policyholders of TRIA-eligible lines of business whether or not they carry 

terrorism risk coverage. 
Appendix I: Objectives, Scope, and 

Methodology

Page 71 GAO-17-62 Terrorism Risk Insurance

To reflect the uncertainty of the process and outcomes, we used two 

methods (percentage load method and revenue target method) that rely 

on different hypothetical assumptions about the insurers’ pricing 

strategies in reaction to recoupment or a federal terrorism risk insurance 

charge. (See table 6 for a comparison of the methods.)

• Percentage load method. We assume that insurers fully pass 

through to policyholders a percentage increase in premium rates (that 

is, the load) based on the annual collection or target amount and 

insurers’ aggregate direct earned premium. For example, if the annual 

collection amount resulted in a 3 percent recoupment surcharge on 

premium rates, we assumed that insurers fully would pass through 

that percentage increase to policyholders and raise premium rates (by 

3 percent). This method would result in larger effects than the revenue 

target method in the form of insurer loss of direct earned premium.

• Revenue target method. We assume that insurers have the incentive 

and would attempt to increase prices to collect, at the margin, as 

much additional direct earned premiums as possible up to the annual 

collection or target amount. Such price increases would be above and 

beyond a full pass through to make up for some or all of the loss of 

net revenue resulting from decreased policyholder participation in 

reaction to the price increase. For example, if Treasury annually 

recouped $6 billion from insurers, we assumed insurers would raise 

prices to collect, at the margin, an additional $6 billion in direct earned 

premiums. This method would result in larger effects than the 

percentage load method in the form of premium increases and 

decreases in participation rates.

Generally, our analyses using the revenue target resulted in a larger 

impact for policyholders in terms of prices and participation, while the 

percentage load analysis resulted in a larger impact for insurers in terms 

of impact on direct earned premiums.
Appendix I: Objectives, Scope, and 

Methodology

Page 72 GAO-17-62 Terrorism Risk Insurance

Table 6: Two Insurer Pricing Methods for Illustration of Potential Effects of Price Increases 

Percentage load method Revenue target method

Premium rates increase by a percentage load based on the 

annual collection amount or target amount and the insurers’

aggregate direct earned premium.

Insurers increase premium rates to collect, at the margin, as much 

additional annual direct earned premiums as possible up to the 

annual collection or target amount.

The annual target amount collected is generally specified by the scenario.a

We calculated the percentage increase in price by dividing the 

annual target amount needed by the insurers’ aggregate direct 

earned premium. In the first year, we assumed the insurers would 

increase premiums by the percentage, and make no subsequent 

increases. 

We calculated the percentage increase in price as the ratio of 

the percentage change in direct earned premiums (from the target 

amount collected) to one plus the price elasticity.

b In the first year, 

we assumed insurers would increase premiums by the percentage 

and make no subsequent increases.

We calculated the percentage decrease in the participation as 

the product of the percentage increase in price and price 

elasticity.b

We calculated the percentage decrease in participation as the 

difference between the percentage increase in insurers’ direct 

earned premium and the percentage increase in price.

We calculated the new gross direct earned premiums as the product of (1) the original direct earned premium, (2) one plus the 

percentage increase in price, and (3) one plus the percentage decrease in participation.

The actual amount collected is calculated as the product of the 

percentage increase in price and the new gross direct earned 

premiums.

The actual amount collected is the same as the target amount 

described above. 

Finally, we calculate the percentage change in insurers’ direct earned premium as the ratio of the new gross direct earned 

premiums (less the actual amount collected) to the original direct earned premiums minus one, as insurers pay the government 

amounts from their new direct earned premiums.c

For example, consider the mandatory recoupment analysis in 2019. At the beginning of year 1, insurers’ direct earned premium from 

TRIA-eligible lines is $218 billion and the annual federal recoupment amount is $6.2 billion for 5 years (for a total recoupment amount 

of $31 billion).

Insurers pass through the 2.84 percent price increase to TRIAeligible policyholders ($218 billion divided by $6.2 billion). 

Assuming an average elasticity of -0.63, we estimated a 1.8 

percent decrease in TRIA-eligible participation. Accounting for 

these changes, we estimated the new gross direct earned 

premiums would be $220.2 billion. The federal government would 

collect 2.84 percent of that amount, or a collection amount of $6.3 

billion.d After the $6.3 billion was subtracted from the new gross 

direct earned premiums, the new TRIA-eligible direct earned 

premiums, net of the surcharge, would be $213.9 billion, 

representing a 1.9 percent decrease in insurer’s TRIA-eligible 

direct earned premiums.

The target collection amount of $6.2 billion represents 2.84 

percent of the $218 billion, which we assumed insurers would 

attempt to collect from TRIA-eligible policyholders. Using an 

elasticity of -0.63, we estimated a 7.7 percent increase in price, 

and a 4.8 percent decrease in participation for TRIA-eligible 

policyholders. Accounting for these changes, we estimated the 

new gross direct earned premiums to be $223.4 billion. After the 

$6.2 billion was subtracted from the new gross direct earned 

premiums, the new TRIA-eligible direct earned premiums net of 

the surcharge would be $217.2 billion, representing a 0.4 percent 

decrease in insurers’ TRIA-eligible direct earned premiums.

Legend: TRIA = Terrorism Risk Insurance Act

Source: GAO analysis. | GAO-17-62

a

Annual target amount is defined by the scenario. For mandatory recoupment the annual target 

amount is the total recoupment amount divided by the mandated number of years to collect. For 

discretionary recoupment, it is the amount that can be collected based on the mandated maximum 

increase in price for discretionary recoupment (3 percent). For the federal charge, it is the annual 

charge amount. Additionally, for discretionary recoupment, we calculated the length of time to collect 

the target amount as the ratio of the total discretionary recoupment amount to the annual target 

amount.

b

The extent to which insurers can increase prices will depend on their ability and incentive to do so. 

For convenience, we assumed that ability and incentive were reflected in the average price 

elasticity—percentage change in participation to the percentage change in price—that we assumed 

on average to be -0.63.
Appendix I: Objectives, Scope, and 

Methodology

Page 73 GAO-17-62 Terrorism Risk Insurance

c

We assumed that funds collected for the recoupment or the federal charge were not invested to earn 

a return.

d

The amount collected is slightly larger than the required amount because the collection is based on 

the new larger gross direct earned premiums.

Assumptions related to analyses of potential effects: Due to the 

prospective nature of this analysis, we made a number of assumptions.

• When necessary, we assumed market reactions to the changes in 

insurers’ prices due to recoupment or alternative funding options, 

such as the sensitivity of participation in TRIA-eligible insurance to 

price changes (price elasticity) and the pricing behavior of insurers.

• For all options, we assumed prices would increase.19

• For each step in our analysis, we assumed that only the variables of 

interest changed, and all other variables remained constant during the 

collection or build-up period. For example, for recoupment we ignored 

other dynamics that could occur in the TRIA-eligible insurance market 

due to a terrorism event such as policyholders or insurers exiting or 

entering the market and price changes not directly related to terrorism 

risk.

• We assumed that a terrorism event or an additional terrorism event 

would not occur during the collection or build-up period.

• We assumed that insurers’ actions primarily would be to collect the 

federal recoupment surcharges or charge for terrorism risk insurance.

• In all cases, we used SNL Financial’s direct earned premium data to 

determine the size of the property/casualty insurance market and 

submarkets (see app. II for further details). We assumed that the 

baseline annual total direct earned premiums for commercial 

property/casualty insurance and the market share of subsets of 

insurers remained unchanged for the implementation period and after 

a terrorism event during the recoupment period.

• We assumed that the current average price elasticity of -0.63 

remained constant over the range of price increases considered.20

 19Although our analyses assumed price increases, it is also possible that there could be 

no change in pricing if the government were to impose a federal terrorism risk insurance 

charge. Under recoupment there would likely be a change in pricing because the 

recoupment surcharge must be paid by the policyholder (unless the cost of collecting the 

surcharge exceeds the amount, in which case, the insurer may directly pay the surcharge 

to Treasury). However, some insurers may choose to effectively absorb the federally 

imposed charge by other policy price reductions to gain a competitive advantage. 
Appendix I: Objectives, Scope, and 

Methodology

Page 74 GAO-17-62 Terrorism Risk Insurance

• We assumed insurers would impose any increase in the first year of 

the collection or build-up period and obtain the annual cost from the 

increase in direct earned premiums. In the second and the remaining 

years of the collection or build-up period, we assumed insurers would 

not adjust prices further since the annual cost would remain constant, 

and insurers would collect the same new direct earned premiums as 

in the first year.21

Assessing the presence and size of a subsidy: To evaluate the extent 

to which insurers and policyholders receive an economic subsidy under 

TRIA, we reviewed and synthesized literature on government subsidies 

taking into account the program’s recoupment feature. We determined 

that a subsidy exists in the program to the extent that the federal 

government is not expected to recoup all its losses. To estimate the 

potential annual size of the subsidy, we estimated forgone federal 

premiums for the federal share of losses. Because we could not 

determine premiums using an actuarial method, we used reinsurance 

rates paid by other national terrorism risk insurance programs. We were 

told by the broker of many reinsurance deals in other national terrorism 

risk insurance programs that the rates were fairly stable across countries 

and generally ranged from 2 percent to 3 percent of the amount of 

coverage. We use a rate-on-line (the ratio of premium paid to loss 

recoverable in a reinsurance contract) of 2.5 percent of reinsurance 

coverage purchased, assumed the federal government purchased 

coverage for its maximum annual losses under TRIA, and added 5 

percent as a collection fee. We performed calculations in scenarios in 

which the government is expected to (1) recoup neither mandatory nor 

discretionary recoupment amounts, and (2) only recoup mandatory

amounts. Specifically, to determine the maximum annual losses under 

TRIA, we used SNL Financial’s insurance market data as described 

above and modeled the maximum terrorism event size ($100 billion in 

insured losses) in 2016 and assumed insurers with an aggregate 

premium base equal to the top 20 insurers were affected by the event. 

We estimated the portion of federal losses that would be subject to 

mandatory and discretionary recoupment. To estimate the forgone federal 

 20For the sensitivity analysis, we estimated low and high percentage changes in price, 

participation, and insurers’ direct earned premium using the minimum and maximum 

estimates of the price elasticity of corporate demand for property insurance.

21Alternatively, in some methodological approaches, insurers could increase prices 

gradually to reach the required level but this would increase the length of the collection or 

build-up period. In other methodological approaches, the annual amount or time period is 

fixed.
Appendix I: Objectives, Scope, and 

Methodology

Page 75 GAO-17-62 Terrorism Risk Insurance

premium amount, we multiplied the maximum federal loss amount by the 

reinsurance rate. For more information on our subsidy analysis including 

limitations and assumptions, see appendix VI.

We conducted this performance audit from January 2015 to January 

2017, in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: Estimating the Government Share 

of Losses under the TRIA Program

Page 76 GAO-17-62 Terrorism Risk Insurance

Under the Terrorism Risk Insurance Act (TRIA), the federal government 

and insurers potentially share losses from a certified terrorism event if 

total losses exceed the program trigger ($120 million in 2016) and losses 

exceed any individual insurer’s deductible.1

• Each insurer’s share of losses is the minimum of its actual losses or 

the sum of its deductible (measured as 20 percent of its previous 

year’s direct earned premium in TRIA-eligible lines) and its co-share 

portion (16 percent of losses exceeding the deductible amount in 

2016).2 Assuming an insurer has satisfied its deductible, its losses are 

capped in the event the program cap ($100 billion) for all losses 

(insurers and federal) has been reached.

• The federal share of losses is the difference between the total losses 

(or the $100 billion program cap, if smaller) and the sum of insurers’

losses.3

Some recent program changes shift a greater share of losses from the 

federal government to insurance companies over time, such as changes 

to the program trigger and the insurer co-share.

To illustrate a range of potential terrorism loss scenarios for insurers and 

the federal government, we analyzed terrorism events affecting insurers 

with aggregate premium bases equal to the top 4, top 10, top 20, and all 

 1

The Secretary of the Treasury, in consultation with the Secretary of Homeland Security 

and the Attorney General of the United States, determines whether an event should be 

certified as an act of terrorism, based on certain criteria. Without a certified act of 

terrorism, TRIA is not activated. Insurers incur all losses and the government incurs no 

losses if insured losses due to a certified terrorism event do not exceed the program 

trigger.

2

TRIA-eligible lines are commercial lines of property/casualty insurance, including excess 

insurance, workers’ compensation insurance, and directors’ and officers’ liability 

insurance. Subject to certain exceptions, eligible commercial lines also include the 

following (as listed in the Exhibit of Premiums and Losses of the National Association of 

Insurance Commissioners): aircraft (all perils), allied lines, boiler and machinery, 

commercial multiperil (liability and nonliability), fire, inland marine, ocean marine, other 

liability, products liability, and workers’ compensation. The law excludes personal 

property/casualty, crop, and private mortgage insurance; commercial automobile, burglary 

and theft, and professional liability insurance; and health and life insurance.

3

To the extent insurers’ losses do not exceed the aggregate industry retention amount, 

any federal losses are subject to mandatory recoupment.

Appendix II: Estimating the Government 

Share of Losses under the TRIA Program
Appendix II: Estimating the Government Share 

of Losses under the TRIA Program

Page 77 GAO-17-62 Terrorism Risk Insurance

insurers with TRIA-eligible lines of insurance.4 Using SNL Financial’s 

data, we determined the direct earned premiums and market share 

earned by the top 4, top 10, top 20, and all insurers in 2014 in TRIAeligible lines of business. As figure 7 shows, insurers earned $201 billion 

in direct earned premiums for TRIA-eligible lines in 2014, according to 

SNL Financial’s data, and the four insurers with the most direct earned 

premiums from TRIA-eligible lines of insurance earned 22.5 percent of 

such premiums.5

 4

The direct earned premium associated with the insurers rather than the number of 

insurers is important because direct earned premium determines the aggregate insurer 

deductible. We used the top 4, top 10, and top 20, and all TRIA-eligible insurers as 

proxies to represent various sized premium bases. For example, the total of direct earned 

premium for a different subset of insurers’ could equal the direct earned premiums of the 

top 4 insurers.

5

We assume a 2 percent annual increase in direct earned premium for subsequent years 

based on A.M. Best’s annual estimates of terrorism risk revenue from 2004 through 2013.
Appendix II: Estimating the Government Share 

of Losses under the TRIA Program

Page 78 GAO-17-62 Terrorism Risk Insurance

Figure 7: Direct Earned Premiums from Categories of Property/Casualty Lines of Business and Insurer Market Share, 2014

Notes: Although data are limited and estimates vary, we determined that using 5 percent of TRIAeligible premiums as an estimate of terrorism risk premiums is reasonable. In 2014, we reported that 

businesses paid no more than approximately 5 percent of their total property premium for terrorism

coverage since 2011. See GAO, Terrorism Insurance: Treasury Needs to Collect and Analyze Data to 

Better Understand Fiscal Exposure and Clarify Guidance, GAO-14-445 (Washington, D.C.: May 22, 

2014). We based this finding on a review of Marsh data. See Marsh and McLennan Companies, Inc.,

Market Update: 2013 Terrorism Risk Insurance Report (May 2013). For this report, we reviewed 

Marsh’s 2016 report and Treasury’s 2016 report on the effectiveness of Terrorism Risk Insurance Act 

(TRIA), which both used limited data on terrorism risk insurance pricing in 2015. See Marsh and 

McLennan Companies, Inc., 2016 Terrorism Risk Insurance Report (July 2016) and Department of 

the Treasury, Federal Insurance Office, Report on the Overall Effectiveness of the Terrorism Risk 

Insurance Program (Washington, D.C.: June 2016). Based on data obtained from its clients, Marsh 

reported that businesses paid 4 percent or 5 percent of overall property premiums for terrorism 

coverage in 2014 and 2015. Based on the data it received from insurers that participated in its 

voluntary data call (representing about 41 percent of the premiums in TRIA-eligible lines in 2015), 

Treasury calculated that if an insurer charged for terrorism risk insurance, the cost on average was 

about 2.6 percent of the total policy premium and ranged from 0.7 percent to 7.1 percent of the policy 

premium depending on the line of insurance. We determined that 5 percent was a reasonable figure 

for our purposes because it fell within the range of percentages reported by both Marsh and Treasury.

We estimated the total direct earned premiums for terrorism risk coverage to be $10 billion (5 percent 

of $201 billion in direct earned premiums for TRIA-eligible lines in 2014). Using a lower percentage, 

such as Treasury’s 2.6 percent would decrease this estimated total direct earned premium for 

terrorism risk coverage.
Appendix II: Estimating the Government Share 

of Losses under the TRIA Program

Page 79 GAO-17-62 Terrorism Risk Insurance

Using these subsets of insurers, we estimated the insurer and federal 

shares of terrorism losses under single-event scenarios, varying by size 

of event (losses of $5 billion, $25 billion, $40 billion, $50 billion, $75 

billion, and $100 billion) and year of event (from 2016 to 2019). We 

estimated the insurer deductible for each insurer group by multiplying 

their direct earned premium by 20 percent.6 If the insurers’ deductible was 

greater than or equal to the loss total, there was no insurer co-share and 

no federal share. If the insurers’ deductible was less than the loss total, 

we estimated the insurers’ co-share by subtracting the insurers’

deductible from the loss total and multiplying the result by the insurers’

co-share percentage. The estimated federal share of losses is the 

difference between the total loss and the insurers’ share.7 Figure 8 

illustrates an example of loss sharing under TRIA.

 6

For our analyses in cases where total losses exceeded the insurers’ deductible, we 

assumed that each affected insurer’s losses exceeded 20 percent of its prior year direct 

earned premium. Insurers that do not experience losses that exceed 20 percent of such 

premium are responsible for all losses and do not share losses with the federal 

government.

7

The federal share is the co-share portion not paid by insurers. For example, in 2016 the 

federal portion of the co-share was 84 percent of the remaining losses after insurers’

deductibles.
Appendix II: Estimating the Government Share 

of Losses under the TRIA Program

Page 80 GAO-17-62 Terrorism Risk Insurance

Figure 8: Example of Loss Sharing under TRIA

Note: In this scenario, the federal share of losses apportioned to mandatory recoupment would be 

$4.4 billion (industry aggregate retention amount in 2016 minus insurers’ share of losses, or $31.5 

billion minus $27.1 billion) and to discretionary recoupment would be $18.5 billion (total losses minus 

insurer losses minus portion of federal share subject to mandatory recoupment, or $50 billion minus 

$27.1 billion minus $4.4 billion). Some numbers may not sum to totals due to rounding.

The relative size of the federal share of losses depends on the amount of 

insured losses from the terrorism event and the direct earned premium of 

insurers affected, as shown in table 7. The federal share of losses would 

be greater in events with more insured losses. For example, in the 

scenarios in which affected insurers had an aggregate premium base 

equal to that of the top 20 insurers, the federal share of losses would 

increase from $1.9 billion in the case of an event with $25 billion in losses 

to $64.9 billion in an event with $100 billion in losses. This shows that the 

government plays a greater role in more catastrophic events, consistent 

with the manner in which the program is structured. Additionally, the 

share of losses the government sustains depends on the aggregate 

TRIA-eligible direct earned premium of the insurers with losses. 

Specifically, the federal share of losses is smaller when losses are shared 

among insurers with larger aggregate premium bases. For example, in a 

$25 billion loss scenario, the government share of losses would be $13.2 

billion if the affected insurers had a premium base equal to that of the top 
Appendix II: Estimating the Government Share 

of Losses under the TRIA Program

Page 81 GAO-17-62 Terrorism Risk Insurance

4 insurers and $1.9 billion if the affected insurers had a premium base 

equal to that of the top 20 insurers.

Table 7: Estimated Federal Share of Losses for Different Sizes of Terrorism Events 

and Subsets of Insurers with Losses in 2016 (dollars in billions) 

Insured losses from the terrorism event (dollars in billions)

Subset of insurers with 

lossesa (numbers) 25 50 75 100

Top 4 insurers 13.2 34.2 55.2 76.2 

Top 10 insurers 7.3 28.3 49.3 70.3 

Top 20 insurers 1.9 22.9 43.9 64.9 

All insurers 0 7.5 28.5 49.5 

Source: GAO analysis of 15 U.S.C. § 6701 note, and SNL Financial’s insurer direct earned premium data.| GAO-17-62.

a

The direct earned premium associated with the insurers rather than the number of insurers is 

important because such premiums determine their deductible amount. We used the top 4, top 10, and 

top 20, and all TRIA-eligible insurers as proxies to represent various sized premium bases. For 

example, the total of direct earned premium for a different subset of insurers’ could equal the direct 

earned premiums of the top 4 insurers.
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 82 GAO-17-62 Terrorism Risk Insurance

The tables in this appendix provide general information on select state 

and federal insurance or insurance-like programs that address the risks of 

natural catastrophes and severe financial conditions, such as 

earthquakes and home foreclosures, respectively.1 These programs 

illustrate a variety of approaches for pricing and managing federal 

charges that could provide insight on how a charge for terrorism risk 

insurance could be designed. For example, policymakers could consider 

how aspects of these programs’ participation requirements, inputs used in 

setting charges, additional funding mechanisms, and oversight could 

apply to a federal charge for terrorism risk insurance. Selected programs 

are described below.

• California Earthquake Authority: A public entity that manages the 

privately funded program and operates as a primary insurer to provide 

catastrophe earthquake insurance to residential property owners and 

renters through participating insurance companies. Participating 

insurers must offer earthquake insurance to their residential property 

insurance policyholders such as those with homeowners/fire 

insurance. Some of the fund’s risk is ceded through reinsurance, 

which is financed through direct purchase of reinsurance or through

capital markets using a special purpose reinsurance entity specifically 

designed to purchase reinsurance. Insurers apply to participate in the 

California program and must submit data for computer modeling to 

determine the insurer’s potential earthquake loss. Newly participating 

insurers with higher risk than other insurers of similar size may be 

charged an annual surcharge if the exposures they present to the 

Authority are higher than the normal risks of the Authority before they 

can participate in the program. Each year, this situation is examined 

and the surcharge is dismissed when the exposures of the new 

participating insurer closely match that of the normal Authority 

exposure base.

• Federal Crop Insurance Corporation: This program was first 

authorized in 1938 to alleviate the economic distress caused by crop 

failures during the Dust Bowl era. The program helps farmers manage 

the risks inherent in farming by allowing them to insure against losses 

caused by poor crop yields, declines in prices, or both. Farmers can 

insure against losses on more than 100 crops, including the five major 

 1

We obtained the information from publically available sources and did not evaluate the 

performance of these programs. Also, for these tables, we refer to the federal and state 

governments and other entities that operate and oversee the programs and their funds as 

“programs.”

Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 83 GAO-17-62 Terrorism Risk Insurance

crops of corn, soybeans, wheat, cotton, and grain sorghum. Approved 

private insurance companies share a percentage of the risk of loss 

and opportunity for gain on each policy. The federal government 

encourages farmer participation by subsidizing premiums and is the 

primary reinsurer to approved insurers.

• Florida Hurricane Catastrophe Fund: A tax- exempt trust fund 

created by the State of Florida to ensure ongoing reinsurance 

capacity to insurers for catastrophic wind losses from hurricanes and 

foster an affordable wind insurance market in Florida. Under this 

program, insurers pay premiums and are reimbursed for a portion of 

their losses.

• Mutual Mortgage Insurance Fund: Title II of the National Housing 

Act, enacted in 1934, authorized a single family mortgage insurance 

program and established the Mutual Mortgage Insurance (MMI) Fund 

to fund it. The program allows single-family homes to be purchased 

with small down payments and long-term mortgages. The Federal 

Housing Administration (FHA), through the MMI Fund, insures lenders 

against loss from defaulted loans. The Fund is funded primarily 

through premiums paid by borrowers and the proceeds of foreclosed 

homes. FHA’s single-family mortgage insurance program has 

provided mortgage credit to families of low and moderate income not 

adequately served by the conventional private mortgage market.

• National Flood Insurance Program: The program makes federally 

backed flood insurance available to property owners in communities 

that participate in the program. Communities participate by adopting 

and enforcing floodplain management regulations designed to prevent 

and mitigate the effects of flooding. The Federal Emergency 

Management Agency, an agency of the Department of Homeland 

Security, administers this program.

• Pension Benefit Guaranty Corporation: As a wholly-owned 

government corporation established to insure the pension benefits of 

participants in and beneficiaries of private-sector defined benefit 

plans, the corporation operates a single-employer program and a 

multi-employer program. Under both programs, plan sponsors pay 

per-participant flat premiums. In addition, under the single-employer 

program, a plan sponsor pays a variable rate premium based on its

plan underfunding.

• Property/Casualty Insurance Security Fund, New York: This fund 

receives premiums from insurers doing business in New York, based 

on each insurer’s direct written premiums on policies it writes. This 

fund pays certain insurance claims of insolvent insurance companies 
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 84 GAO-17-62 Terrorism Risk Insurance

when such payments are allowed in accordance with New York 

Insurance Law. The payments are subject to policy limits and a 

statutory cap. The superintendent of New York’s Department of 

Financial Services is the administrator of the fund.

Table 8 provides information about the type of individual or business 

entity that participates in each program, whether participation in the 

program is mandatory, and briefly describes the benefit payment 

transaction.

Table 8: Information on Participation in Seven Selected Programs

Name of 

program/ 

fund

California 

Earthquake 

Authority 

Federal 

Crop 

Insurance 

Corporation 

Florida Hurricane 

Catastrophe Fund 

Mutual 

Mortgage 

Insurance 

Fund 

National 

Flood 

Insurance 

Program 

Pension 

Benefit 

Guaranty 

Fund 

Property/ 

Casualty 

Insurance 

Security Fund, 

State of New York 

Participant 

type

Residential 

property owners 

who have 

homeowner/fire 

policies with 

participating 

insurance 

companiesa

Crop 

producer

Property/casualty 

insurance 

companies writing 

many lines of 

residential 

insurance 

Buyers of 

single-family 

homes who 

borrow funds 

to buy the 

homes

Residential 

and 

commercial 

property 

owners

Privatesector 

defined 

benefit 

pension 

plans

Property/casualty 

insurance 

companiesb
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 85 GAO-17-62 Terrorism Risk Insurance

Name of 

program/ 

fund

California 

Earthquake 

Authority 

Federal 

Crop 

Insurance 

Corporation 

Florida Hurricane 

Catastrophe Fund 

Mutual 

Mortgage 

Insurance 

Fund 

National 

Flood 

Insurance 

Program 

Pension 

Benefit 

Guaranty 

Fund 

Property/ 

Casualty 

Insurance 

Security Fund, 

State of New York 

Mandatory 

participation

Residential 

property ownerNo

Insurance 

company

– Yes, 

participating 

insurance 

companies must 

offer earthquake 

insurance to their

homeowner/fire 

insurance 

policyholders 

written through 

the California 

Earthquake 

Authority.

—No, nonparticipating 

insurance 

companies may 

not offer 

earthquake 

insurance 

through the 

California 

Earthquake 

Authorityc

No Yes No Property 

owners not in 

designated 

special flood 

hazard areas 

– No

Property 

owners in 

designated 

special flood 

hazard areas 

– Yesd

Yes Yes

Benefit 

payment 

transaction

Participating 

insurer 

processes 

payment to 

policyholder for 

covered losses.

Program 

compensates 

insurers for

claims paid to 

policyholders 

and a set of 

expense to cover 

their process 

expenses. 

Approved 

insurers pay 

crop 

producers for 

covered 

losses.

Program pays 

insurer for covered 

losses in excess of 

insurer’s retention 

amount, up to 

limits based on 

calculations 

involving the 

insurer’s share of 

premiums paid for 

that year. 

Program 

pays the 

lender the 

outstanding 

balance of 

the 

borrower’s 

loan upon 

default. 

Approved 

insurers pay 

policyholder 

for covered 

losses. 

Program 

reimburses 

insurer for 

claims paid.

Program 

generally 

insures 

defined 

benefit plan 

pensions 

subject to 

statutory 

maximums.

Fund pays allowed 

claims of insolvent 

insures that cannot 

meet the policy 

obligations. 

Source: GAO review of program documents. | GAO-17-62.

a

This program is for residential properties and property/casualty insurers selling earthquake coverage 

in the State of California.
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 86 GAO-17-62 Terrorism Risk Insurance

b

This includes fire insurance, miscellaneous property insurance, water damage insurance, burglary 

and theft insurance, collision insurance, personal injury liability insurance, property damage liability 

insurance, fidelity and surety insurance, and motor vehicle and aircraft physical damage insurance. 

This program applies to policies insuring property or risks located or resident in the State of New 

York.

c

The California Earthquake Authority statute has provisions for an associate participating insurer, 

which contains characteristics of a participating and a nonparticipating insurer. Cal. Ins. Code § 

10089.16.

d

Property owners in areas at high risk for flooding generally are subject to a mandatory purchase 

requirement and must retain flood insurance for the life of their mortgage loans.

Table 9 briefly describes upfront charges, other upfront funding sources, 

and post-event funding sources for each program and statutory 

appropriation requirements. Information on these charges includes 

general information on the key inputs used in setting the level of or 

structuring the charge. The table also presents various statutory funding 

mechanisms. Although this table provides primary revenue sources, it is 

not intended to be an exhaustive list of each program’s revenue sources. 
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 87 GAO-17-62 Terrorism Risk Insurance

Table 9: Highlights of Funding Sources for Seven Selected Programs

Name of 

program/fund

California 

Earthquake 

Authority Fund

Federal Crop 

Insurance 

Corporation

Florida 

Hurricane 

Catastrophe 

Fund

Mutual 

Mortgage 

Insurance 

Fund

National Flood 

Insurance 

Program

Pension 

Benefit 

Guaranty 

Corporation

Property/ 

Casualty 

Insurance 

Security Fund 

(State of New 

York)

Up-front 

charges

Property owner 

pays premium to 

program based, 

in part, on 

earthquake risk, 

such as location 

in proximity to a 

fault; and 

geological and 

construction 

factors.

Insurer 

contributes 

capital to the 

program fund 

based on its 

market share by 

direct 

earthquake 

premiums upon 

joining the fund. 

The fund must, 

among other 

requirements, 

have reached a 

target for 

participation for 

authority to 

operate. 

Crop producer 

pays 

subsidized 

premium to 

approved 

insurers. The 

premium rate 

is based, in 

part, on crop 

type, yield 

history, past 

losses, and 

farming 

practice. The 

subsidy rates 

vary by the 

amount of 

coverage 

purchased. 

Insurance 

company pays 

a premium to 

the program, 

based, in part, 

on 

geographical 

area, 

construction 

type, and a 

factor to build 

up cash in the 

fund. 

Borrower 

pays an upfront 

premium, 

calculated as 

a percentage 

of the 

original loan 

amount and 

annual 

premiums, 

calculated as 

a percentage 

of the 

outstanding 

loan amount, 

to the 

program.

Property owner 

pays premium 

to approved 

insurer based, 

in part, on flood 

risk, program 

expenses and 

certain property 

characteristics. 

Some property 

owners pay 

subsidized 

premiums.

Policyholders 

pay a flat fee 

surcharge.

Single 

employer 

pension plans 

pay premiums 

based on a flat 

fee for each 

participant. For 

each that is

underfunded, 

an additional 

variable rate 

premium is 

charged based 

on the amount 

of its unfunded 

vested 

benefits. 

Multiemployer 

plan sponsors 

pay a flat fee 

annually for 

each plan 

participant.

Contributions 

to the fund are 

based on the 

insurer’s net 

direct written 

premiums on 

policies that 

insure property 

or risks in the 

State of New 

York.

If the 

superintendent 

determines the 

net value of the 

fund has at 

least $150 

million at the 

end of the fund 

year, no further 

contributions 

shall be made 

the following 

fund year. 

Other up-front 

funding source

Reinsurance

Issue bonds 

No Reinsurance

Pre-event

bonds 

Permanent 

and 

indefinite 

budget 

authority to 

draw funds 

from 

Treasury in 

the event 

that a

secondary 

reserve 

account has 

insufficient 

funds.a

No No No
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 88 GAO-17-62 Terrorism Risk Insurance

Name of 

program/fund

California 

Earthquake 

Authority Fund

Federal Crop 

Insurance 

Corporation

Florida 

Hurricane 

Catastrophe 

Fund

Mutual 

Mortgage 

Insurance 

Fund

National Flood 

Insurance 

Program

Pension 

Benefit 

Guaranty 

Corporation

Property/ 

Casualty 

Insurance 

Security Fund 

(State of New 

York)

Post-event 

funding source

Program can 

assess insurers, 

issue bonds and 

impose 

policyholder 

surcharges. 

No Program can 

issue revenue 

bonds that are 

repaid, in part, 

with 

emergency 

assessments 

on almost all 

property 

casualty 

insurers in 

Florida—

including those 

not already 

participating in 

the program.b

No Federal 

Emergency 

Management 

Agency has 

borrowing 

authority from 

Department of 

the Treasury 

(Treasury), 

which is 

intended for use 

if there is not 

enough to cover 

insured claims. 

Assets of 

single 

employer 

plans the 

program has 

taken over, 

and amounts 

recovered 

from assets of 

such plans. 

Also, 

Investment 

income on its 

trust funds.

If the fund falls 

below the 

statutory 

minimum, the 

program seeks 

additional 

funding from 

the insurers. 

Statutory 

appropriation 

requirementsc

No Authority to 

expend 

necessary 

funds to, 

among other 

things, pay 

premium 

subsidies and 

administrative 

and operating 

expenses of 

the approved 

insurers.

No Permanent 

and 

indefinite 

budget 

authority to 

draw funds 

from 

Treasury in 

the event 

that a

secondary 

reserve 

account has 

insufficient 

funds.a

Authority to 

borrow from 

Treasury when 

losses exceed 

premium 

revenue and any 

accumulated 

surplus. 

This program 

receives no 

funds through 

the annual 

appropriation 

process.

Annual 

statutory 

appropriation 

and 

encumbrance 

of $90 million 

unless not 

appropriated, 

then the 

amount would 

be up to the 

amount 

transferred by 

the fund to the 

state general 

fund. 

Source: GAO review of program documents. | GAO-17-62.

a

The Mutual Mortgage Insurance Fund has two reserve accounts: a primary reserve account to cover 

expected future losses and a secondary reserve account to cover additional, unexpected future 

losses.

b

The program’s fund is structured as a state trust fund and thus exempt from federal income tax. The 

structure enables the program fund to accumulate funds tax free, reducing the amount of post-event 

financing needed.

c

A statutory appropriation requirement may also be listed as an up-front or post-event funding source.

Table 10 provides examples of who—program staff or third parties—

perform the day-to-day operations of key functions and oversight for each 

program. The table highlights certain large activity components such as 

issuing policies, collecting premiums, and servicing policies and is not 
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 89 GAO-17-62 Terrorism Risk Insurance

intended to provide an exhaustive list of all operational activities. The 

table also provides information about the oversight approach each 

program uses to help ensure its participants report accurate information 

and pay the correct charges. Finally, the table also highlights the reviews 

or assessments each program performs to determine the adequacy of its 

charges and the financial viability of its fund.

Table 10: Highlights of Operations and Oversight Functions for Seven Selected Programs

Name of 

program/fund

California 

Earthquake 

Authority Fund

Federal Crop 

Insurance 

Corporation

Florida 

Hurricane 

Catastrophe 

Fund

Mutual 

Mortgage 

Insurance 

Fund

National 

Flood 

Insurance 

Program

Pension 

Benefit 

Guaranty 

Fund

Property/ 

Casualty 

Insurance 

Security Fund 

(State of New 

York)

Examples of 

day-to-day 

functions

Program issues 

policies.

Insurers service 

policies.

The program 

compensates 

insurers for 

claims paid to 

policyholders 

and services 

performed.

Program is 

authorized to 

use third parties 

for services 

such as 

actuarial and 

geological 

expertise.

Approved 

insurers sell 

and service 

policies, such 

as adjusting 

claims and 

paying 

covered 

losses. 

Program, among 

other things, 

issues 

reimbursement 

contracts, and 

reimburses 

participating 

insurers for 

losses.

Program uses a 

third party to 

develop a 

formula for 

reimbursement 

premium rates. 

Program 

collects 

premiums 

from 

borrowers.

Federal 

government 

manages the 

National Flood 

Insurance 

Fund and 

oversees 

approved 

private 

insurers.

The insurers

sell and 

service 

policies, such 

as by 

underwriting, 

adjusting 

claims, and 

paying 

covered 

losses.

Program relies 

on contractors 

to collect data, 

market the 

program, and 

help map flood 

hazards.

Program 

collects 

premiums, 

pays benefits, 

or provides 

financial 

assistance, 

and tests 

plan sponsor 

compliance.

Premium 

rates are set 

as provided 

by statute.

Keeps 

accounting of 

fund levels, 

audits insurers’

fillings for 

compliance 

with payment 

requirements 

and takes 

enforcement 

actions.
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 90 GAO-17-62 Terrorism Risk Insurance

Name of 

program/fund

California 

Earthquake 

Authority Fund

Federal Crop 

Insurance 

Corporation

Florida 

Hurricane 

Catastrophe 

Fund

Mutual 

Mortgage 

Insurance 

Fund

National 

Flood 

Insurance 

Program

Pension 

Benefit 

Guaranty 

Fund

Property/ 

Casualty 

Insurance 

Security Fund 

(State of New 

York)

Oversight of 

participant 

compliance

Program’s 

books and 

accounts are 

subject to audit 

by independent 

auditors chosen 

by the State of 

California’s 

Department of 

Finance and 

approved by the 

California 

Insurance 

Commissioner 

or an inspection 

by the 

Department of 

Insurance.

Program has 

general 

enforcement 

and disciplinary 

authority to 

ensure 

compliance with 

the program’s 

regulatory 

provisions.

Program can 

examine 

records of 

insurance 

company for 

compliance. 

Program 

conducts routine 

examinations of 

participants of 

limited scope to 

verify 

compliance with 

data reporting 

requirements. 

Program can 

audit lenders. 

Program can 

review insurer 

activities such 

as claims and 

underwriting 

and performs 

financial audits 

every 2 years. 

Program can 

review plan 

records,

which 

includes

verifying the 

accuracy of 

reported 

information. 

Audits insurers’

fillings for 

compliance 

with payment 

requirements. 

Oversight of 

pre-event 

charges or 

fund’s financial 

viability

Models are used 

to calculate the 

program’s 

claims paying 

capacity each 

year. The 

capacity is 

subject to 

approval 

annually by the 

Authority’s

Governing 

Board 

comprising the 

state’s governor, 

treasurer, and 

insurance 

commissioner. 

Review rate 

setting 

methodology 

periodically. 

Statutory 

requirement, 

each year, to 

estimate various 

loss severity 

scenarios and 

provide financing 

options for each 

scenario, among 

other things. 

Statutory 

requirement 

for actuarial 

review of 

fund each 

year. 

Program 

conducts 

annual review 

of its 

underwriting 

experience as 

part of 

assessing the 

fiscal 

soundness of 

its rating and 

coverage 

structure.a

Actuarial 

evaluations 

each year to 

provide 

estimates of 

the two 

program’s 

future 

financial 

condition.b

Not applicable. 

Fund uses 

statutory 

minimum fund 

levels to initiate 

additional 

payments from 

insurers. 

Source: GAO review of program documents. | GAO-17-62.
Appendix III: Information on Pricing Structure 

of Selected State and Federal Insurance or 

Insurance-like Programs

Page 91 GAO-17-62 Terrorism Risk Insurance

a

GAO has recommended that the Federal Emergency Management Agency (FEMA) ensure that its 

rate-setting methods for the National Flood Insurance Program result in rates that accurately reflect 

flood risks. See GAO, Flood Insurance: FEMA’s Rate-Setting Process Warrants Attention, 

GAO-09-012 (Washington, D.C.: Oct. 31, 2008). In addition, the program has been on GAO’s highrisk list since 2006. See GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: 

February 2013).

b

The Pension Benefit Guaranty Fund does not have the authority to set its own premiums, which are 

set as provided by statute.
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 92 GAO-17-62 Terrorism Risk Insurance

This appendix provides an overview of U.S. insurance accounting 

practices, in-depth information about identified domestic approaches, and 

examples of set-aside approaches used in other countries.

The current U.S. insurance accounting standards (statutory accounting 

principles, or SAP) permit insurers to establish loss reserves only after an 

event has occurred and U.S. insurers have the flexibility to manage their 

capital to cover unexpected or catastrophic losses across all lines of 

business. Although, insurers may consider terrorism risk exposure in their 

assessments of the adequacy of capital, they do not segregate assets 

that are restricted for potential terrorism losses or establish loss reserves 

for events that have not yet occurred.

• Loss reserve. For this report, we define a loss reserve as the 

company’s estimate of amounts needed to cover indemnity payments 

that will come due on policies already written for losses from events 

that have already occurred and the administrative expenses of dealing 

with the associated claims. Loss expenses related to increases in loss 

reserves reduce an insurer’s taxable income. Such liabilities are 

typically the largest single liability on an insurer’s balance sheet.

• Capital. For this report, we define capital as the excess of an 

insurance company’s assets above its liabilities. Capital generally is 

not segregated for specific purposes. It provides a cushion to an 

insurer against insolvency for any unexpected or underestimated 

losses. For example, if the recorded loss reserves are insufficient, the 

insurer’s capital is available to pay claims. Insurers are generally free 

to manage their capital as long as they satisfy external solvency and 

liquidity requirements and internal assessments of capital adequacy. 

Insurers may also use their capital to expand their business.

• Accounting standards and financial reporting. Insurers must 

report their financial holdings on an individual legal entity basis to the 

regulator in their state of domicile, using statutory accounting 

principles of the National Association of Insurance Commissioners 

(NAIC). According to NAIC, SAP are designed to assist state 

insurance departments in the regulation of the solvency of insurance 

companies. The ultimate objective of solvency regulation is to ensure 

that policyholder, contract holder, and other legal obligations are met 

when they come due and that companies maintain capital and surplus 

at all times and in such forms as required by statute to provide a 

margin of safety. In addition to SAP, insurance groups may issue 

audited financial statements using U.S. generally accepted accounting 

principles (GAAP), which in the United States are promulgated by the 

Financial Accounting Standards Board and are designed to provide 

Appendix IV: Accounting Practices and 

Some Domestic and International Set-Aside 

Approaches
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 93 GAO-17-62 Terrorism Risk Insurance

decision-useful information to investors and other users of financial 

reporting.1 SAP stress the measurement of ability to pay claims in the 

future. SAP and GAAP recognize certain items differently and 

therefore may result in different capital and net income amounts. 

Accounting standards for recording insurance liabilities state that 

insurers only may create a loss reserve for a covered event that has 

occurred and for which the cost of the event is estimable.2 No liability 

exists without the occurrence of a covered event. Unless otherwise 

noted, references in this report to accounting for or recording liabilities 

refer to SAP.

• Tax deduction. Federal tax laws allow tax deductions for an increase 

to loss reserves that result from incurred losses for events that 

occurred during the period.3

• Risk-based capital requirements. State regulators require insurance 

companies to maintain specific levels of capital to continue to conduct 

business. Regulators determine the minimum amount of capital 

appropriate for an insurer to support its overall business operations, 

taking into consideration its size and risk profile. All state regulators 

have adopted NAIC’s Risk-Based Capital for Insurers Model Act and 

also use formulas that NAIC has developed to establish a minimum 

capital requirement based on the types of risks to which a company is 

exposed. NAIC has separate models for different lines of insurance.

• Assets. For this report, we define assets to represent the resources 

that contribute to an entity’s future net cash flow and that an entity 

might use to pay its debts. Insurers’ assets are available for potential 

covered losses and generally are not segregated or restricted for 

limited uses. But in some instances, an insurer’s assets may be 

segregated or restricted for specific purposes. For example, insurers 

 1

In the United States, the Financial Accounting Standards Board establishes GAAP, which 

governs the preparation of financial statements by nongovernmental entities. The 

International Accounting Standards Board issues International Financial Reporting 

Standards for foreign non-governmental entities. Neither standard allows liabilities to be 

included on financial statements for events that have not yet occurred, because they do 

not meet the definition of a liability.

2

Statement of Statutory Accounting Principles no. 55 establishes the principles for 

recording liabilities for paid and unpaid losses and loss adjustment expenses for property 

casualty companies. See also Financial Accounting Standards Board Accounting 

Standards Codification 450-20 and 944.

3

26 U.S.C. §832(b)(5) and (c)(4); 26 C.F.R. § 1.832-4(b). In general, insurers may deduct 

the discounted value of estimated losses that have been incurred and they will be required 

to pay under insurance policies currently in force.
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 94 GAO-17-62 Terrorism Risk Insurance

may segregate or restrict their assets for specific purposes such as 

holding assets for collateral.

• Liabilities. For this report, we define liabilities as present obligations 

to transfer assets or provide services to other entities in the future as 

a result of past transactions or events.

For further details on the domestic approaches described in the report, 

see the following.

NAIC catastrophe reserve proposal. According to a study on the NAIC 

catastrophe reserve proposal, the proposal’s design includes voluntary 

participation, a specific formula for an insurer to calculate its annual setaside amount to cover catastrophic losses, and a loss reserve structure

for catastrophic events that have not yet occurred.

4 The proposal was 

developed to address constraints faced by insurance companies when 

catastrophes occur and pose significant challenges to the economy.5

Under the proposal, a reserve cap for each participating insurer would be 

calculated with a formula based on each insurer’s net written premiums 

written on qualifying business lines. Each insurer participating on a 

voluntary basis would determine the amount to set aside each year in a 

catastrophe reserve over a 20-year time frame. The proposal would 

establish a target amount of $40 billion across the property/casualty 

insurance industry, which was based on written premiums in 1999. 

Individual companies’ contributions would occur over a 20-year period.

Each participating insurer’s set-aside would be structured as a separate 

liability on its balance sheet (distinct from other loss reserves and 

unearned premium reserves) without specific segregation of assets.6 The 

 4

Kay A. Cleary and Judy Pool Boutchee, “Reserving for Catastrophes,” at

https://www.casact.org/pubs/forum/02fforum/02ff025.pdf

5

The proposal was finalized by the NAIC membership in 2001, but a number of actions 

would have been needed for it to have been implemented and used by insurance 

companies, including changes to the federal tax code to allow the categorization of the 

contributions to these set-asides as tax deductible, according to the proposal. In addition, 

the proposal recognizes that current SAP and GAAP accounting limits the recognition of 

loss reserves to events that have already occurred. Under the proposal, insurers would 

be allowed to establish loss reserves for potential catastrophic losses.

6

In general, an unearned premium reserve is an account that contains accrued premiums 

that have not been earned because they are for coverage to be provided in the future. 

Loss reserves generally are the amounts that the company expects to pay out to cover (1) 

indemnity payments that will come due on policies already written for events that have 

already occurred and (2) the administrative expenses of dealing with associated claims.

Details on Selected 

Domestic Set-Aside 

Approaches
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 95 GAO-17-62 Terrorism Risk Insurance

proposed federal tax treatment would provide for tax deductions over a 

period of 20 years for contributions into the set-aside.

According to the proposal, an insurer could use its reserve to cover its 

share of losses for multiple perils, among other uses. The reserve would 

be used primarily for catastrophic losses resulting from multiple perils 

such as wind, hail, or earthquake—and the drawdowns would be subject 

to criteria designed to protect solvency and limit use of the reserve for 

only catastrophic losses. Insurers also could use the reserve when the 

reserve balance exceeded the reserve cap or if their domiciliary state 

commissioners required them to release the catastrophe reserve as a 

rehabilitation, conservation, or liquidation measure or to forestall 

insolvency.

Catastrophe risk weight. In 2013, NAIC began testing a catastrophe risk 

weight (a weighted measure included in assessments of the adequacy of 

insurers’ capital) to better measure an individual insurer’s ability to remain 

solvent, when taking into account the insurer’s earthquake and hurricane 

risk exposures.7 When fully implemented, the catastrophe risk weight will 

be incorporated into an insurer’s risk-based capital requirements, and will 

have no limitations on its use. All insurers will include an estimate of their 

hurricane and earthquake exposure as part of their risk-based capital 

calculations. The catastrophe risk weight was developed from historical 

data on catastrophe losses. An insurer enters its individually calculated 

modeled losses into a formula to determine a target amount of capital to 

maintain against these two exposures.

However, the company’s available capital is not limited to covering losses 

from hurricanes and earthquakes and could be used for any purpose, 

such as paying claims for other types of catastrophic losses. Hurricane 

and earthquake risks were included as part of the catastrophe risk weight 

because they were the two perils most likely to cause losses that could 

significantly affect an insurer’s solvency and the models for these risks 

were considered advanced enough to estimate the effect of such losses 

on insurers’ business. NAIC officials leading this effort also told us that 

they plan to consider similar risk-based capital weights for other risks, 

including for terrorism.

 7

According to NAIC officials, they are in the initial data collection and testing phase and 

expect to fully implement the catastrophe risk weight by 2017.
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 96 GAO-17-62 Terrorism Risk Insurance

Selected aspects of legislative proposals. Two proposals by House 

members that we reviewed included provisions to establish set-asides 

with segregated insurer assets for terrorism losses to help stabilize the 

marketplace following a terrorist event.8 Key aspects of one or both of the 

proposals included (1) requiring insurers that sold terrorism coverage to 

participate, (2) providing for a specific target annual contribution (a 

percentage of the premiums collected from policyholders for terrorism 

coverage to be set aside), and (3) specifying the use of funds for insurer 

and federal shares of terrorism losses. Each insurer participating in the 

Terrorism Risk Insurance Act (TRIA) program could establish and 

maintain a set-aside with segregated assets for terrorism losses (the 

TRIA Reserve Fund) in fiduciary capacity on behalf of the Secretary of the 

Treasury.9

Other aspects of one or both proposals provide additional details on the 

structure of a set-aside. Specifically, each year an insurer would place 50 

percent of the premiums collected from policyholders for terrorism 

coverage in a set-aside with segregated assets. The set-aside would be 

maintained in a segregated account, be held by the insurer on behalf of 

the Secretary of the Treasury, and kept until the program terminated. 

Therefore, the premium income diverted to this set-aside likely would not 

be part of an insurer’s taxable income, according to an insurer we 

interviewed. Funds in these set-asides would be collected and used by 

the Secretary of Treasury to offset the federal share of compensation 

provided to any affected insurers under TRIA in the event of a certified 

terrorism event, except that insurers could use these funds first to pay for 

any of their own covered terrorism losses (including losses below TRIA’s 

program trigger level). If the Department of the Treasury (Treasury) used 

insurers’ set-asides to offset any of the federal share of losses, Treasury 

would reimburse the companies for such amounts after the federal share 

of terrorism losses had been recouped.

 8

The legislative proposals—which were developed by the House Financial Services 

Committee and entitled the Terrorism Risk Insurance Revision Act of 2005 and Terrorism 

Risk Insurance Modernization (TRIM) Act of 2014—also addressed other aspects of the 

TRIA program. For the purposes of our report, we combined aspects of both proposals 

and discuss them collectively. The aspects discussed appear in at least one or both 

proposals. The Terrorism Risk Insurance Revision Act of 2005 was introduced in 

November 2005. (H.R. 4314, 109th Cong. (1st Sess. 2005)). The TRIM Act of 2014 was a 

draft outline and was never introduced as a bill.

9

We interpreted the proposals to require a set-aside with segregated assets.
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 97 GAO-17-62 Terrorism Risk Insurance

We identified some countries in which insurers are allowed to establish 

set-asides for events that have not yet occurred, although the use, 

participation, and structures of set-asides differed among some of these 

countries (see fig. 9). Generally, the set-asides could be available for 

multiple perils and solvency purposes, and three of the selected countries 

explicitly allowed insurers to recognize potential terrorism losses. In 

addition, four of the selected countries mandated insurer participation to 

establish set-asides, two allowed for voluntary participation, and one 

country had mandatory and voluntary set-asides. The structures of setasides took distinct forms such as loss reserves and specific risk-based 

capital requirements, and some provide a tax deduction for the increases 

to such set-asides.10 We discuss the identified international set-aside 

approaches for events that have not yet occurred on the following 

pages.11

 10Equalization reserves are intended to cover random fluctuations of claim expenses for 

some types of insurance contracts, such as hail insurance, using a formula based on 

multiyear claims experience. They also can be tax deductible.

11We examined some of the national terrorism risk insurance programs in a recently 

issued report. See GAO, Terrorism Risk Insurance: Comparison of Selected Programs in 

the United States and Foreign Countries, GAO-16-316 (Washington, D.C.: Apr. 12, 2016). 

However, the focus in this appendix is at the insurer level as opposed to the national level 

in the prior report. 

Examples of Set-Aside

Approaches Used in Other 

Countries
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 98 GAO-17-62 Terrorism Risk Insurance

Figure 9: Overview of Insurer Set-Asides Identified in Six Countries

a

Canadian insurance companies’ mandatory risk weights account for earthquake, nuclear, and 

mortgage risks. For this table, we included its earthquake risk weight and earthquake loss reserve.

b

A loss reserve structure for events that have not yet occurred also includes an equalization reserve 

structure. Equalization reserves are intended to cover random fluctuations of claim expenses for 

some types of insurance contracts such as hail insurance, using a formula based on multilayer claims 

experience. They also can be tax deductible.

Australia. Australian insurers must establish a mandatory set-aside, 

generally structured as a specific risk weight in capital requirements. It is 

intended to help insurers to maintain adequate capital against the risks 

associated with insurance concentration in their activities, including 

natural catastrophe risks. Natural catastrophes can include all natural 

events, including earthquakes and storms. This insurance risk weight 

represents the net financial impact on the insurer from either a single 

large event or a series of smaller events, within a 1-year period. The risk 

weight takes into account all possible perils in all regions to determine the 

size of loss that could occur from a single event. The insurer must retain 

at least this calculated target amount of capital for all these risks, 

including natural catastrophes, at all times.

Austria. Austria’s Terrorism Risk Insurance Program design includes 

voluntary insurer participation and loss reserve structure with specified 
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 99 GAO-17-62 Terrorism Risk Insurance

insurer target amounts equal to their deductibles. The set-aside in this 

program was established for potential terrorism losses, according to the 

Austrian program representative. It is unknown whether the set-aside may 

be used for other purposes such as solvency.

Participating insurers would structure the set-aside as a loss reserve to 

cover their program deductible on terrorism losses. The reserve is 

structured as a loss reserve in which the amount that is contributed to the 

set-aside reduces an insurer’s taxable income, according to a program 

representative.12 This set-aside would help to cover potential terrorism 

losses and the target amounts are based on each insurer’s market share 

of terrorism coverage, according to the program representative. Initially, 

the reserves were accumulated over 10 years. The time frame was 

increased to 15 years to allow insurers additional time to accumulate 

increased program deductibles.13

Canada. According to insurance regulatory officials, Canadian insurance 

companies must include mandatory set-asides for specific risk exposures 

as part of minimum capital requirements and also have the option to 

establish a voluntary set-aside in capital for earthquake events that have 

not yet occurred. The mandatory capital set-asides account for potential 

losses from earthquake, nuclear, and mortgage risks in risk-based capital 

requirements. The Canadian insurance regulator provides guidance for 

an insurer to determine the supervisory target level of required capital for 

each risk (risk weights) that would be included as part of an insurer’s riskbased capital requirements. The supervisory capital target for earthquake 

risk is calculated based on a 500 year probable maximum loss. In 

addition, for potential earthquake losses, insurers also may participate in 

establishing a voluntary set-aside in capital. Officials said that this 

 12Austria’s government has no additional financial or administrative role in the program

(beyond allowing insurers’ contributions to the loss reserve to be deducted from taxable 

income). The program is run by an insurance association. In addition to the deductibles, 

insurers collectively purchase reinsurance above the deductible amount. 

13According to the Austrian representative, the Austrian program increased its insurers’

deductible (overall target amount) from $60 million to $90 million (€50 million to €75 

million) in January 2013. The representative told us this action decreased the amount of 

reinsurance the pool needed to purchase, which decreased the cost to the pool members 

but required the insurers to hold larger reserve accounts at their institutions. The members 

have until 2018 to increase their reserve accounts. The individual insurers contribute to 

the overall cost of the reinsurance and maintain the reserve account on their balance 

sheets to pay for claims. All members pay a share of the reinsurance premium based on 

their market share of terrorism coverage. 
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 100 GAO-17-62 Terrorism Risk Insurance

voluntary set-aside is not typically used by insurers for various reasons 

including the fact that it locks-in capital that may otherwise be used 

elsewhere. Officials also told us that assets are not specifically 

segregated in either the mandatory or voluntary set-asides and that the 

voluntary set-asides provide a deduction for income tax purposes.

Finland. According to insurance department representatives, nonlife 

insurers in Finland must establish set-asides structured as equalization 

reserves—a type of loss reserve—that serves as a buffer for 

exceptionally high claims. These mandatory insurers’ equalization 

reserves can cover events that have not yet occurred, including losses 

from natural catastrophes and terrorism. The calculations of target 

amounts and contributions to such equalization reserves are based on 

European Union capital requirements. The equalization reserve also has 

a maximum amount, which can be up to four times the target amount. 

Representatives also told us that the set-aside is not subject to tax on an 

ongoing basis but may be subject to income taxes as the set-aside is 

decreased.

France. According to French insurance regulatory officials, insurance 

companies in France may establish set-asides generally structured as 

equalization reserves to cover events that have not yet occurred, 

including natural disasters and terrorism. Insurers establish equalization 

reserves on a voluntary basis that allow for tax deduction by the French 

Tax Administration, but these reserves are not allowed to be included on 

financial statements prepared under international accounting standards 

because the event has not occurred, according to officials. Insurers 

benefit from a tax deduction to reduce an insurer’s taxable income for 

contributions to these set-asides if certain standards are met, such as not 

exceeding a target amount set by the French Tax Administration. The 

target amount and time frames depend on the risk that the equalization 

reserve is meant to cover. For example, an equalization reserve that 

includes terrorism risk can be kept for 12 years.

Mexico. According to a representative from the insurance regulator, 

insurers in Mexico are required to establish set-asides for catastrophic 

events that have not yet occurred and structure these set-asides as 

special catastrophe reserves to cover natural catastrophe risks as well as 

other catastrophe risks. Insurers create the catastrophe reserves with a 

target amount based on probable maximum loss that is calculated at the 

end of each fiscal year. In addition, insurers record these set-asides as 

loss reserves on the balance sheet and contributions to these set-asides 

are tax deductible. Once a catastrophic event occurs, insurers must first 
Appendix IV: Accounting Practices and Some 

Domestic and International Set-Aside 

Approaches

Page 101 GAO-17-62 Terrorism Risk Insurance

exhaust their reinsurance options before utilizing their own catastrophic 

set-asides.
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 102 GAO-17-62 Terrorism Risk Insurance

In this appendix, we discuss additional details about our methodology and 

results regarding how recoupment under the Terrorism Risk Insurance 

Act (TRIA) and alternative funding options could affect market 

participants. As noted previously, while our analyses of potential market 

effects of TRIA recoupment and alternative funding options rely on 

assumptions regarding price increases under each option, it is also 

possible that there could be no change in price, policyholder participation, 

or insurers’ volume of premium. In addition, we discuss additional 

information we obtained from our interviews with industry participants 

such as insurers and state regulators.

We estimated the potential upper ranges of effects of recoupment on 

TRIA-eligible policyholder price and participation, and insurers’ direct 

earned premium after a terrorism event, under scenarios that result in the 

very large mandatory and discretionary recoupment amounts.1

Specifically, we estimated effects of (1) a very large mandatory 

recoupment amount, (2) the shortest time frame for collecting the 

mandatory recoupment amount (which would result in a very large annual 

surcharge), and (3) a very large discretionary recoupment amount (to 

show a very long collection time frame). See table 11 for a summary of 

the results.

• To illustrate potential effects of a very large mandatory recoupment

amount we used an event size of $40 billion that occurs in the year 

2019 (year with the maximum industry aggregate retention) that 

affected a small set of insurers—insurers with aggregate prior-year 

direct earned premium equal to those of the top four TRIA-eligible 

insurers.2 Using SNL Financial’s 2014 data, the top four insurers of 

TRIA-eligible lines carried 22.5 percent of the prior-year TRIA-eligible 

 1

Under TRIA’s recoupment provision, the federal government recoups some or all of its 

losses through insurer enforced premiums surcharges on all policyholders with TRIAeligible insurance coverage after an event occurs.

2

TRIA-eligible lines are commercial lines of property/casualty insurance, including excess 

insurance, workers’ compensation insurance, and directors’ and officers’ liability 

insurance. Subject to certain exceptions, eligible commercial lines also include the 

following (as listed in the Exhibit of Premiums and Losses of the National Association of 

Insurance Commissioners): aircraft (all perils), allied lines, boiler and machinery, 

commercial multiperil (liability and nonliability), fire, inland marine, ocean marine, other 

liability, products liability, and workers’ compensation. The law excludes personal 

property/casualty, crop, and private mortgage insurance; commercial automobile, 

burglary, and theft, and professional liability insurance; and health and life insurance.

Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding 

Options

Additional Potential Effects 

of Recoupment under 

TRIA Following a 

Terrorism Event
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 103 GAO-17-62 Terrorism Risk Insurance

direct earned premium. We estimated the TRIA-eligible insurance line 

direct earned premium in 2018 to be $218 billion.

• To maximize potential market effects from a very large mandatory 

recoupment amount, we used the same event size and subset of 

affected insurers, but the event occurs in 2017 when the time frame 

for mandatory recoupment is the shortest (1 year and 9 months when 

collection begins the January following the event). We estimated the 

TRIA-eligible insurance line direct earned premium in 2016 to be $209 

billion.

• To illustrate potential effects of a very large discretionary recoupment

amount, we used an event size of $100 billion in 2019 that affected 

insurers with aggregate prior-year direct earned premium equal to 

those of the top 10 TRIA-eligible insurers. Using SNL Financial’s 2014 

data, the top 10 insurers of TRIA-eligible lines carried 39.8 percent of 

the prior-year TRIA-eligible direct earned premium.

• We discuss our results from each of the two analysis methods used 

(percentage load method or revenue target method).3 These two 

methods rely on different assumptions about insurers’ pricing 

strategies.

Table 11: Comparison of Potential Market Effects of Recoupment Examples 

$40 billion event in 2019 resulting in 

mandatory recoupment of $31 billion 

and the average change for the same 

event in 2017a

$100 billion event in 2019 resulting in 

mandatory recoupment of $6.2 billion 

and discretionary recoupment of 

$62.5 billionb

Percentage load method

Years to collect

[low, average, high]

5 (program requirement)

2017: 2

Mandatory: 5 (program requirement)

Discretionary: [10, 10, 10]

Percentage change in price

[low, average, high]

[2.8, 2.8, 2.8]

2017: 6.3

Mandatory: [0.6, 0.6, 0.6]

Discretionary: 3 (program specified)

Percentage change in participation [low, 

average, high]

[-1.2, -1.8, -2.3]

2017: -4.0

Mandatory: [-0.2, -0.4, -0.5]

Discretionary: [-1.3, -1.9, -2.5] 

Percentage change in insurers’ direct earned 

premium [low, average, high]

[-1.3, -1.9, -2.4]

2017: -4.4

Mandatory: [-0.3, -0.4, -0.5]

Discretionary: [-1.4, -2.0, -2.6] 

 3

In the percentage load method, insurers pass a specified premium increase percentage 

to policyholders. In the revenue target method, insurers increase premiums in an attempt 

to maintain total premium revenue. 
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 104 GAO-17-62 Terrorism Risk Insurance

$40 billion event in 2019 resulting in 

mandatory recoupment of $31 billion 

and the average change for the same 

event in 2017a

$100 billion event in 2019 resulting in 

mandatory recoupment of $6.2 billion 

and discretionary recoupment of 

$62.5 billionb

Revenue target method

Years to collect [low, average, high] 5 (program requirement)

2017: 2 

Mandatory: 5 (program requirement)

Discretionary: [18, 28, 62]

Percentage change in price

[low, average, high]

[5.0, 7.7, 15.8]

2017: 17.1

Mandatory: [1.0, 1.5, 3.2]

Discretionary: 3 (program specified)

Percentage change in participation [low, 

average, high]

[-2.2, -4.8, -13.0]

2017: -10.8

Mandatory: [-0.4, -1.0, -2.6]

Discretionary: [-1.3, -1.9, -2.5] 

Percentage change in insurers’ direct earned 

premium [low, average, high]

[-0.1, -0.4, -2.1]

2017: -1.8

Mandatory: [*, -0.1, -0.1]

Discretionary: [0, 0, 0] 

Legend: * = smaller than -0.1 percent

Source: GAO analysis of analysis of 15 U.S.C § 6701 and SNL Financial’s insurer direct earned premium data. | GAO-17-62

Notes: In the percentage load method, insurers pass a specified premium increase percentage to 

policyholders. In the revenue target method, insurers increase premium rates to collect, at the margin, 

additional annual premium revenue up to the annual recoupment amount. Another possibility is that 

insurers would not pass premium increases to policyholders. Insurers likely would pass increases to 

policyholders in the recoupment option. We estimated the industry prior-year direct earned premium 

for 2016 and 2018 Terrorism Risk Insurance Act (TRIA)-eligible insurance lines from SNL Financial’s 

2014 data annually adjusted by a percentage generated from A.M. Best’s estimates of terrorism risk 

insurance premiums. We used low, average, and high premium elasticity of demand for commercial 

property/casualty insurance as -0.43, -0.63, and -0.82, respectively. We calculated average elasticity 

from high and low values. We used elasticity of demand for commercial property/casualty insurance 

rather than for corporate demand for terrorism risk insurance, which ranges from –0.31 to –0.71, 

because most premium adjustments would be imposed on commercial property/casualty. See 

Erwann Michel-Kerjan, Paul Raschky, and Howard Kunreuther, “Corporate Demand for Insurance: 

New Evidence from the U.S. Terrorism and Property Markets,” The Journal of Risk and Insurance, 

82, no. 3 (2015) 505–530.

a

In this example, affected insurers had aggregate prior-year direct earned premiums equal to those of 

the top four TRIA-eligible insurers. The Department of the Treasury (Treasury) recovers all the federal 

losses through mandatory recoupment surcharges on policyholder premiums of TRIA-eligible lines of 

business within the 5-year collection period. We also show the average effects for the equivalent 

event in 2017 to illustrate how the date of a terrorism event can affect the results.

b

In this example, affected insurers had aggregate prior-year direct earned premiums equal to those of 

the top 10 TRIA-eligible insurers. Treasury recovers a small portion of the federal losses through 

mandatory recoupment surcharges on policyholder premiums of TRIA-eligible lines of business within 

the 5-year collection period. Treasury recoups the remaining losses through discretionary 

recoupment.

In addition to the effects previously discussed, recoupment could lead to 

a loss of direct earned premium for insurers following a terrorism event. 

However, according to one insurer, recoupment may not affect the 

marketwide availability of terrorism risk coverage. We describe some 

results and observations from our illustrative analyses relating to insurers’

potential loss of premium revenue and findings from literature and 

interviews. 

Insurers
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 105 GAO-17-62 Terrorism Risk Insurance

• The potential losses of TRIA-eligible direct earned premium to 

insurers vary with factors such as the size of the event, the year of the 

event, the assumed elasticity of demand, and the assumed insurer 

pricing methodology. The potential direct earned premium loss could 

be higher or lower depending on whether coverage was mandatory for 

the line. For example, states require workers’ compensation 

coverage, so any increase of prices due to a requirement to collect a 

recoupment surcharge likely would have a small effect on the 

premium revenue of a workers’ compensation insurer.

• In certain scenarios, insurers’ potential loss of direct earned premium 

could be less when losses were recouped under discretionary 

recoupment compared with mandatory recoupment, because the price 

increase to policyholders is capped for discretionary recoupment.

• For losses recouped under mandatory recoupment, the time allowed 

to recoup determine the size of the effect. Greater loss of direct 

earned premium could occur if the time frame to collect the losses 

were short. For example, the time frame to collect is shorter for an 

event that occurs in 2017 (less than 2 years) compared to 2019 (less 

than 5 years). Using scenarios that had $40 billion in losses and 

resulted in high mandatory recoupment (exceeding $20 billion), we 

estimated that if premiums were increased by a specified percentage, 

the 2017 event, on average could lead to about a 4.4 percent loss of 

TRIA-eligible direct earned premium, compared to about 1.9 percent 

for the 2019 event. Or if insurers increased prices to collect target 

amounts, direct earned premiums on average could decrease by 1.8 

percent for the 2017 event, compared to about 0.4 percent for the 

2019 event.

Federally imposed premium increases in the form of recoupment 

surcharges might limit the ability of state insurance regulators to restrain 

potential price increases. State regulators told us that when they review 

rate increases from insurers, they consider whether the increases are 

excessive, inadequate, or unfairly discriminatory to policyholders. Two 

state regulators stated that to the extent the federal government 

mandated an increase in policyholder premiums through recoupment 

surcharges, they likely would not have a reason to deny such premium 

increases.4 However, regulators might be able to influence the size of any

increase that insurers might submit above the federal surcharge.

 4

Generally state law requires insurers to file rates (and to file insurance forms) with state 

regulators that review the rates to ensure they are not excessive, inadequate, or unfairly 

discriminatory. 

State Regulators
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 106 GAO-17-62 Terrorism Risk Insurance

In addition to the potential effects of mandatory recoupment, we also 

estimated potential policyholder price increases and participation 

decreases resulting from discretionary recoupment. TRIA-eligible 

insurance prices could increase by a maximum 3 percent and we 

estimated participation on average could decrease by about 2 percent. 

For terrorism events that result in very large discretionary recoupment 

amounts (more than $60 billion), we estimated the collection period to be 

as much as 28 years.

We estimated the potential effects of a premium-like federal charge for 

terrorism risk insurance under TRIA on policyholder price and 

participation, and insurers’ direct earned premium, using (1) international 

reinsurance rates and (2) frequency assumptions.5

• We estimated the annual federal charge in 2016 as the cost of 

reinsurance for the maximum federal share of losses and analyzed 

the effect if the charge was imposed on three different policyholder 

bases (all property/casualty, with estimated prior-year direct earned 

premium of $572 billion in 2015; TRIA-eligible, with estimated prioryear direct earned premiums of $205 billion in 2015; and TRIA, with 

direct earned premiums estimated to be 5 percent of TRIA-eligible 

direct earned premium or $10 billion in 2015).

• We estimated annual federal charges using the maximum government 

share of losses from assumed events that occurred at frequencies of 

every 20, 50 and 100 years and calculated the increase in premium 

for the three different policyholder bases described above.

Table 12 shows a summary of potential market effect for the federal 

charge by policyholder group charged.

 5

Previously in this report, we discussed two purposes for which a federal charge could be 

collected: (1) A charge could be intended to help pay for the federal share of potential 

losses and could replace the current recoupment provision; or (2) a charge or fee paid to 

the Treasury for the promise of payment of the federal share of losses with recoupment in 

place to cover the actual federal share of losses. In this appendix, we analyzed only the 

former—a charge for the federal share of potential losses under TRIA.

Policyholders

Additional Potential Effects 

of a Federal Charge for 

Terrorism Risk Insurance
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 107 GAO-17-62 Terrorism Risk Insurance

Table 12: Comparison of Potential Market Effects of a Federal Charge by Policyholder Charge Group Using Average Demand 

Elasticity

Charge based on

Reinsurance 

costa Event frequency of 20 yearsb Event frequency of 50 yearsb Event frequency of 100 yearsb

Percentage load method

Percentage change in price All property/casualty 0.3 0.6 0.2 0.1

TRIA-eligible 0.8 1.7 0.7 0.3

TRIA 15.8 33.2 13.3 6.6

Percentage change in 

participation

All property/casualty -0.2 -0.4 -0.2 -0.1

TRIA-eligible -0.5 -1.0 -0.4 -0.2

TRIA -10.0 -20.9 -8.4 -4.2

Percentage change in 

insurers’ direct earned 

premium

All property/casualty -0.2 -0.4 -0.2 -0.1

TRIA-eligible -0.5 -1.1 -0.4 -0.2

TRIA -11.5 -27.9 -9.5 -4.5

Revenue target method

Percentage change in price All property/casualty 0.8 1.6 0.6 0.3

TRIA-eligible 2.1 4.5 1.8 0.9

TRIA 42.7 89.7 35.9 17.9

Percentage change in 

participation 

All property/casualty -0.5 -1.0 -0.4 -0.2

TRIA-eligible -1.3 -2.8 -1.1 -0.6

TRIA -26.9 -56.5 -22.6 -11.3

Percentage change in 

insurers’ direct earned 

premium

All property/casualty * * * *

TRIA-eligible * -0.1 * *

TRIA -11.5 -50.7 -8.1 -2.0

Legend: * = smaller than -0.1 percent

Source: GAO analysis of SNL Financial’s insurer direct earned premium data. | GAO-17-62

Notes: In the percentage load method, insurers pass a specified premium increase percentage to 

policyholders. In the revenue target method insurers increase premiums rates to collect, at the 

margin, additional annual premium revenue up to the annual collection amount required. Another 

possibility is that insurers would not pass premium increases to policyholders. We estimated the 

industry prior-year direct earned premium for 2015 Terrorism Risk Insurance Act (TRIA)-eligible 

insurance lines from 2014 SNL Financial’s data annually adjusted by a percentage generated from 

A.M. Best’s estimates of terrorism risk insurance premiums. We estimated TRIA direct earned 

premiums to be 5 percent of TRIA-eligible direct earned premiums. Using a lower estimate, such as 

Treasury’s estimate of 2.6 percent would increase the estimated impact from of a federal charge 

applied to terrorism risk premiums. We used average premium elasticity of demand for commercial 

property/casualty insurance as -0.63, which we calculated from high and low values (-0.42 and -0.82). 

We used elasticity of demand for commercial property/casualty insurance rather than for corporate 

demand for terrorism risk insurance, which ranges from –0.31 to –0.71. See Erwann Michel-Kerjan, 

Paul Raschky, and Howard Kunreuther, “Corporate Demand for Insurance: New Evidence from the 

U.S. Terrorism and Property Markets,” The Journal of Risk and Insurance, 82, no. 3 (2015): 505–530.

a

We estimated the federal charge based on the cost of private reinsurance that other national 

programs purchase for their programs. We used an average cost of coverage of 2.5 percent and we 
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 108 GAO-17-62 Terrorism Risk Insurance

assumed that the government would purchase coverage for its maximum payout. We show results 

based on which group of policyholders would be charged.

b

We estimated the federal charge based on frequency (20, 50, and 100 years) of a maximum payout 

($65 billion). We show results based on which group of policyholders would be charged.

Insurers’ overall volume of premium could be negatively affected under 

recoupment and a federal charge for terrorism risk insurance. 

Additionally, potential insurer loss of direct earned premium resulting from 

a federal charge for terrorism risk insurance would depend on several 

factors, including the extent to which insurers pass the cost to 

policyholders and insurer characteristics.

If insurers were to spread the cost among policyholders from all TRIAeligible lines of business, our modeled results show potential losses of

direct earned premium of 0.5 percent on average if premiums were 

increased by a specified percentage or less than 0.1 percent on average 

if insurers increased prices to collect a target amount.6 If spread among 

policyholders from all property/casualty lines, the losses of direct earned 

premium could be 0.2 percent on average if premiums were increased by 

a specified percentage or less than 0.1 percent on average if insurers 

increased prices to collect a target amount.

A federal charge for terrorism risk insurance could affect insurers’ loss of 

business unevenly. One stakeholder said that the potential loss of 

business due to a federal charge could vary by insurer size. In particular, 

small insurers—which may not collect explicit premiums for terrorism—

might be affected more than larger ones. An insurer and broker said that 

small insurers would be less able to absorb the cost from a federal charge 

and, consequently, more likely to pass the charge to their policyholders. 

This could increase loss of business of small insurers in two ways: 

retention of existing clients would decline and attraction of new clients 

would become increasingly difficult, especially if larger insurers did not 

pass the charge to their clients and had lower prices. However, one large 

insurer said it would not be able to absorb a federal charge and would 

need to pass this cost to its policyholders.

According to insurers, they would incur administration costs associated 

with a federal charge for terrorism risk insurance. Administration costs

would be incurred if insurers would need to collect premiums from 

policyholders on behalf of the government.

 6

We used a federal charge based on reinsurance costs to estimate these results. 

Insurers
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 109 GAO-17-62 Terrorism Risk Insurance

Implementation of a federal charge for terrorism risk insurance could 

affect reinsurers differently based on policymakers’ design decisions, 

according to stakeholders. For example, a charge could be designed as 

voluntary or mandatory. In a voluntary charge, the federal role matches 

that of a reinsurer, and if Congress allowed private reinsurance to 

compete with the government under this option, reinsurers could see an 

increase in market opportunity. If Congress mandated that insurers 

purchase reinsurance from the government (disallowed competition), 

reinsurers might see their business decline because insurers would have 

less funds available to purchase private reinsurance.

Similar to recoupment surcharges, state regulators’ ability to restrain 

potential price increases might be limited under the federal charge option. 

For example, one stakeholder said that if a federal charge substantially 

increased prices, states might stop requiring terrorism coverage if it 

harmed the workers’ compensation market. One stakeholder stated that 

the portion of rate increases that insurers imposed to make up for 

premium revenue losses likely would receive more scrutiny from state 

regulators.

We obtained information on the potential effects of insurer terrorism setaside approaches on different industry stakeholders.7 Approaches that 

did not involve segregated assets likely would result in no or minimal 

impact on price, participation, or insurer direct earned premium. 

Approaches that involved segregated assets (as in our interpretation of 

the legislative proposals) could have some impact on price, participation, 

and insurer direct earned premium because they might require insurers to 

raise additional capital. However, we did not determine the size of any 

increase.

To the extent that prices increased, insurers’ overall direct earned 

premium could be negatively affected under the terrorism set-aside 

approaches. Stakeholders said that if a segregated set-aside were 

required, insurers might need to raise more capital to increase capacity 

for their other lines of business and would need to earn an acceptable 

return on capital for shareholders. Stakeholders reported that capital 

could be raised in the markets, which would increase the insurer’s cost of 

 7

The terrorism set-aside approaches would retain TRIA’s recoupment provisions.

Reinsurers

State Regulators

Additional Potential Effects 

of Terrorism Set-Asides

Insurers
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 110 GAO-17-62 Terrorism Risk Insurance

doing business, or it could be raised by increasing premiums on 

policyholders.

Insurers may also incur administrative costs associated with a terrorism 

set-aside for terrorism risk. Specially, three insurers indicated increased 

business costs associated with a terrorism set-aside and one insurer 

stated that any effect on its business costs would depend on the tax 

implications for any capital considerations.

Reinsurers could experience decreases in market opportunities under the 

terrorism set-aside option, but reinsurance availability likely would not be 

affected. As discussed above, most insurers fund reinsurance purchases 

from premiums. To the extent that insurers would need to build terrorism 

set-asides, they might have less capital available to purchase reinsurance 

unless one purpose of the set-aside was to build funds to purchase 

reinsurance. For this reason, reinsurers also could experience a loss of 

business as a result of a requirement for a terrorism set-aside. 

Furthermore, if the government were to give the same tax advantage to 

the set-asides as post-event loss reserves, insurers could have less need 

for reinsurance.

Two industry participants stated that the potential supply of reinsurance 

for terrorism likely would be unaffected by a terrorism set-aside 

requirement. For example, one industry participant stated that insurer 

actions would not strain reinsurance supply or affect reinsurance pricing.

Unlike with a federally mandated premium increase, state regulators 

might have purview over any insurer increases to cover the cost of a 

terrorism set-aside because increases likely would be determined by 

insurers rather than be federally mandated. In this case, insurers likely 

would need to follow normal rate increase protocol. If premium increases 

to cover the cost of a terrorism set-aside were minimal, regulators and 

policyholders might not notice the increase. However, regulators may 

have additional oversight responsibilities under set-aside approaches. For 

example, two state regulators pointed out that implementing a set-aside 

for potential terrorism losses with specifically segregated assets could 

affect state oversight related to laws and practices involving receivership

and liquidation should an insurer become insolvent.

Stakeholders had differing opinions on whether insurers would increase 

premiums as a result of terrorism set-asides. For example, three insurers 

stated that such a set-aside would require insurers to increase premiums, 

while another stakeholder stated that any effect on premiums might be 

Reinsurers

State Regulators

Policyholders
Appendix V: Additional Potential Effects of 

Recoupment and Alternative Funding Options

Page 111 GAO-17-62 Terrorism Risk Insurance

negligible. One stakeholder estimated that companies with exposure in 

high-risk areas such as New York City had a need for a large set-aside, 

while others may not; however, these estimations assume that the setaside only would be for insurers’ share of the losses. The approach in 

which insurers would set aside funds that could be used for both insurer 

and federal losses likely would require a larger target amount. One 

insurer said that insurers could spread costs across all lines of business. 

Similar to the federal charge, that type of cost sharing for the set-aside 

would have a negligible impact on policyholder premiums.
Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

Page 112 GAO-17-62 Terrorism Risk Insurance

In this appendix, we discuss the extent to which the role of the federal 

government under the Terrorism Risk Insurance Act (TRIA) creates an 

economic subsidy for market participants and the potential size of such a 

subsidy. We determined that TRIA could produce a federal government 

economic subsidy to the extent the government was not expected to fully 

recoup its losses. Estimating the size of an economic subsidy depends on 

many factors and requires several assumptions that we discuss later in 

this appendix.

Under TRIA, the federal government initially shares responsibility for 

some of the insured losses with private insurers in the event of a certified 

terrorism event and may recoup all or some of its losses through 

policyholder surcharges.1 Unlike private insurers or reinsurers, the 

government does not charge premiums for its potential share of terrorism 

losses but may recoup some or all of its losses post-event. Specifically, 

Treasury reimburses an insurer for a certain percentage of its insured 

losses above its deductible.2 If insurers’ aggregate losses are equal to or 

below the industry aggregate retention amount, TRIA requires mandatory 

recoupment of the federal losses up to the retention amount reached by 

the losses through post-event premium surcharges on all policyholders 

with TRIA-eligible insurance, including those with no insured losses and 

 1

Under TRIA, all commercial property/casualty insurers must make terrorism insurance 

available to their policyholders but policyholders are not required to purchase it. However, 

the federal share of losses from a terrorism event would be recouped from all TRIAeligible policyholders. This creates a cross-subsidy in that all TRIA-eligible policyholders

are subsidizing the subset of these policyholders who had purchased terrorism risk 

coverage. We did not assess this cross-subsidy.

2

The program caps liability for insurers that have met their deductible and for the 

government at $100 billion per year; policyholders are not compensated for terrorism 

losses above that cap.

Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

To the Extent That Losses 

Are Not Expected to Be 

Recouped, the Federal 

Government Provides an 

Economic Subsidy under 

TRIA
Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

Page 113 GAO-17-62 Terrorism Risk Insurance

those without terrorism risk coverage.3 In addition, TRIA allows for 

discretionary recoupment when losses exceed the industry aggregate 

retention amount. As structured, the program potentially exposes the 

federal government to a significant amount of financial risk and it does not 

require recoupment of all losses and expenses in some scenarios.

For the purpose of this report, an economic subsidy can involve a 

payment by the government that reduces the buyer’s price below the 

seller’s price.4 Whether there is no payment involved or in addition to a 

payment, an economic subsidy can involve the full or partial absence of a 

charge by the government for an action that benefits private market 

participants.5 Either case implies a payment or benefit from the 

government to private market participants, for which the government 

receives no commensurate benefit. Certain types of government 

intervention could produce an economic subsidy. Table 13 lists some 

government interventions and their applicability to TRIA.

 3

Treasury must collect 140 percent of the losses apportioned to mandatory recoupment. 

The legislative and Congressional records do not include any substantive discussion of 

the purpose of the 40 percent mandatory recoupment scaling factor. According to the 

Congressional Budget Office, the scaling factor would address lost federal tax revenue as 

policyholders deducted the recoupment charges from their income taxes as well as 

provide some compensation to the government for bearing risk. Congressional Budget 

Office, Federal Reinsurance for Terrorism Risk in 2015 and Beyond, Working Paper 2015-

04 (Washington, D.C.: June 2015). TRIA-eligible lines are commercial lines of 

property/casualty insurance, including excess insurance, workers’ compensation 

insurance, and directors’ and officers’ liability insurance. Subject to certain exceptions, 

eligible commercial lines also include the following (as listed in the Exhibit of Premiums 

and Losses of the National Association of Insurance Commissioners): aircraft (all perils), 

allied lines, boiler and machinery, commercial multiperil (liability and nonliability), fire, 

inland marine, ocean marine, other liability, products liability, and workers’ compensation. 

The law excludes reinsurance, personal property/casualty, crop, and private mortgage 

insurance; commercial automobile, burglary and theft, and professional liability insurance; 

and health and life insurance.

4

Robert S. Pindyck and Daniel L. Rubenfeld, Microeconomics, 8th ed. (Boston, Mass.: 

Pearson, 2013): 345-349.

5

Veronique Bruggeman, Michael Faure, and Tobias Heldt, “Insurance against 

Catastrophe: Government Stimulation of Insurance Markets for Catastrophic Events,”

Duke Environmental Law and Policy Forum, vol. 23, no. 185 (2012).
Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

Page 114 GAO-17-62 Terrorism Risk Insurance

Table 13: Government Interventions That Could Produce an Economic Subsidy and Their Application to TRIA

Type of government intervention Application to Terrorism Risk Insurance Act (TRIA) 

Federal government intentionally provides 

goods or services at no cost or below 

market price to businesses

• A federal government backstop is provided to insurers and policyholders at no cost 

before an event, and insurers and policyholders may be responsible for paying 

either none or only a portion of the cost after an event.

• The federal government acting as the backstop without establishing any reserves 

implies that the government is willing to incur costs for its share of losses that 

exceed mandatory recoupment amounts.

Federal government provides credit directly 

or through a loan guarantee to businesses 

and the final credit subsidy amount will not 

be known until the life of the loan is 

complete 

• Under the program’s current post-event recoupment the federal government’s share 

of the losses only will be known after the event. 

Federal government’s regulation of 

businesses create net benefits 

• Not applicable. TRIA does not directly affect the federal regulation of insurers or 

reinsurers, which is limited except in the case of insurers that have been designated 

as systematically important financial institutions.

Source: GAO analysis of certain federal programs and TRIA. | GAO-17-62

While TRIA is designed to recoup at least a portion of the federal share of 

losses, in some scenarios recoupment could adversely affect the market. 

For example, in some scenarios, the mandatory recoupment time frames 

could lead to large increases in policyholders’ premiums, which could 

affect the political will to carry out mandatory recoupment. In addition, the 

discretionary portion of recoupment could require a protracted collection 

period of premium surcharges, which could be a factor in Treasury’s 

determination of whether and to what extent to pursue discretionary 

recoupment. As a result, market participants and others may not expect 

the government to fully implement TRIA’s recoupment provisions. As 

such, in this report we assess the presence and potential size of an 

economic subsidy on the basis of whether and to what extent the 

government would be expected to recoup the federal share of losses, 

regardless of whether a terrorism event occurs.

To the extent the losses to the federal government were not expected to 

be fully recouped, the federal government would be providing an 

economic subsidy because insurers and policyholders would receive a 

benefit from the federal government in the absence of a charge.6 In 

certain ways, the economic subsidy could benefit private insurers and the 

policyholders. However, if the government was not expected to fully 

recoup its losses, the primary recipients of the subsidy would be the 

 6

Although the federal government may receive other benefits from its intervention (for 

example, TRIA may reduce demand for post-event assistance), the government subsidy 

likely would be a net cost.
Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

Page 115 GAO-17-62 Terrorism Risk Insurance

policyholders because they would have received insurance coverage 

without paying either pre-event premiums for the federal share of losses 

or the actual full costs post-event.7

Using various assumptions and taking into account several limitations, we 

analyzed the potential size of an economic subsidy under different 

recoupment scenarios. We estimated the size of a subsidy by determining 

the value of insurance coverage without knowledge of whether, and to 

what extent, claims would occur.8 Specifically, using the cost of private 

reinsurance in other national programs we estimated annual forgone 

federal terrorism risk insurance premiums in scenarios in which the 

government would be expected to (1) recoup only the mandatory amount 

of losses, and (2) recoup no losses.9 We estimated the annual cost of the 

economic subsidy could be as high as $1.6 billion if the government were 

not expected to recoup any of its losses. However, if the government 

were expected to recoup all of its losses as described in TRIA, the 

economic subsidy would be $0 (no subsidy).

Certain factors, such as limited data, limited our estimation method and 

affected our ability to accurately estimate the potential size of any 

subsidy. We used terrorism risk reinsurance rates in other national 

programs to estimate forgone premiums in the TRIA program because we 

lack data to determine premiums that would be required for any other 

 7

In addition to the potential economic subsidy policyholders and insurers may receive if 

the government did not fully recoup, insurers and policyholders may receive a benefit from 

the existence of a federal backstop. Specifically insurers benefit because the backstop 

allows them to provide coverage that they might not be able to provide at prices 

policyholders would be willing to pay without the program. Policyholders benefit because 

the backstop ensures the availability and affordability of terrorism risk insurance coverage. 

8

For certain purposes, the size of a subsidy also could be measured retrospectively based 

on actual or assumed claims experience rather than value-of-insurance measures.

9

To determine the potential annual federal share of losses in the program, we modeled 

the program maximum event size of $100 billion. We simulated losses under the current 

TRIA program using 2014 SNL Financial’s data on the size of the property/casualty 

insurance market (see app. II). We used an event year of 2016 and affected insurers with 

an aggregate premium base equal to the top 20 insurers and therefore contributing to the 

industry deductible and co-share. Additionally, we included a governmental administrative 

cost of 5 percent. 

Potential Size of an 

Economic Subsidy 

Depends on Extent to 

Which Recoupment Is 

Expected to Be 

Implemented and Certain 

Factors Affect Ability to 

Accurately Estimate the 

Size
Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

Page 116 GAO-17-62 Terrorism Risk Insurance

estimation method.10 Currently premiums are not collected from 

policyholders for the federal share of losses, and the government would 

need to consider many factors in potentially setting a federal charge for 

terrorism risk insurance. Using reinsurance rates charged by private 

reinsurers to other national terrorism risk insurance programs for our 

estimate of forgone premiums could provide information on how the 

private market values terrorism risk insurance and the cost of capital to 

provide that insurance. We were told by the broker of many reinsurance 

deals in other national programs that premium rates were fairly stable 

across countries and generally ranged from 2 percent to 3 percent of the 

dollar amount of coverage. For example, the Australian terrorism risk 

insurance program purchased reinsurance in 2014 for six layers of 

reinsurance, with the rates ranging from 1.85 percent to 5.5 percent of 

coverage.11 Rates decreased with each additional layer of cover. For our 

analysis, we used an average cost of 2.5 percent of coverage and we 

assumed that the government would purchase coverage for its maximum 

payout. Use of other data or another estimation method could result in a 

different estimate of a subsidy amount.

Finally, the estimation of the size of any subsidy could be affected by 

different assumptions about the private reinsurance market. There are 

limitations to our use of the cost of private reinsurance in other national 

programs to estimate forgone federal terrorism risk insurance premiums 

to the United States.

• First, the private reinsurance market may price coverage differently for 

the U.S. program or may be limited in the amount it is willing to cover. 

For example, the private reinsurance market may not consider the risk 

within the United States commensurate with risks in other countries; 

U.S. risk may not be sufficiently geographically diverse to qualify for 

the same pricing; or Treasury may not have sufficient information on 

 10In a previous report, we estimated the size of a government subsidy in the National 

Flood Insurance Program by considering forgone premiums. See GAO, Flood Insurance: 

Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data 

System Changes, GAO-15-111 (Washington, D.C.: Dec. 11, 2014).

11Australia’s average rate-on-line—the ratio of premium paid to loss recoverable in a 

reinsurance contract—across all layers of reinsurance was 2.5 percent of coverage.
Appendix VI: Extent to Which an Economic 

Subsidy Exists within the Terrorism Risk 

Insurance Act

Page 117 GAO-17-62 Terrorism Risk Insurance

the risk of the underlying portfolio for reinsurers to price the 

coverage.12

• Second, the capacity of the private reinsurance market may not be 

sufficiently large for the amount that we assume would be purchased 

in this analysis. Programs in other countries purchase much smaller 

amounts of reinsurance. For example, the Australian program 

purchased just under $2 billion (about A$3 billion) of reinsurance 

coverage in 2014. Our analysis assumed that the United States would 

need to purchase more than 30 times that amount (about $65 billion in 

reinsurance coverage).

• Third, the government might not choose to purchase this much 

reinsurance. For example, the government might choose to selfreinsure or charge less in premiums.

• Fourth, our analysis assumes the entire amount would be covered by 

private reinsurance. However, reinsurance purchasers generally must 

pay a deductible, co-share, or both, which would decrease the actual 

amount of reinsurance coverage purchased.

 12Treasury has begun collecting data on pricing, take-up rates, and exposures, among 

other items from insurers participating in TRIA as required by the 2015 reauthorization of 

TRIA. 
Appendix VII: GAO Contact and Staff 

Acknowledgments

Page 118 GAO-17-62 Terrorism Risk Insurance

Daniel Garcia-Diaz, (202) 512-8678 or garciadiazd@gao.gov

In addition to the contact named above, Jill Naamane (Assistant Director); 

Charlene J. Lindsay (Analyst in Charge); Robert Dacey; Pamela 

Davidson; Karen Jarzynka-Hernandez; DuEwa Kamara; John Karikari; 

Alma Laris; Emei Li; Efrain Magallan; Scott McNulty; Susan Murphy; 

Joseph O’Neill; Laurel Plume; Angela Pun; Oliver Richard; Barbara 

Roesmann; Jessica Sandler; Jena Sinkfield; Shannon Smith; Andrew J. 

Stephens; and Frank Todisco made key contributions to this report.

Appendix VII: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(100048)
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