CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

CBO

PAPER

JANUARY 2005

Federal Terrorism

Reinsurance:

An Update

The Congress of the United States O Congressional Budget Office

CBO

Federal Terrorism Reinsurance:

An Update

January 2005

A

PAPER

Preface

Enacted in response to the events of September 11, 2001, the Terrorism Risk Insurance 

Act (TRIA) created a temporary federal reinsurance program for terrorism insurance. The 

program had two main aims: to limit insurance companies’ risks of financial loss from terrorist attacks and to increase the availability of terrorism coverage for property owners. TRIA is 

scheduled to expire on December 30, 2005, and the Congress has been considering proposals 

to extend the terrorism reinsurance program.

This Congressional Budget Office (CBO) paper—prepared at the request of the Senate Budget Committee—analyzes the TRIA program and assesses changes in insurance markets since 

the law’s enactment in November 2002. The paper builds on two previous CBO reports: Federal Reinsurance for Disasters (September 2002) and Federal Reinsurance for Terrorism Risks 

(October 2001). In keeping with CBO’s mandate to provide objective, impartial analysis, this 

paper makes no recommendations. 

David Torregrosa of CBO’s Microeconomic and Financial Studies Division wrote the paper 

under the direction of Marvin Phaup and Roger Hitchner. Perry Beider, Megan Carroll, Kim 

Cawley, Ufuk Demiroglu, Robert Dennis, Richard Farmer, Arlene Holen, Kim Kowalewski, 

Mark Lasky, Julie Middleton, Robert Murphy, Elizabeth Robinson, Natalie Tawil, Derek 

Trunkey, and Melissa Zimmerman of CBO provided helpful comments on earlier drafts, as 

did Jeffrey R. Brown of the University of Illinois at Urbana-Champaign, Ron Feldman of the 

Federal Reserve Bank of Minneapolis, Lucy Hoffman and C. Christopher Ledoux of the 

Department of the Treasury, Rade T. Musulin of the Florida Farm Bureau Insurance Companies, consulting actuary Richard Roth Jr., and Kent Smetters of the University of Pensylvania’s 

Wharton School. Steve Atkins of Pool Re, Robert Hartwig of the Insurance Information Institute, Cynthia Lamar of the Reinsurance Association of America, Ann Lavie of Insurance Services Office Inc., Steve Lundin of Marsh Inc., and Mario Ugoletti of the Treasury’s Terrorism 

Risk Insurance Program supplied data and other information. (The assistance of such external 

participants implies no responsibility for the final product, which rests solely with CBO.)

Christian Spoor edited the report, and John Skeen proofread it. Roger Hitchner took the 

cover photograph. Maureen Costantino designed the cover and prepared the paper for publication. Lenny Skutnik produced the printed copies, and Annette Kalicki and Simone Thomas 

prepared the electronic versions for CBO’s Web site (www.cbo.gov).

Douglas Holtz-Eakin

Director

January 2005

Summary vii

TRIA’s Provisions 1

Effects of TRIA on Insurance Markets 3

Effects on the Supply of Terrorism Insurance 3

Effects on Prices for Terrorism Insurance 6

Effects on Purchases of Terrorism Insurance 6

Economic Effects and the Cost of TRIA 9

Short-Term Macroeconomic Effects 9

Cost to Taxpayers 11

Long-Term Effects 12

Policy Implications 14

Pros and Cons of Letting TRIA Expire 17

Pros and Cons of Modifying TRIA 19

Appendix A: Terrorism Insurance Programs in Europe 21

Appendix B: Catastrophe Bonds for Natural Disaster

and Terrorism Risks 23

Appendix C: Federal Disaster Assistance After the 

September 11 Attacks 25

CONTENTS
vi FEDERAL TERRORISM REINSURANCE: AN UPDATE

Figures

1. Premium for Terrorism Coverage as a Percentage of the Premium

for Property Insurance 7

2. Median Annual Premium for Terrorism Coverage 8

3. Percentage of Companies Purchasing Terrorism Coverage 9

Boxes

1. Losses Excluded Under TRIA 2

2. Terrorism Insurance for Commercial Mortgages 10

3. State Regulations That Affect Terrorism Insurance 11

4. Does Low Coverage Signal a Market Failure? 12

5. Diversification as an Alternative to Insurance 13

6. Mutual Reinsurance Pools 15

7. CBO’s Estimate of the Costs of the Terrorism Insurance 

Backstop Extension Act of 2004 16

8. Estimated Economic Effects of TRIA’s Expiration 18
Summary

In November 2002, the federal government enacted 

the Terrorism Risk Insurance Act (TRIA), which created 

a temporary federal reinsurance program to limit insurers’ 

risk of financial loss from acts of terrorism.1

 At the time, 

the attacks of September 11, 2001, had made insurers less 

willing to provide terrorism coverage because of uncertainty about the future risk of, and losses from, terrorist 

acts. Policymakers feared that a shortage of terrorism insurance could expose property owners to uninsured risk, 

retard commercial construction, and reduce economic activity in the short run.2 Indeed, anecdotal evidence suggested that some large construction projects had been 

canceled or delayed in part because of the lack of terrorism coverage.3 Many analysts expected that insurers 

would need some time to reassess the risk of terrorism, 

raise capital, and eventually reenter the market. But how 

long that would take was uncertain. The TRIA program 

was intended to fill the gap in the supply of terrorism 

insurance, at least until private insurers could recover.

Under TRIA, insurance companies are required to offer 

terrorism coverage. That coverage is subsidized by the 

federal government, which agrees to pay 90 percent of an 

insurer’s losses, above a deductible, in the event of an attack by foreign terrorists. The insurer would have to pay 

the deductible and the other 10 percent of losses—up to 

a total limit for the program of $100 billion. The government would then be required to recoup some of its costs 

by assessing surcharges on commercial insurance policies 

sold after the terrorist attack occurred. Insurers are not 

charged any premiums for that federal reinsurance, which 

allows them to spread the risk of loss more widely, thus 

strengthening their ability to insure against catastrophes.

By increasing the availability of terrorism insurance at below-market rates, the TRIA program has led to a rise in 

the percentage of companies buying terrorism coverage, 

predominately in places thought to be at especially high 

risk of terrorist attacks.

The program is scheduled to expire on December 31, 

2005. Some policymakers have called for an immediate 

extension of TRIA without major amendments. Others 

would allow the law to expire; still others would extend it 

with revisions. The Administration has deferred any decision about TRIA’s future until at least the summer of 

2005, when the Treasury is scheduled to deliver a report 

to the Congress on the reinsurance program. As part of 

that report, the Treasury is comprehensively surveying 

insurers and policyholders about their experiences under 

the program. 

This Congressional Budget Office (CBO) analysis examines the effects of TRIA on insurance markets, the U.S. 

economy, and taxpayers. The conclusions that it reaches 

may be relevant to the choices facing policymakers.

B A primary consideration in the decision about TRIA’s 

future is how long the elevated risk of terrorism is expected to last. If the increase in risk turns out to be 

temporary, TRIA may have succeeded in keeping 

property owners and insurance companies from overreacting to the attacks of September 11. By providing 

zero-premium coverage and not requiring policyholders to take actions to reduce their exposure to losses, 

TRIA effectively lessened incentives for property owners to make costly adjustments to a short-term threat. 

B However, the growing belief that the terrorism threat 

is long-lived does not support a simple extension of 

TRIA. A persistent high-level risk of terrorism implies 

1. Reinsurance, in which one insurer sells some of its business and 

the associated income from premiums to another insurer, is a 

common way of spreading risk in the private-sector market for 

property and casualty insurance.

2. See Congressional Budget Office, Federal Reinsurance for Disasters 

(September 2002), and Federal Reinsurance for Terrorism Risks

(October 2001). 

3. See, for example, U.S. Congress, Joint Economic Committee, 

Economic Perspectives on Terrorism Insurance (May 2002), available 

at www.house.gov/jec/terrorism/insur.pdf. 
viii FEDERAL TERRORISM REINSURANCE: AN UPDATE

that the owners of assets at risk should adopt measures 

to reduce their losses—for example, by relocating 

some activities, retrofitting existing structures, investing in disaster-recovery information systems, and 

installing security systems. By subsidizing insurance 

rates, TRIA weakens owners’ incentives to make those 

investments. 

B The nation might adjust to a sustained high level of 

risk more quickly if the premiums charged for terrorism insurance reflected higher expected losses. That 

outcome could be achieved by letting the federal 

reinsurance program expire or by adding cost-based 

(“actuarially fair”) premiums to the program. 

B Alternatives to terrorism insurance also would be 

likely to develop more quickly if premiums were actuarially fair. That is, the expiration of TRIA or the addition of cost-based premiums could stimulate the 

development of mutual reinsurance pools and of capital instruments such as catastrophe bonds. Another, 

less costly alternative to traditional insurance is for 

owners of the largest assets at risk (and their creditors) 

to protect themselves by diversifying their holdings 

among many different properties and locations. 

B Letting the TRIA program end would not increase the 

overall cost to the nation of the risk of terrorism. In 

fact, losses from terrorist attacks could decline if the 

resulting higher premiums encouraged firms to adopt 

measures to reduce losses. 

B TRIA’s expiration would, however, change who bore 

the ultimate burden of that overall cost. Under TRIA, 

most of the cost of the catastrophic risk of terrorism is 

initially borne by taxpayers. (Future policyholders 

would reimburse the government for at least some realized losses after the fact, but those surcharges would 

not compensate taxpayers for bearing the uncertainty 

and risk of the insurance.) If the TRIA program ended 

as scheduled, more of the future costs of terrorism risk 

would be borne by the owners of assets at risk.

B If TRIA expired, the availability and price of terrorism 

coverage would depend in part on the willingness of 

private-sector reinsurers to assume the catastrophic 

risk. There are indications that private reinsurers 

would fill much of the gap in supply left by TRIA’s 

expiration, but that outcome is not certain.

B If TRIA expired, reinsurers would most likely continue their previous practice of not covering losses 

from nuclear, biological, chemical, and radiological attacks. That exclusion would be important mainly for 

the workers’ compensation market, because primary 

insurers that offer workers’ compensation policies are 

required to cover loses from all causes. If such insurers 

were unable to diversify that catastrophic risk through 

reinsurance, rates for workers’ compensation policies 

could rise substantially, at least in the near term.

B In the event that the TRIA program ended and an 

unexpectedly large terrorist attack occurred, insurance 

markets would probably be disrupted again, and coverage could be unavailable for some high-risk

properties. 

In sum, as the Congress considers whether to extend 

TRIA (and in what form), it is useful to consider what 

has changed in the two years since the law was enacted. 

The most significant development seems to be a growing 

sense that the terrorism threat to the United States will 

continue for the foreseeable future. That development 

suggests that the economy, especially the stock of physical 

capital, needs to be responsive to the prospective losses 

from terrorist attacks. For example, new construction 

might be designed, located, and built to withstand such 

attacks. Existing structures might need to be retrofitted 

with safety features. Those needs argue against extending 

the TRIA program in its current form, which subsidizes 

insurance and dampens incentives for mitigation

activities. 

The macroeconomic costs of scaling back the federal subsidy for terrorism insurance are likely to be small. One 

reason is that the capacity of insurance companies to provide terrorism coverage has improved recently. Another 

reason is that TRIA does not lower the costs of terrorist 

attacks but rather partially shifts those costs from property owners to taxpayers. As noted above, total costs 

might be lower without TRIA. However, the gains in economic efficiency from allowing TRIA to expire could require a significant trade-off: without the TRIA program, 

an especially large loss from a terrorist attack would be 

likely to produce another episode of scarce coverage, rising prices, and uninsured assets. 
Federal Terrorism Reinsurance:

An Update

As has sometimes happened after an unexpectedly 

large natural disaster, insurance markets did not function 

well in the aftermath of the terrorist attacks of September 11, 2001. Although property and casualty insurers 

were able to pay insured claims, they sharply reduced the 

availability of terrorism insurance and raised premiums 

substantially. The Terrorism Risk Insurance Act (TRIA), 

which lawmakers enacted in November 2002, can be seen 

as an effort to prevent the economic effects of an overreaction to the heightened risk of losses from terrorism. 

The September 11 attacks revealed an increase in risk that 

may have reduced the value of many assets. However, the 

extent of the increase in risk—and of the reduction in asset values—was uncertain. That uncertainty enhanced 

the potential for insurers and property owners to misestimate the change in risk and asset values.

After September 11, analysts anticipated that insurers 

would need some time to recover financially from their 

losses, adjust their models of risk, and reenter the market. 

Consequently, TRIA created a temporary program designed to immediately boost the supply of terrorism insurance and bring down premiums. It also provided time 

for property owners and insurers to reassess risks. That 

program is scheduled to expire at the end of calendar year 

2005.

TRIA’s Provisions

TRIA requires all commercial property and casualty insurers to “make available” terrorism coverage to their policyholders and to disclose the premium charged for that 

coverage.1 The terrorism insurance cannot differ materially from the terms, amounts, and other coverage limitations that apply to losses from nonterrorist events. However, TRIA does not require property owners to purchase 

terrorism insurance. 

In the event of an terrorist act as defined by TRIA, the 

federal government would reimburse (or reinsure) insurance companies for a significant portion of their terrorism claims. Reinsurance—in which one insurer sells some 

of its business and the associated income from premiums 

to another insurer—is a common practice in the privatesector property and casualty market worldwide.2 Reinsuring hazards with third parties allows primary insurers to 

diversify their risks and avoid ruinous losses from a single 

event. TRIA’s reinsurance is limited in several respects, 

one being that only acts by foreign terrorists are covered. 

(For details about exclusions under TRIA, see Box 1.) 

In the TRIA program, primary insurers would have to 

absorb some losses before federal reinsurance would begin to pay. Specifically, each insurer is responsible for a

1. TRIA applies to the following types of commercial insurance policies: property coverage, business-interruption coverage (which 

replaces financial losses when damages force companies to suspend 

operations), commercial liability coverage, workers’ compensation 

coverage (which reimburses lost wages and medical costs from onthe-job accidents and pays benefits to survivors of employees 

killed on the job), and surety bonds (third-party guarantees of the 

performance of a specific obligation). A separate federal program 

provides terrorism insurance for air carriers. See Debra J. Roberts, 

Terrorism Risk Insurance Act of 2002: A Primer (Washington, D.C.: 

Center on Federal Financial Institutions, November 16, 2004), 

available at www.coffi.org/pubs.html. Some “commercial” policies 

also cover single-unit dwellings. The California Insurance Department classifies an insurance policy on a non-owner-occupied single-unit dwelling as a commercial policy subject to TRIA. At least 

one insurance company made a rate filing for such a policy but set 

the terrorism premium at zero. Personal communication to the 

Congressional Budget Office by Richard J. Roth Jr., consulting 

actuary with Bickerstaff, Whatley, Ryan & Burkhalter, September 

24, 2004.

2. Many European countries have also established terrorism insurance programs. They are typically reinsurance pools, in which taxpayers bear most of the financial risk from large terrorist events. 

For more information about those programs, see Appendix A.
2 FEDERAL TERRORISM REINSURANCE: AN UPDATE

deductible, which in 2005 equals 15 percent of its premiums on commercial property and casualty policies during 

the previous year. For some of the largest insurers, that 

deductible amounts to hundreds of millions of dollars.3

Once an insurer had met the deductible, the federal government would pay 90 percent of the insurer’s terrorism 

losses and the insurer would pay 10 percent—up to a total cap for the program of $100 billion per year. If insured 

losses exceeded that limit, Congressional action would be 

required to provide additional assistance. However, according to TRIA, insurers that met their deductibles (and 

made their 10 percent copayments) would not be liable 

for any insured losses exceeding the $100 billion cap. 

The government charges insurers no premiums for its reinsurance. However, if it paid any claims under TRIA—

which has not happened so far—the government would 

be required to recoup a certain amount of its losses by assessing surcharges on commercial insurance policies sold 

after the terrorism event occurred. That amount of losses, 

known as the aggregate industry retention level, is set at 

$15 billion in 2005. To recoup it, the Treasury would 

have to assess annual surcharges of up to 3 percent of premiums on all commercial policyholders—even those that 

did not purchase terrorism insurance. The Treasury also 

has the discretion to recoup additional losses through 

continued assessments. Consequently, over the long term, 

TRIA’s effect of the federal budget could be neutral—

cash outlays could be offset by subsequent receipts from 

surcharges. 

To encourage the development of private terrorism insurance, TRIA raises the industry retention level and insurers’ individual deductibles each year. The industry retention level grew from $10 billion in 2003 to $12.5 billion 

in 2004 to the current level of $15 billion. Likewise, deductibles equaled 7 percent of premiums in 2003 and 10 

percent in 2004 and equal 15 percent now.

TRIA and the program it established are due to end on 

December 31, 2005. Before that (by June 30), the Secretary of the Treasury is required to complete a study of the 

Box 1.

Losses Excluded Under 

TRIA

One goal of the Terrorism Risk Insurance Act 

was to restore the terrorism coverage that had 

been dropped after the attacks of September 11, 

2001—not to expand the previous range of coverage. Consequently, coverage under TRIA is 

incomplete because gaps in coverage existed before September 11.

In general, TRIA covers neither acts of terrorism 

by domestic groups nor acts of war. (An exception exists for losses under workers’ compensation insurance, because most states do not allow 

any exclusions under that type of coverage.) 

Moreover, private insurers generally continue to 

exclude losses from nuclear, biological, chemical, and radiological attacks from property and 

casualty coverage (but not workers’ compensation), as they did before TRIA was enacted. The 

federal program does not mandate that losses 

from those sources be included, but it will cover 

them if the primary policy does. In addition, before federal payments would be made, the Secretary of the Treasury would have to certify that 

losses were related to international acts of terrorism and exceeded $5 million. Federal payments 

would not cover punitive damage awards.

Up to now, financial losses in the United States 

from nuclear, biological, chemical, and radiological attacks have been insignificant, and 

losses from acts of terrorism by domestic groups 

have been readily assumed by insurers. TRIA’s 

certification process is untested, however, and 

some analysts worry about what would happen 

in cases in which the identity of a terrorist was 

hard to verify. For example, investigators have 

not yet identified the source of letters containing anthrax, which killed several people and 

sickened many more in 2001 when they were 

mailed to Members of Congress and others. 

3. See Vinay Saqi and others, Correction: Assessing Insurers’ Terrorism 

Risk (New York: Morgan Stanley Equity Research, March 24, 

2004); and R.J. Lehmann, “Despite Federal Backstop, Terror 

Exposures Could Exceed Sept. 11 for Many Insurers,” BestWire, 

on-line wire service from A.M. Best Co., March 25, 2004.
FEDERAL TERRORISM REINSURANCE: AN UPDATE 3

effectiveness of the law. Proposals have been made to extend the TRIA program, in some cases with modifications. Examining the effects of the program to date may 

be useful to policymakers who face choices about TRIA’s 

future.

Effects of TRIA on Insurance Markets

The Terrorism Risk Insurance Act added a subsidized 

federal source of reinsurance and gave the insurance industry time to improve its ability to forecast losses and 

to gradually reenter the market. For owners of high-risk 

properties, the law has succeeded in increasing the availability and lowering the price of coverage for property 

and casualty losses from terrorism. As a result, TRIA has 

led to an increase in the percentage of companies purchasing terrorism coverage.

Effects on the Supply of Terrorism Insurance 

TRIA has served its purpose of immediately expanding 

the supply of terrorism insurance. It has also given private 

insurers time to raise financial capital and improve their 

models of risk, which have indirectly contributed to increasing the supply of coverage. 

Mandatory Offer of Coverage. The requirement that insurance companies offer coverage and the federal government’s assumption of much of the catastrophic risk for 

that coverage have made terrorism insurance much more 

available than it was in the months following the September 11 attacks. TRIA required the Secretary of the Treasury to determine by September 1, 2004, whether the 

law’s “make available” requirement should be extended 

through the third and final year of the program. In June 

2004, the Secretary opted to extend that requirement 

through 2005. Because commercial insurance contracts 

are renewed throughout the year, the Secretary made that 

determination in advance of the deadline to prevent disruption in insurance markets.4

Unlike primary insurers, reinsurers in the private sector 

are not covered by TRIA. At current prices, most insurers 

are not buying private reinsurance to cover their potential 

deductibles and 10 percent copayments under TRIA. 

However, reinsurance for acts of terrorism not covered by 

the law (such as terrorism by domestic groups) and for 

certified workers’ compensation is widely available and is 

being purchased.5

Financial Condition of Insurers. Insurers’ capacity to 

provide coverage depends on their net worth (assets minus liabilities) and the availability of reinsurance. The 

largest component of net worth is their accumulated 

stock of retained earnings.

The net worth of property and casualty insurers dropped 

after September 11. Insured losses from the attacks have 

been estimated at $30 billion to $35 billion.6

 Insurers’ 

total underwriting losses—the difference between their 

premium income and expenses—reached $52.6 billion 

in 2001. With insufficient investment income in 2001 to 

offset those underwriting losses, the industry’s net worth 

fell by $27.8 billion that year.7

Under TRIA, property and casualty insurers have replaced capital and are earning underwriting profits for 

the first time in nearly 20 years, in part because of rela4. See Department of the Treasury, “Treasury Announces Decision 

to Extend the ‘Make Available’ Provisions of the Terrorism Risk 

Insurance Act into 2005” (press release JS-1734, June 18, 2004).

5. Marsh Inc., Marketwatch: Property Terrorism Insurance 2004 (New 

York: Marsh & McLennan, April 2004), pp. 27-29, 38.

6. As of July 2004, the Insurance Information Institute estimated 

$32.5 billion in insured losses from the September 11 attacks, 

including $11 billion in business-interruption losses, $9.6 billion 

in property losses, $3.5 billion in aviation liability, $1.8 billion in 

workers’ compensation, and $1 billion in life insurance payments. 

See Robert P. Hartwig, Insurance Information Institute, “The Fate 

of TRIA: Is Terrorism an Insurance Risk?” (presentation at the 

New York Insurance Association Annual Conference, Saratoga 

Springs, N.Y., June 3, 2004), available at www.iii.org/media/

presentations/tria/. A recent court ruling could increase insurance 

payments for the attacks by $1.1 billion; see Charles V. Bagli, 

“Towers’ Insurers Must Pay Double,” New York Times, December 

7, 2004, p. A1. In addition, the federal government’s September 

11th Victim Compensation Fund has made $7 billion in death 

and disability payments related to the attacks. 

7. Insurance Services Office Inc. and the National Association of 

Independent Insurers, “Decline in Surplus Tarnishes P/C Industry’s Return to Profitability in 2002” (press release, Jersey City, 

N.J., April 16, 2003), available at www.ISO.com/press_releases/

2003/04_16_03.html. 
4 FEDERAL TERRORISM REINSURANCE: AN UPDATE

tively low catastrophic losses.8 Consequently, the net 

worth of the industry rose to $370.4 billion on June 30, 

2004, from $285 billion at the end of 2002.9

Modeling Insurance Losses. TRIA also provided time for 

the industry to improve its ability to predict losses from 

terrorism and thus to put a price tag on risk more accurately. Several competing models that predict the risk of 

losses from terrorism by zip code or by individual location are now available from EQECAT, Risk Management 

Solutions (RMS), and Applied Insurance Research 

Worldwide (AIR).10 The level of detail in the new models 

allows insurers to distinguish the higher risk faced by city 

centers from the lower risk faced by outlying urban areas. 

Each model contains a list of potential terrorist targets 

and produces estimates of the severity of losses associated 

with different types of attacks. 

Although substantial progress has been made in modeling 

terrorism losses, the new models are not as reliable as 

those for natural catastrophes, which are based on more 

than 100 years of data rather than on two major events in 

the past 11 years (the September 11 attacks and the 1993 

bombing of the World Trade Center). Terrorism models 

are hampered not only by a lack of data but also by the 

absence of an established “theory” of terrorist attacks. For 

example, the RMS model assumes that most of the risk is 

concentrated in a few major cities and in a limited number of landmark properties with high visibility. In contrast, the EQECAT model assumes that terrorists might 

attack low-profile targets in outlying areas to demonstrate 

that no place is safe. Moreover, the EQECAT model assumes that terrorists will change their tactics when efforts 

are made to reduce risks at specific sites. Although opinions differ about the accuracy of the models, lack of consistency between models need not hinder development of 

a private market. The private sector has been able to insure against natural disasters despite varying estimates of 

losses from such events.

Notwithstanding concern by some actuaries that existing 

tools are not good enough to predict losses from terrorism—and thus to set prices for coverage—insurers use a 

calculated benchmark for setting premiums. The Insurance Services Office (ISO), a company that provides data 

and analytic services to insurers, files advisory estimates of 

loss costs (expected annual losses over the long term) with 

insurance commissioners in each state. Once state commissioners approve an ISO advisory, any insurance company operating in that state can use the estimates as a basis for setting premiums without having to undertake the 

formal rate-filing process. In 2003, all 50 states approved 

ISO’s estimates of loss costs. 

ISO’s estimates—which are based on a model for estimating terrorism losses developed by its subsidiary, AIR—are 

location-specific. On the basis of that model, ISO placed 

8. Insurers’ net income after taxes rose to $23.5 billion in the first 

half of 2004 from $14.5 billion in the first half of 2003. For 2003 

as a whole, the industry’s net income after taxes was $29.9 billion, 

versus just $3 billion in 2002. See Insurance Services Office Inc. 

and the Property Casualty Insurers Association of America, “Property/Casualty Industry’s First-Quarter Net Income Doubles as 

Earnings Approach Cyclical Peak” (press release, Jersey City, N.J., 

June 29, 2004), available at www.ISO.com/press_releases/2004/

06_29_04.html. For the first six months of 2004, the industry 

earned an underwriting profit of nearly $9 billion; see A.M. Best, 

“Property/Casualty Insurers Post Solid Results; Surge in Hurricane Losses Changes Tone for Upcoming Quarters” (press release, 

Oldwick, N.J., September 20, 2004), available at www.ambest.

com/press/. Losses from Hurricanes Charley, Frances, Ivan, and 

Jeanne are likely to weaken performance in the third quarter of 

2004 because claims are likely to exceed $20.5 billion; see Insurance Services Office Inc., “Insurers Suffer Record $21.3 Billion in 

Third-Quarter Catastrophe Losses, Says ISO’s Property Claim 

Services Unit” (press release, Jersey City, N.J., November 2, 

2004), available at www.iso.com/press_releases/2004/11_02_04.

html. Also see Insurance Services Office Inc. and the Property 

Casualty Insurers Association of America, “Property/Casualty 

Industry’s First-Half Income and Surplus Rose on Strong Underwriting Results and Investment Gains” (press release, Jersey City, 

N.J., Oct. 18, 2004), available at www.iso.com/press_releases/

2004/10_18_04.html. 

9. Not all of that net worth would be available to cover losses from a 

terrorist attack, because the actual losses for individual companies 

might not match their capital. According to estimates, about 40 

percent of the industry’s stock of retained earnings backs types of 

insurance that include terrorism coverage. See Robert P. Hartwig, 

“2004 Mid-Year Property Casualty Insurance Update: Trends & 

Challenges in P/C Insurance Business Today” (PowerPoint presentation, Insurance Information Institute, July 1, 2004), available at 

www.iii.org/media/presentations/2004midyear/.

10. For more information about those models, see Towers Perrin,

Workers’ Compensation Terrorism Reinsurance Pool Feasibility Study 

(April 14, 2004), pp. 35-38 and 54-63, available at www.

towersperrin.com/tillinghast/publications/reports/WC_Terr_

Pool/WC_Terr_Pool_Study.pdf.
FEDERAL TERRORISM REINSURANCE: AN UPDATE 5

New York, Washington, D.C., Chicago, and San Francisco in the highest tier and recommended loss costs of 

$0.10 per $100 of property value. (Actual prices for insurance would be adjusted upward to also cover administrative costs, the cost of capital, and risk.) Cities in the 

highest tier, however, objected that such rates would hurt 

businesses. Subsequently, ISO lowered its estimate of 

maximum losses to $0.03 per $100 of property value in 

downtown city centers and to lesser amounts for properties on the outskirts of those cities. Tier 2 rates—covering 

Boston, Houston, Los Angeles, Philadelphia, and Seattle—were set at $0.018 per $100 of property value. Rates 

for tier 3—covering the rest of the country—were set at 

$0.001 per $100.11

Although the probability of events such as terrorist attacks cannot be known, the maximum amount of losses 

can be estimated, because property values and replacement costs are known. Modelers agree that the insurance 

industry could face losses from a single event greater than 

those experienced on September 11.12 In particular, 

losses for workers’ compensation policies, which cover all 

contingencies, could be far higher than the less than $2 

billion in claims that followed September 11. For example, the EQECAT model estimates a one-in-100 chance 

of losses of at least $13.7 billion for workers’ compensation insurers. The RMS model puts that one-in-100 

chance of loss at $3.8 billion.13 Those two models also 

assign very different losses to events with a more remote 

possibility of occurring and different probabilities to specific terrorist attacks.14

Capital-Market Innovations. Although capital markets 

are currently absorbing some terrorism risk, the development of financial instruments for spreading that risk 

would probably be more rapid in the absence of TRIA. 

The reason is that private alternatives have difficulty 

competing with a free federal program.15 Because international capital markets are larger than insurance markets, they could potentially absorb the losses from a terrorist attack without significant disruption. Daily 

fluctuations in the overall value of traded capital assets 

worldwide can easily exceed the losses incurred on September 11.16

In the absence of TRIA, catastrophe bonds—which fully 

or partly forgive the bond seller from making interest and 

principal payments in the event of specified catastrophes—might be used for terrorism losses, as they have 

been used to spread the risk of natural disasters.17 (For 

more information, see Appendix B.) Two international 

catastrophe bonds have been issued that combine terrorism risk with other risks.

11. Pool Re, the United Kingdom’s reinsurance pool, has a similar 

tiered pricing structure, with rates highest in central London. The 

British government stands behind that reinsurance pool. See 

Appendix A of this report and Howard Kunreuther, Erwann 

Michel-Kerjan, and Beverly Porter, Assessing, Managing and 

Financing Extreme Events: Dealing with Terrorism, Working Paper 

No. 10179 (Cambridge, Mass.: National Bureau of Economic 

Research, December 2003), available at http://papers.nber.org/

papers/w10179. 

12. The nation has been told to expect more terrorist attacks, possibly 

including attacks more extreme than those of September 11. See 

National Commission on Terrorist Attacks Upon the United 

States, The 9/11 Commission Report (July 22, 2004), available at 

www.9-11commission.gov/report/index.htm. 

13. Reinsurance broker and actuarial consulting firm Towers Perrin 

uses a blended model that reflects 80 percent of RMS’s estimates 

and 20 percent of a proxy measure comparable to EQECAT’s estimates. (The proxy measure has fewer and simpler assumptions 

and does not define specific target sites.) See Towers Perrin, Workers’ Compensation Terrorism Reinsurance Pool Feasibility Study, pp. 

35-38 and 54-63.

14. EQECAT estimates that a one-in-500 loss is $47.6 billion, 

whereas RMS estimates such a loss at $7.7 billion. Expected 

annual costs were not reported. See Towers Perrin, Workers’ Compensation Terrorism Reinsurance Pool Feasibility Study, Exhibit 8, 

p. 23, and Exhibit 9, p. 24. 

15. For an analysis of capital-market products for disaster risks, see 

General Accounting Office, Catastrophe Insurance Risks: The Role 

of Risk-Linked Securities and Factors Affecting Their Use, GAO-02-

941 (September 2002). 

16. See Kent Smetters, “Insuring Against Terrorism: The Policy Challenge” (paper prepared for the January 8-9, 2004, Conference of 

the Brookings-Wharton Papers on Financial Services, February 2, 

2004, draft), available at http://irm.Wharton.upenn.edu/WPInsuring-Smetters.pdf. Also see Neil A. Doherty, “Financial Innovation in the Management of Catastrophe Risk,” Journal of 

Applied Corporate Finance, vol. 10, no. 3 (Fall 1997), pp. 84-95. 

17. Other factors besides TRIA—such as a number of complex 

accounting, regulatory, and tax issues—have limited the further 

development of the catastrophe-bond market. See General 

Accounting Office, Catastrophe Insurance Risks: Status of Efforts to 

Securitize Natural Catastrophe and Terrorism Risk, GAO-03-1033 

(September 2003). 
6 FEDERAL TERRORISM REINSURANCE: AN UPDATE

Effects on Prices for Terrorism Insurance

TRIA accelerated a previous trend of declining prices for 

terrorism insurance.18 Since the beginning of 2003, rates 

for that insurance have fallen by half. In the third quarter 

of 2004, the premium for terrorism coverage typically 

represented about 4 percent of the total premium for 

property insurance—down from more than 10 percent in 

the first quarter of 2003 (see Figure 1). That drop occurred as insurers’ own deductibles under TRIA were rising, which would normally cause insurers to raise premiums.19 TRIA is probably not responsible for the entire 

drop in rates in 2003, because more capital was entering 

the insurance industry and insurers were learning more 

about pricing terrorism risks.20

Despite TRIA, terrorism coverage remained costly in 

2003, especially for high-risk properties. A survey by the 

Council of Insurance Agents and Brokers showed that in 

that year, terrorism coverage added 10 percent to the 

average property insurance premium for small and 

medium-size accounts and up to 20 percent for larger 

accounts. Landmark properties in major urban areas 

faced even higher additions. For example, one insurance 

broker reported that in Manhattan, terrorism risks could 

be priced at 100 percent of the rate for property insurance, compared with just 5 percent to 10 percent in other 

sections of New York City.21

In 2004, the median cost of purchasing terrorism insurance ranged from $53 to $80 per $1 million of insured 

value (or between 0.53 and 0.80 basis points). Although 

that cost dropped by more than 40 percent between the 

second and fourth quarters of 2003, it returned to higher 

levels in the first half of 2004 as companies purchased 

more-comprehensive coverage (see Figure 2).22 Because 

of the increasing level of coverage, that rise in overall cost 

may have masked a continuing trend of falling rates. The 

overall cost of terrorism insurance came back down in the 

third quarter of 2004.23

Effects on Purchases of Terrorism Insurance

Purchases of insurance against terrorism-related losses 

were initially low under TRIA but have since increased 

sharply. After the cost of terrorism coverage fell substantially in 2003, the percentage of firms buying policies 

nearly doubled.24 A recent survey by an insurance broker 

shows that 44 percent of large companies bought terrorism coverage in the third quarter of 2004, compared with

18. Through early 2002, insurers were pricing terrorism coverage in 

the expectation that attacks similar in magnitude to those on September 11 were likely in the near future; see Ben Gartson, Lloyd’s 

Terrorism Panel, “Terrorism Insurance: An Overview of the Private Market” (background note presented at the Organization for 

Economic Cooperation and Development Conference on Catastrophic Risks and Insurance, November 22-23, 2004). During 

the first nine months of 2002, however, prices for terrorism insurance declined by 50 percent to 75 percent, according to insurance 

brokers. The available limits (or maximum coverage that could be 

purchased) also increased substantially during that period. See 

Shadow Financial Regulatory Committee, A Proposed Federal 

Backstop for Terrorism Insurance and Reinsurance, Statement No. 

182 (Washington, D,C.: American Enterprise Institute, September 23, 2002), available at www.aei.org/publications/pubID.

14325/pub_detail.asp. Also see Jeffrey R. Brown and others, “An 

Empirical Analysis of the Economic Impact of Federal Terrorism 

Reinsurance,” Journal of Monetary Economics, vol. 51 (July 2004), 

Figure 4, p. 893. 

19. By contrast, the rise in the aggregate industry retention level from 

$10 billion in 2003 to $12.5 billion in 2004 should not affect premiums. That increase affects only the size of the potential surcharges that the Treasury might have to levy in the future. 

20. Brown and others, “An Empirical Analysis of the Economic 

Impact of Federal Terrorism Reinsurance,” pp. 861-898.

21. Council of Insurance Agents and Brokers, “Many Commercial 

Interests Are Not Buying Terrorism Insurance, New CIAB Survey 

Shows” (press release, Washington, D.C., March 24, 2003). 

22. See Marsh Inc., “As Costs Come Down, Businesses Warm to Terrorism Insurance—One Firm in Three Buys Coverage” (press 

release, New York, May 10, 2004). Also see Marsh Inc., Marketwatch: Property Terrorism Insurance 2004. Other surveys show 

rates stabilizing in early 2004. In a survey by the Council of Insurance Agents and Brokers, more than half of respondents reported 

no change in premium rates for terrorism insurance in the first 

quarter of 2004, but slightly more firms reported rate increases 

than decreases. Council of Insurance Agents and Brokers, “Commerical Property/Casualty Market Continues to Ease During First 

Quarter of 2004, CIAB Survey Shows” (press release, Washington, 

D.C., April 19, 2004). 

23. Marsh Inc., Marketwatch: Property Terrorism Insurance Update—

3rd Quarter 2004 (New York: Marsh & McLennan, December 

2004).

24. In general, purchases of insurance for catastrophes are more price 

sensitive than purchases of basic insurance; see Martin F. Grace, 

Robert W. Klein, and Paul R. Kleindorfer, “Homeowners Insurance with Bundled Catastrophe Coverage,” Journal of Risk and 

Insurance, vol. 71, no. 3 (2004), pp. 351-379. 
FEDERAL TERRORISM REINSURANCE: AN UPDATE 7

Figure 1.

Premium for Terrorism Coverage as a Percentage of the Premium

for Property Insurance

(Percent)

Source: Congressional Budget Office based on survey data from insurance broker Marsh Inc.

Notes: The survey whose data are shown here covers Marsh clients, which tend to be drawn from the 5,000 largest firms. Thus, small firms 

may be underrepresented in the results. 

The first quarter of 2003 was the first real opportunity for insurance companies to provide terrorism coverage under the Terrorism Risk 

Insurance Act, but the Treasury was still implementing the legislation. Marsh cautions that data for that quarter may not be comparable with later results. 

The cost of terrorism insurance fell throughout the period shown in this figure, but so did the cost of property insurance. In the morerecent quarters, property insurance costs fell faster than terrorism insurance costs, causing the slight upward trend after the third 

quarter of 2003. 

26 percent in the third quarter of 2003 (see Figure 3).25

Another survey found that 57 percent of commercial 

property owners purchased terrorism insurance in the 

third quarter of 2004 versus 24 percent in early 2003.26

A majority of firms with terrorism coverage are now purchasing insurance for events not covered by TRIA, including acts of terrorism by domestic groups.27

Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004

0

2

4

6

8

10

12

25. Marsh Inc., Marketwatch: Property Terrorism Insurance Update—

3rd Quarter 2004. Companies renew their insurance policies 

throughout the year. The Marsh survey covered 754 companies 

that renewed their property policies in the third quarter of 2004. 

Quarterly results can be volatile because of changes in the sample. 

The survey includes Marsh’s clients, most of which are drawn 

from the largest 5,000 firms. Consequently, the sample population generally does not include small companies. Some evidence 

suggests that smaller companies are more likely to buy terrorism 

coverage than larger firms are. See R. Glenn Hubbard and Bruce 

Deal, The Economic Effects of Federal Participation in Terrorism 

Risk (study prepared by Analysis Group Inc. for the insurance 

industry, September 14, 2004), available at www.iii.org/media/

lateststud/TRIA/. 

26. Those numbers come from a survey by insurance broker Aon Corporation of 500 of its clients. See Aon Corporation, Terrorism Risk 

Management and Risk Transfer Market Overview (New York: Aon 

Corp., December 2004), pp. 8-10, available at www.aon.com/

about/publications/issues/2004_global_terrorism_wp.pdf. 

27. More than 75 percent of the companies that bought terrorism 

insurance in the third quarter of 2004 purchased TRIA coverage 

plus coverage for noncertified events; see Marsh Inc., Marketwatch: Property Terrorism Insurance Update—3rd Quarter 2004, 

p. 7.
8 FEDERAL TERRORISM REINSURANCE: AN UPDATE

Figure 2.

Median Annual Premium for Terrorism Coverage

(Percentage of total insured value)

Source: Congressional Budget Office based on survey data from insurance broker Marsh Inc. 

Notes: * = not available.

The survey whose data are shown here covers Marsh clients, which tend to be drawn from the 5,000 largest firms. Thus, small firms 

may be underrepresented in the results.

Premiums for both terrorism insurance and property insurance fell during the period shown in this figure; however, for most of the 

period, property insurance rates fell faster. As rates fell, firms purchased more-comprehensive terrorism coverage. That morecomprehensive coverage pushed up premiums measured as a percentage of total insured value.

Rates of coverage vary by region. Among large companies, they tend to be highest in the Northeast and Midwest (over 50 percent for the past 12 months) and lowest 

in the West (34 percent), where risk is presumed to be 

lowest.28 Coverage also varies by financing source. For 

example, nearly all of the properties that are financed by 

commercial mortgage-backed securities have terrorism 

coverage (see Box 2 on page 10). Moreover, effective rates 

of coverage may be higher than surveys indicate because 

the surveys do not reflect terrorism insurance that is implicitly included in certain policies—such as workers’ 

compensation policies and those for losses from fires—

because of state regulations (see Box 3 on page 11).

As for companies that do not buy terrorism coverage, surveys suggest that most of them do not consider themselves potential terrorist targets.29 (Coverage is higher in 

cities thought to be at greatest risk—such as New York, 

Washington, Chicago, and San Francisco—than in other 

areas despite higher premiums in those cities.) Firms 

might choose to forgo coverage for other reasons as well. 

Surveys suggest that pricing and a company’s ability to 

tolerate some risk are factors in the decision not to purchase terrorism coverage.30 Moreover, to the extent that 

firms’ shareholders hold diversified portfolios, they may 

place little value on losses to specific companies. If some

Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

0.008

*

28. Marsh Inc., Marketwatch: Property Terrorism Insurance Update—

3rd Quarter 2004. A smaller survey showed coverage to be highest 

in the South (84 percent); see Aon Corporation, Terrorism Risk 

Management and Risk Transfer Market Overview.

29. See Kunreuther, Michel-Kerjan, and Porter, Assessing, Managing 

and Financing Extreme Events. 

30. See, for example, the National Alliance and Risk and Insurance 

Management Society May 2004 Terrorism Survey, which covered 

113 members and visitors to the society’s Web site.
FEDERAL TERRORISM REINSURANCE: AN UPDATE 9

Figure 3.

Percentage of Companies Purchasing Terrorism Coverage

(Percent)

Source: Congressional Budget Office based on survey data from insurance broker Marsh Inc. 

Notes: * = not available.

The survey whose data are shown here covers Marsh clients, which tend to be drawn from the 5,000 largest firms. Thus, small firms 

may be underrepresented in the results.

firms have rationally decided that the costs of buying terrorism coverage outweigh the benefits, then full coverage 

may not be a desirable policy goal (see Box 4 on page 

12).31

Economic Effects and the Cost of TRIA

TRIA was explicitly designed to minimize the short-term 

economic effects of the risk of terrorism, at some expected cost to taxpayers. Whether it has succeeded in doing so is difficult to determine. Although no claims have 

been filed under TRIA, administering the program is expected to cost taxpayers $14 million over the 2003-2005 

period. Moreover, the program exposes taxpayers to tens 

of billions of dollars in possible liabilities. In addition, the 

TRIA program may be hurting the economy in the 

longer term by delaying the private sector’s adjustment to 

a continuing risk of terrorism. 

Short-Term Macroeconomic Effects

TRIA was created as a temporary program to avoid a contraction of economic activity.32 In particular, by increasing the availability and lowering the price of terrorism insurance, the program was intended to keep commercial 

construction projects moving forward. Assessing the 

macroeconomic effects of TRIA is difficult because it is 

hard to know how the economy would have performed in 

the absence of the law. For example, the extent to which 

commercial construction would have declined because 

builders could not obtain financing is uncertain. Surveys 

Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004

0

10

20

30

40

50

*

31. For an analysis of the demand for terrorism insurance, see 

Smetters, “Insuring Against Terrorism.” Although the United 

States has not mandated coverage, some countries, such as France, 

have done so. See Appendix A and Kunreuther, Michel-Kerjan, 

and Porter, Assessing, Managing and Financing Extreme Events,

pp. 27-28.

32. Jeffrey R. Brown, Randall S. Kroszner, and Brian H. Jenn, “Federal Terrorism Risk Insurance,” National Tax Journal, vol. 55, no. 

3 (September 2002), pp. 647-657. 
10 FEDERAL TERRORISM REINSURANCE: AN UPDATE

indicate that in the six months following September 11, 

banks did not significantly tighten their commerciallending requirements in response to the shortage of terrorism insurance, but there is little other evidence from 

before TRIA was enacted.33 (In part, commercial-lending 

requirements may have stayed the same because firms 

have alternative ways of spreading risk besides insurance; 

see Box 5 on page 13.) 

After TRIA’s enactment, some recovery in retail construction occurred.34 But the law appears to have had little 

measurable effect on office construction, employment in 

the construction industry, or the volume of commercial 

construction loans made by large commercial banks. Various factors complicate that assessment, however: the efBox 2.

Terrorism Insurance for Commercial Mortgages

The demand for insurance coverage is high in the 

market for commercial mortgages because of requirements imposed by third parties, especially creditrating agencies. For example, Moody’s generally requires terrorism coverage in order for a commercial 

mortgage-backed security (CMBS)—which groups 

the underlying cash flows from mortgages on various 

properties into a bond—to receive the agency’s highest rating, Aaa.1 Requirements also vary depending 

on the investor and the servicer. (Servicers act as intermediaries, collecting principal and interest payments from borrowers and handling defaults.) 

According to an industry survey, nearly all of the balances being serviced for CMBSs—the largest segment of the commercial/multifamily mortgage market—were required to have terrorism insurance in 

place, whereas just 28 percent of the balances held 

as whole loans by commercial banks and savings and 

loan institutions required terrorism insurance.2

 In 

one recent deal, involving a $1.3 billion CMBS composed of 106 loans and 120 properties (including a 

number of retail shopping malls across the country), 

99.7 percent of the balance underlying the CMBS 

had terrorism insurance in place.3

An industry survey of $656 billion in commercial/

multifamily loans found that investors or servicers 

required terrorism insurance on $616 billion, or 

about 94 percent, of that debt.4 Terrorism insurance 

was actually in place for about $548 billion, or 84 

percent.5

 Such widespread terrorism coverage for 

commercial mortgages suggests that there is a substantial private-sector supply of terrorism insurance.

1. Aaa bonds are supposed to have a default rate of about one 

in 10,000, or 0.01 percent, over 10 years. Daniel B. Rubock, 

CMBS: Moody’s Approach to Terrorism Insurance After the Federal Backstop, Structured Finance Special Report (New York: 

Moody’s Investors Service, January 6, 2003). 

2. Mortgage Bankers Association, “More Than $400 Billion of 

Commercial/Multifamily Debt at Risk for Loss of Terrorism 

Risk Insurance Without Extension of TRIA ‘MakeAvailable’ Provision” (press release, Washington, D.C., June 

2, 2004), available at www.mortgagebankers.org/news/.

3. Standard & Poor’s, “Presale: J.P. Morgan Chase Commercial 

Mortgage Securities Corp., Series 2004-CIBC8,” Ratings 

Direct, March 16, 2004. 

4. Mortgage Bankers Association, “More Than $400 Billion of 

Commercial/Multifamily Debt at Risk.” The survey sampled about 123,000 loans, with an average size of $5.3 million, out of the total commercial/multifamily mortgage 

market of about $2 trillion. Commercial banks and savings 

and loans were minimally represented in the survey and thus 

do not greatly affect the overall results.

5. When coverage is required but not in place, servicers seldom 

resort to litigation to require it. Most servicers prefer to work 

with borrowers to obtain coverage, although some will purchase it themselves and then bill borrowers for the cost.

33. See Board of Governors of the Federal Reserve System, Senior 

Loan Officer Opinion Survey on Bank Lending Practices (April 

2002), available at www.federalreserve.gov/boarddocs/snLoan

Survey/200205/default.htm. Also see Congressional Budget 

Office, Federal Reinsurance for Disasters, pp. 28-30. 

34. Brown and others, “An Empirical Analysis of the Economic 

Impact of Federal Terrorism Reinsurance,” pp. 647-657. 
FEDERAL TERRORISM REINSURANCE: AN UPDATE 11

fects of the 2001 recession and of the investment bubble 

of the late 1990s could be masking positive macroeconomic effects of TRIA.

Cost to Taxpayers

As of December 1, 2004, no claims have been incurred 

under TRIA, but that does not mean that the program 

has no cost. Indeed, the cost—in terms of risk and uncertainty—of having the federal government provide terrorism reinsurance is approximately the same as the cost of 

having the private sector provide it. With a federal program, however, that cost is shifted from shareholders of 

insurance companies and owners of commercial properties to taxpayers. The shift in cost would occur even if 

surcharges ultimately offset all cash outlays under TRIA.

The Congressional Budget Office (CBO) estimates the 

expected value of federal outlays from TRIA to be $630 

million over the 2005-2015 period and the value of governmental receipts from surcharges to be $320 million 

Box 3.

State Regulations That Affect Terrorism Insurance

Various state regulations limit insurers’ ability to restrict coverage for losses from terrorist attacks and to 

set risk-adjusted rates for some types of insurance. If 

the Terrorism Risk Insurance Act (TRIA) expired 

after 2005, those restrictions could decrease the supply of private-sector terrorism insurance in the long 

run by discouraging insurers from issuing it.

State regulations dealing with coverage have implications both for the current marketplace and for the 

future if TRIA expired. For example, even before 

that law was enacted, five states—New York, California, Florida, Georgia, and Texas—required terrorism 

coverage to be included in commercial property and 

casualty insurance. Unless changed at the state level, 

those requirements would continue to apply after 

TRIA’s expiration. Moreover, even today, companies 

that do not purchase terrorism coverage could find 

some of their terrorism-related claims covered by 

other types of insurance. In 23 states (including California, New York, and Illinois), property insurance 

covers losses from fires regardless of the cause of the 

fire.1 Moreover, 49 states require workers’ compensation policies to cover occupational injuries regardless 

of their cause. (Pennsylvania has an exception for 

war-related losses.) Thus, state regulations result in 

terrorism coverage for some claims whether or not a 

federal requirement exists.

State regulations also limit insurers’ ability to set 

prices for their exposure to terrorism risk in the 

workers’ compensation market. The portion of 

workers’ compensation premiums that reflects terrorism generally does not vary geographically within a 

state or by the amount of risk.2 Coverage is virtually 

mandatory and is guaranteed through state workers’ 

compensation funds or assigned risk mechanisms.3 If 

many workers are injured in a single event, losses can 

be high. Thus, concentrated risks—which can 

threaten insurers’ solvency—generally cannot be 

priced in the primary workers’ compensation market, even though a reinsurer would most likely take 

that risk into consideration by charging higher premiums for reinsurance. Those regulations limit the 

private supply of workers’ compensation insurance.

1. General Accounting Office, Terrorism Insurance: Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-

307 (April 2004), p. 26.

2. Towers Perrin, Workers’ Compensation Terrorism Reinsurance 

Pool Feasibility Study (April 14, 2004), available at www.

towersperrin.com/tillinghast/publications/reports/WC_

Terr_Pool/WC_Terr_Pool_Study.pdf. 

3. Employers that are considered high-risk may have problems 

obtaining workers’ compensation insurance in the private 

market. How such cases are handled varies from state to 

state. Some states have their own workers’ compensation 

funds, which accept all risks rejected by private insurers. 

Other states rely on assigned risk plans and allocate high-risk 

employers to insurers on the basis of an insurer’s market 

share. 
12 FEDERAL TERRORISM REINSURANCE: AN UPDATE

over the same period.35 (Expected-value estimates reflect 

CBO’s expectation of payments during the period based 

on the probabilities of various outcomes, from losses of 

zero up to very large amounts.) The outlay estimate does 

not include any charge for the risk and uncertainty borne 

by taxpayers.36 Thus, it is less than the likely market price 

for such reinsurance.

Unlike CBO’s baseline, the President’s budget (which is 

prepared by the Office of Management and Budget) does 

not report expected losses from insurance claims for the 

TRIA program. Because of the uncertainty surrounding 

losses from and frequency of future terrorist attacks, the 

President’s budget shows only the administrative costs of 

the program.37

Long-Term Effects

An increase in risk from terrorism is in some senses analogous to an increase in risk from natural disasters: it raises 

the costs and lowers the value of some types of activities 

in high-risk areas. By analogy, TRIA is equivalent to a 

policy of subsidizing property and casualty insurance in 

an area that appears to have an especially high risk of natural disasters. If the increase in risk is only temporary or 

akin to a once-in-100-year phenomenon, then a federal

Box 4.

Does Low Coverage Signal a Market Failure?

Even though the percentage of companies purchasing terrorism insurance has been rising, roughly one 

in two large firms still lacks such insurance. That low 

rate of coverage most likely results from a rational 

weighing of the costs and benefits of purchasing insurance rather than from some failure in the market. 

Lack of available coverage and imperfect information 

could be signs of a market failure; however, those factors do not appear to explain the pattern of purchases and prices in the market for terrorism insurance. 

The existing evidence suggests that coverage is available. In particular, high coverage rates in the market 

for commercial mortgage-backed securities (as described in Box 2) support the belief that the supply is 

ample in the primary market. Moreover, competition 

should force insurers to pass the subsidies provided 

by the Terrorism Risk Insurance Act through to 

policyholders, so current premiums for terrorism 

coverage should be below market rates. Insurance 

companies and brokers might be keeping a small 

portion of the subsidy—an outcome that is more 

likely if recent allegations of bid-rigging by insurers 

and brokers are substantiated.1

Property owners appear to be making rational decisions about terrorism coverage on the basis of publicly available information. (The government may 

have better information about risk that remains classified.) Higher coverage in areas at greater risk supports that view. However, if purchases are being held 

down by the expectation that the federal government 

would aid uninsured parties after a terrorist attack or 

by underestimates of risk, then coverage may be too 

low. 

1. Allegations of bid-rigging by insurers and by the largest 

insurance broker, Marsh & McLennan, suggest that commercial insurance customers in general may not have fully 

benefited from competition in the market. See Monica Langley and Theo Francis, “Insurers Reel from Spitzer’s Strike,” 

Wall Street Journal, October 18, 2004, p. 1. 

35. Those are the amounts included in CBO’s January 2005 baseline, 

which projects future federal spending and revenues under current 

laws. (CBO did not prepare a cost estimate for the Terrorism Risk 

Insurance Act.) Although the TRIA program expires at the end of 

2005 under current law, the estimate includes costs in later years 

for several reasons. First, payments for property losses can be 

delayed for years because of disputes, such as those over businessinterruption claims, which can be contentious. Second, certain 

casualty claims are paid over several years. The chief example is 

workers’ compensation claims, which are paid for years following 

an injury. 

36. For an analysis of the cost of risk that the government assumes, see 

Congressional Budget Office, Estimating the Value of Subsidies for 

Federal Loans and Loan Guarantees (August 2004), pp. 9-15.

37. Budget of the United States Government, Fiscal Year 2004: Appendix, pp. 769-770.
FEDERAL TERRORISM REINSURANCE: AN UPDATE 13

program to provide low-cost insurance could be justified 

as a means of avoiding an expensive and unnecessary effort to reduce losses. 

If the increase in risk is long-lived, however, such a federal 

program could be costly to the economy because it could 

further delay owners of assets from making adjustments 

to mitigate their risk and reduce potential losses. Since 

July 2004, when the 9/11 Commission published its report, a consensus appears to have emerged that the current increased risk of terrorism is likely to continue for 

years. With a sustained change in the risk of loss, spreading that risk through insurance is only part of an economically efficient response. Taking steps to mitigate 

risk—such as moving operations to safer locations, 

installing better security systems, establishing disasterrecovery procedures, and setting up systems to protect 

computerized information—is also important.

There is relatively little evidence that firms have been 

making additional investments since September 11 to 

improve their security and avoid losses.38 One possible 

reason is that firms are only gradually and reluctantly 

Box 5.

Diversification as an Alternative to Insurance 

After the attacks of September 11, 2001, there was 

little systemic evidence that problems in the insurance market had spilled over to affect financing of 

construction projects. One explanation is that lenders financing such projects can reduce their risk 

through loan diversification as well as insurance.1

Moreover, real estate investment trusts, which are 

essentially mutual funds for real estate holdings, and 

commercial mortgage-backed securities (CMBSs), 

which group the underlying cash flows from mortgages on various properties into bonds, allow lenders 

to shed most of their credit risk—and investors to 

diversify their holdings—at low cost. 

If terrorism insurance is in short supply, meeting the 

criteria that credit-rating agencies set for investmentgrade CMBSs may affect how properties are combined into securities. In particular, single-property 

CMBSs will be less attractive (in the absence of federal reinsurance) because large properties—particularly landmark properties—are thought to be at 

greater risk from terrorists than other properties are. 

In addition, Moody’s is more likely to rate a security 

lower if a large loan represents more than 20 percent 

of that security, thus creating the potential for a concentrated loss from a terrorist act. When terrorism 

insurance is lacking, adjustments to the capital structure of a CMBS might be required to maintain a 

high credit rating. For example, the developers might 

be required to put more equity into the properties.

In the wake of September 11, two of the three rating 

agencies, Moody’s and Fitch Ratings, did downgrade 

some CMBSs because of a lack of terrorism coverage.2 The third, Standard & Poor’s, did not downgrade any CMBSs because of a lack of coverage, but 

it disclosed whether terrorism coverage was in place 

for the properties that made up a security.3

1. See Kent Smetters, “Insuring Against Terrorism: The Policy 

Challenge” (paper prepared for the January 8-9, 2004, Conference of the Brookings-Wharton Papers on Financial Services, February 2, 2004, draft), available at http://irm.

Wharton.upenn.edu/WP-Insuring-Smetters.pdf. 

2. Moody’s did not take any rating actions on CMBSs rated 

below Aa because, below that level, the risk from uninsured 

terrorism losses was seen as being heavily outweighed by the 

standard risks that such mortgages entail. Daniel B. Rubock, 

CMBS: Moody’s Approach to Terrorism Insurance After the Federal Backstop, Structured Finance Special Report (New York: 

Moody’s Investors Service, January 6, 2003).

3. Standard & Poor’s believed that TRIA’s “make available” 

provision mandated insurers to cover terrorism risk and thus 

worsened their risk profile. The agency also believed that 

insurers did not know how to price terrorism insurance and 

that risk models could lull them into a “false sense of complacency.” See Standard & Poor’s, “Little Ratings Cheer for 

Insurers in New Terrorism Risk Legislation,” Ratings Direct, 

November 26, 2002.

38. See Congressional Budget Office, Homeland Security and the Private Sector (December 2004). 
14 FEDERAL TERRORISM REINSURANCE: AN UPDATE

concluding that the terrorism threat will persist. Other 

reasons may be that some initial measures that firms are 

taking (such as decentralizing certain operations) are not 

easily tracked or that firms needed time to evaluate the 

cost-effectiveness of different measures. But a possible explanation is that subsidized insurance is shielding companies from facing the costs of their exposure to risk. (Because any postevent surcharges levied under TRIA would 

be uniformly assessed on all commercial policyholders, 

rather than only on holders of terrorism coverage, they do 

not provide an incentive for firms to reduce losses.) 

If the federal government continued to subsidize terrorism insurance, it would probably contribute to deferring 

the private-sector’s long-term adjustment to the increase 

in risk.39 Less adjustment means that losses from future 

attacks would be greater than would otherwise be the 

case. Experience with other federally subsidized insurance 

programs suggests that their economic effects can be substantial. For example, federal flood insurance encourages 

development in areas prone to flooding and discourages 

both relocation and measures to prevent floods.40 In that 

way, federal programs can increase losses from hazards. 

The extent to which TRIA may actually be reducing efforts to mitigate risk is unknown. However, some evidence suggests that the law is having an effect in another 

area: slowing the development of alternative approaches 

to spreading risk, such as mutual reinsurance pools and 

catastrophe bonds (see Box 6 and Appendix B).41

Policy Implications

Three options for the future of the TRIA program have 

been under discussion in the Congress. One is to allow 

the program to expire at the end of calendar year 2005, 

as scheduled under current law. A second option is to extend it as is. For example, H.R. 4772, which was introduced in the House on July 7, 2004, would have extended the TRIA program in its current form and left 

individual insurers’ deductibles and the industry retention level unchanged. A third option is to modify TRIA. 

For example, H.R. 4634, which was reported by the 

House Committee on Financial Services on September 

29, 2004, would have continued the program through 

2007, raised individual insurers’ deductibles from 15 percent this year to 20 percent in 2007, increased the industry retention level from $15 billion now to $20 billion in 

2007, and extended reinsurance coverage to providers of 

group life insurance. CBO estimated that on an expectedvalue basis, that legislation would increase outlays by $1.3 

billion and receipts by $480 million over the 2005-2014 

period (for more details of that estimate, see Box 7).42

The Administration has not announced a policy recommendation for the TRIA program. It is waiting for the 

Treasury to complete an assessment of the law and of the 

industry’s likely capacity to offer terrorism insurance in

39. In general, firms will weigh the benefits of insurance against the 

costs of risk-mitigation efforts. By lowering the costs of insurance, 

the TRIA program tilts a firm’s decision away from expenditures 

on self-protection. However, some analysts see that tilting as desirable because firms do not take into account that their spending on 

risk mitigation will increase the risk faced by other firms, by making those other firms relatively more attractive targets for terrorists. Thus, investments in risk mitigation can potentially have 

negative side effects (or externalities, as economists call them). See 

Darius Lakdawalla and George Zanjani, Insurance, Self-Protection, 

and the Economics of Terrorism, Working Paper No. 9215 (Cambridge, Mass.: National Bureau of Economic Research, September 

2002). 

40. Although the flood insurance program’s subsidies discourage some 

preventive measures, the program includes significant mitigation 

requirements. For estimates of flood insurance risk borne by taxpayers, see the statement of JayEtta Z. Hecker, Director, Physical 

Infrastructure, General Accounting Office, before the Subcommittee on Housing and Community Opportunity of the House 

Committee on Financial Services, published as General Accounting Office, Flood Insurance: Challenges Facing the National Flood 

Insurance Program, GAO-03–606T (April 1, 2003). 

41. Jeffrey R. Brown and others, “An Empirical Analysis of the Economic Impact of Federal Terrorism Reinsurance,” pp. 861-898. 

Also see Anne Gron and Alan O. Sykes, Terrorism and Insurance 

Markets: A Role for the Government As Insurer? Working Paper No. 

155 (Chicago: University of Chicago Law School, 2002).

42. Before TRIA was enacted, insurers had proposed another option: 

having the federal government financially support private reinsurance pools for terrorism risk, as some European countries have 

done. However, that approach leads to long-term government 

involvement and is not being actively considered by U.S. policymakers. For other analyses of options, see Debra J. Roberts, TRIA: 

Where Do We Go from Here? (Washington, D.C.: Center on Federal Financial Institutions, November 16, 2004), available at 

www.coffi.org/pubs/TRIAprimerp3.pdf; and Lloyd Dixon and 

others, Issues and Options for Government Intervention in the Market for Terrorism Insurance (Santa Monica, Calif.: RAND Center 

for Terrorism Risk Management Policy, 2004), available at 

www.rand.org/publications/OP/OP135/.
FEDERAL TERRORISM REINSURANCE: AN UPDATE 15

Box 6.

Mutual Reinsurance Pools 

Reinsurance pools allow insurers to share their risks 

with other members of the pool. Typically, an insurer 

is financially responsible for some initial level of 

losses, but the entire pool covers some or all of the 

losses above that level. In return for sharing losses, 

the other members of the pool receive a portion of 

the insurer’s premiums. Thus, pools provide an alternative to reinsurance. The major difference is that 

pool members may be hit with surcharges after an 

event that exhausts the pool’s resources.

The United Kingdom and other nations have 

formed government-backed mutual reinsurance 

pools for terrorism risk (see Appendix A). However, 

U.S. insurers could also form such pools without 

government backing.1

 Although reinsurance pools 

would not create new capital in the insurance industry, they would expand the industry’s ability to write 

coverage and absorb losses by increasing the diversification of risk. Mutual reinsurance pools might be 

particularly well suited to the risk of terrorism because they typically set premiums on the basis of relative risk and rely on assessing surcharges on pool 

members after the fact to cover shortfalls. Consequently, estimates of the level of terrorism risk would 

not be needed. 

In early 2004, a group of 14 insurers (including the 

Hartford Financial Services Group and American International Group) considered forming a mutual 

reinsurance pool to cover workers’ compensation 

losses from terrorist acts, including nuclear, biological, chemical, and radiological attacks.2 Estimates 

predicted that the pool could have reduced most 

members’ risk by more than 50 percent. (Pooling 

risk tightens the probability distribution of losses 

and thus reduces financial risk; it does not change 

expected losses.) Projections also showed that a mutual reinsurance pool for workers’ compensation 

could handle losses from an event similar in size to 

the September 11 attacks on the World Trade Center 

but not worst-case scenarios involving biological, 

chemical, or nuclear contamination.3

The main reason that insurers did not proceed with 

the mutual reinsurance pool was fear that, even with 

the pool, a catastrophic act of terrorism could exhaust the capital backing workers’ compensation insurance. Uncertainty about the future of the federal 

terrorism reinsurance program was another factor. 

However, if that program expires as scheduled, a mutual reinsurance pool to spread the terrorism risk facing workers’ compensation insurance may look more 

attractive to insurers.

1. Mutual insurance pools are used in the United States in 

surety finance. The pools are an alternative to purchasing 

surety bonds, which insurers sell to oil and gas companies to 

meet their financial-assurance requirements for reclamation 

after oil and gas activities. Two states have formed bond 

pools that mutualize participants’ risk, and the mining 

industry has expressed interest in expanding the use of bond 

pools. See Congressional Budget Office, Bonding for 

Reclaiming Federal Lands (October 2003). 

2. Towers Perrin, Workers’ Compensation Terrorism Reinsurance 

Pool Feasibility Study (April 14, 2004), available at www.

towersperrin.com/tillinghast/publications/reports/WC_

Terr_Pool/WC_Terr_Pool_Study.pdf.

3. Workers’ compensation claims from the September 11 

attacks are estimated to total about $1.8 billion. Payouts 

from the federal September 11th Victim Compensation 

Fund reduced those claims by about $200 million. Personal 

communication to the Congressional Budget Office by 

Robert Hartwig, Insurance Information Institute, July 22, 

2004. 
16 FEDERAL TERRORISM REINSURANCE: AN UPDATE

the absence of federal backing.43 That assessment, which 

was mandated by TRIA, is due to be delivered to the 

Congress by June 30. As part of the analysis, the Treasury 

is conducting comprehensive surveys of insurers, reinsurers, and policyholders, which will examine the effects of 

changes in TRIA’s insurer deductibles in successive years 

of the program. Those surveys are intended to provide a 

broader and more dynamic view of the marketplace than 

existing surveys by private firms do.44 The Treasury’s assessment could reveal whether there is evidence of long43. See the testimony of Wayne A. Abernathy, Assistant Secretary for 

Financial Institutions, Department of the Treasury, before the 

Subcommittee on Capital Markets, Insurance, and Government 

Sponsored Enterprises and the Subcommittee on Oversight and 

Investigations of the House Committee on Financial Services, 

April 27, 2004. 

Box 7.

CBO’s Estimate of the Costs of the Terrorism Insurance Backstop 

Extension Act of 2004

Extending the Terrorism Risk Insurance Act of 2002 

(TRIA) under the terms envisioned by the Terrorism 

Insurance Backstop Extension Act of 2004 (H.R. 

4634) would expose federal taxpayers to tens of billions of dollars in liabilities for two more years. For 

any single year, the Congressional Budget Office 

(CBO) has no basis for estimating the likelihood of 

terrorist attacks or the amount of insured damage 

they might cause. Instead, its estimate of the cost of 

enacting H.R. 4634 reflects how much, on average, 

the government could be expected to pay insurers.1

On the basis of discussions with insurers and information provided by the insurance industry, CBO estimates that the expected average annual loss subject 

to coverage under TRIA would be about $1.5 billion, including $100 million from the inclusion of 

group life insurance policies. That estimate assumes 

that in most years, terrorist attacks would cost less 

than $1.5 billion. There is a significant assumed 

probability—approaching 50 percent—that no terrorist attacks that would be covered by TRIA would 

occur in a given year. Further, CBO assumes for that 

estimate that attacks similar in scale to the losses sustained on September 11, 2001, are likely to occur 

very rarely. 

On an expected-value basis, CBO estimates that enacting H.R. 4634 would increase direct spending by 

about $1.1 billion over the 2005-2009 period and by 

$1.3 billion over 10 years. The Treasury Department 

would recoup some or all of those costs through surcharges, which would increase governmental receipts 

by about $70 million through 2009 and $480 million over 10 years. Because surcharges can be imposed for many years, CBO expects that the increase 

in spending would eventually be offset to a greater 

extent than that.

The Treasury would need to charge insurers premiums of almost $700 million in both calendar years 

2006 and 2007 just to offset the government’s average annual loss from providing the reinsurance, 

CBO estimates. However, those premiums would 

not compensate taxpayers for the risk they were 

bearing.

Although this estimate reflects CBO’s best judgment 

on the basis of available information, actual costs 

could vary greatly from the estimate.

1. Congressional Budget Office, Cost Estimate for H.R. 4634, 

Terrorism Insurance Backstop Extension Act of 2004 (November 19, 2004).

44. Some of the information being collected includes the cost of terrorism coverage compared with the cost of total insurance coverage within eligible types of insurance, basic financial data, 

insurance deductibles and limits for terrorism coverage, the use of 

reinsurance and self-insurance, and types of risk-management programs. The Treasury’s first survey collected data for 2002 (to 

establish a base point prior to TRIA’s enactment) and for 2003. 

The second survey, covering 2004, has been sent out. The final 

survey will be sent in early 2005. Personal communication to the 

Congressional Budget Office from Lucy Hoffman, Department of 

the Treasury, November 24, 2004. 
FEDERAL TERRORISM REINSURANCE: AN UPDATE 17

term failures in the insurance market that are not apparent from current information.

Pros and Cons of Letting TRIA Expire

Two significant changes have occurred in the years since 

TRIA was enacted that have implications for future policy. First, there is a growing perception that the risk of 

terrorism is likely to remain high. That development suggests that property owners and businesses need to take 

measures to reduce their exposure to that risk. They 

would have a stronger incentive to take such measures if 

the insurance subsidies conveyed through TRIA were reduced or eliminated. Second, the underwriting capacity 

of the insurance industry has recovered greatly. That 

change implies that private insurers can play a bigger role 

in providing terrorism coverage.

If TRIA expired as planned, premiums for terrorism insurance would be likely to rise, perhaps substantially. Not 

only would the end of federal subsidies drive up rates in 

the private sector, but the uncertainty associated with the 

risk of terrorism could lead insurers to charge higher premiums than they would if they had more-precise estimates of the probability, frequency, and size of possible 

losses, according to some analysts.45 However, the increase in premiums would encourage insurers and owners 

of assets to adjust to the higher level of terrorism risk.46

That adjustment, which would include more mitigation 

efforts, should reduce expected losses from terrorist 

attacks. 

In the absence of federal reinsurance, insurers would be 

looking to use the private-sector reinsurance market to 

shed some of their terrorism risk and thereby limit their 

risk of catastrophic losses and insolvency. Reinsurers covered about 60 percent to 80 percent of the losses from the 

September 11 attacks, according to one estimate.47 In 

2004, the capacity of the private terrorism reinsurance 

market remained low—between $4 billion and $6 billion, by industry estimates.48 In the face of higher premiums, however, mutual reinsurance pools might be a feasible source of increased coverage, especially for workers’ 

compensation (see Box 6 on page 15).49

The economic effects of letting TRIA expire are unclear. 

But the economy is stronger now than it was in 2001 and 

2002 and therefore is better able to handle an increase in 

costs for terrorism insurance. A study sponsored by the 

insurance industry concluded that failing to extend TRIA 

would have adverse effects on economic growth and employment, even if another terrorist attack did not occur.50

The study predicted that economic growth would be 

slowed because higher premiums for property insurance 

(and a resulting decrease in property values) would raise 

operating costs for businesses and because higher premiums for workers’ compensation would increase labor 

costs. However, the study’s results depend heavily on its 

particular assumptions; adverse effects would be smaller 

under a more plausible set of assumptions (see Box 8). 

The study also does not take into account TRIA’s cost to 

taxpayers and its potentially adverse impact on the economy’s long-term adjustment to a higher level of terrorism 

risk. 

More fundamentally, letting TRIA expire would not increase the expected cost of terrorism to the economy but 

rather would change who bore it. Only if the government 

can bear terrorism risk at a lower cost than private firms 

and insurers will costs rise with the expiration of TRIA. 

However, there is no evidence to suggest that the government can bear terrorism risk more efficiently than others 

can. Currently, the cost of terrorism risk is being shared 

by taxpayers and by private parties—insurers and the 

owners of assets. If TRIA expired as scheduled, more of 

the cost would be borne by private firms and insurers. 

(Because uninsured losses can be deducted from corporate income taxes, taxpayers will always bear some of the 

losses.)

45. Kunreuther, Michel-Kerjan, and Porter, Assessing, Managing and 

Financing Extreme Events. 

46. See Rawle O. King, Insurance and Emergency Preparedness: The

9/11 Commission Recommendations, CRS Report for Congress 

RL32646 (Congressional Research Service, October 25, 2004). 

47. Marsh Inc., Marketwatch: Property Terrorism Insurance 2004, p. 9.

48. Private communication to the Congressional Budget Office by 

Cynthia Lamar, Vice President and Assistant General Counsel, 

Reinsurance Association of America, July 20, 2004. 

49. See Howard Kunreuther and Erwann Michel-Kerjan, Policy 

Watch: Challenges for Terrorism Risk Insurance in the United States, 

Working Paper No. 10870 (Cambridge, Mass.: National Bureau 

of Economic Research, October 2004). 

50. R. Glenn Hubbard and Bruce Deal, The Economic Effects of Federal Participation in Terrorism Risk (study prepared by Analysis 

Group Inc. for the insurance industry, September 14, 2004), pp. 

75-85, available at www.iii.org/media/lateststud/TRIA/.
18 FEDERAL TERRORISM REINSURANCE: AN UPDATE

Box 8.

Estimated Economic Effects of TRIA’s Expiration

A recent study estimated that expiration of the Terrorism Risk Insurance Act (TRIA) would result in a 

doubling of premiums for terrorism coverage, which 

would increase businesses’ operating costs. The study 

also concluded that labor costs would rise to the extent that rates for workers’ compensation insurance 

increased. Consequently, it said, economic growth 

would suffer: in 2008, for example, gross domestic 

product could be 0.4 percent lower, household net 

worth 0.9 percent lower, and the number of jobs 0.2 

percent lower than would otherwise be the case, even 

in the absence of another major terrorist attack.1

Those findings, however, appear to be on the high 

side of a plausible range. 

The study’s results hinge on assumptions about the 

extent to which premiums would increase and about 

businesses’ response to those increases. First, on the 

basis of prices prevailing in 2002, the study assumes 

that the average premium for terrorism coverage 

would double once TRIA expired. But in 2002, the 

insurance industry was still in the early stages of adjusting to the shock of September 11. Today, it is 

better positioned to bear and price terrorism risk, 

which suggests that the premium increases would be 

smaller than assumed. Second, the model used in the 

study—which comes from the forecasting firm Macroeconomic Advisers—assumes that 100 percent of 

companies would have insurance coverage both before and after the assumed doubling of premiums. 

However, about 50 percent of companies have terrorism coverage today. Thus, far fewer firms would 

be affected by the higher prices than assumed. In addition, the higher prices would motivate more businesses to self-insure, which presumably costs less 

than purchasing coverage.

The study’s assumption about monetary policy may 

magnify the short-term impact on economic activity. 

The study assumes that the Federal Reserve would 

not relax monetary policy in the face of weaker aggregate demand. But adopting an accommodative 

monetary policy could offset the aggregate economic 

effects in the short run.

The study also assumes that businesses would pay for 

the entire increase in premiums for workers’ compensation. Macroeconomic Advisers’ standard 

model, which is used in the study, generally assumes 

that part of similar employment costs are immediately shifted to workers, but that assumption was not 

used in this estimate. Moreover, the model implies 

that ultimately, all of the costs would be shifted to labor, so any negative effects on employment would 

most likely be temporary as well as overstated. Further, if firms could locate to less risky areas, higher 

operating costs might not be permanent.

The study also potentially magnifies the short-term 

effects of a higher cost of capital by assuming that 

the stock of nonresidential structures adjusts at a 

faster rate than is incorporated in Macroeconomic 

Advisers’ standard model.2 Without that alternative 

assumption, the short-term negative effect on the 

economy would be smaller than projected.

Moreover, questions remain about the degree to 

which higher prices for insurance would reduce investment in nonresidential structures. Investment in 

so-called trophy (or landmark) properties would be 

likely to decline. But to the extent that smaller structures—with smaller risk and hence lower costs of terrorism insurance—could substitute for trophy properties, then investment would decline by less than 

the model suggests. 1. The authors also estimated negative economic effects for 

2006 and 2007. R. Glenn Hubbard and Bruce Deal, The 

Economic Effects of Federal Participation in Terrorism Risk 

(study prepared by Analysis Group Inc. for the insurance 

industry, September 14, 2004), available at www.iii.org/

media/lateststud/TRIA/. The study was funded by the 

American Insurance Association, the Financial Services 

Roundtable, the National Association of Mutual Insurance 

Companies, the National Council of Compensation Insurance, the Property Casualty Insurers Association of America, 

and the Reinsurance Association of America.

2. The macroeconomic estimates were generated by Macroeconomic Advisers’ model using the assumptions that Hubbard 

and Deal made about the effect of TRIA’s expiration on 

pricing and coverage. However, for that analysis, Macroeconomic Advisers shortened the lag in its standard equation for 

nonresidential structures because it believed that the long lag 

in the standard model did not adequately capture the 

response of the demand for nonresidential structures to 

higher insurance costs. 
FEDERAL TERRORISM REINSURANCE: AN UPDATE 19

A disadvantage of letting TRIA expire is that doing so 

risks a market disruption after an unexpectedly large 

event, as has been the pattern for natural catastrophes. In 

particular, reinsurance premiums would be likely to spike 

after a terrorist attack, and the availability of insurance 

and reinsurance would drop. How long that disruption 

would last is uncertain. But in the aftermath of catastrophic events that deplete capital, high prices and reduced availability of insurance can persist, in part because 

of adjustment costs and uncertainty.51

Reinsurers would also probably continue to exclude losses 

related to nuclear, biological, and chemical attacks from 

their coverage. That exclusion would be important 

mainly for the workers’ compensation market, since primary insurers for that type of policy must cover loses 

from all causes. Potentially, insurers would be unable to 

diversify that catastrophic risk, at least in the near term, 

so rates for workers’ compensation policies could rise substantially. Thus, TRIA’s expiration would be likely to create transitional problems in the workers’ compensation 

market. 

Another disadvantage of letting TRIA expire is that with 

higher prices, the prevalence of insurance coverage would 

probably decline. Thus, lawmakers might find themselves 

providing more supplemental disaster assistance for 

uninsured losses following a major attack. In the case of 

September 11, federal assistance to businesses adversely 

affected by the attacks exceeded $6 billion, out of total 

federal aid of more than $30 billion in response to the attacks (see Appendix C).52 Of the $6 billion for businesses, a relatively small amount—less than $1 billion—

was targeted specifically to firms that lacked coverage for 

business-interruption and property losses.

Pros and Cons of Modifying TRIA 

If the TRIA program was extended rather than allowed to 

expire, the government could take steps to reduce the adverse effects that the program’s financial backstop has on 

mitigation activities. Charging premiums for federal reinsurance would help encourage the private sector to adjust to the higher level of risk. When TRIA was proposed, 

its supporters argued against premiums on the grounds 

that not charging them would have only small effects in 

the short run and would avoid the need to create a federal 

entity to set premiums. However, if the primary goal now 

is to prompt the economy to adjust to a continuing threat 

of terrorism, that goal could be accomplished by setting 

premiums as close as possible to expected losses. Alternatively, to ensure that private insurers and reinsurers had 

room to compete with the government, policymakers 

could set premiums higher than expected losses (in other 

words, add “risk loads”). In addition, gradually raising the 

deductibles and coinsurance percentages that insurers pay 

for losses would help by slowly removing the government 

from the market. 

On the downside, such changes would mostly likely cause 

the amount of terrorism coverage to decline. In addition, 

setting actuarially fair premiums is difficult for government agencies.

51. See Kenneth A. Froot, Risk Management, Capital Budgeting, and 

Capital Structure Policy for Insurers and Reinsurers, Working Paper 

No. 10184 (Cambridge, Mass.: National Bureau of Economic 

Research, December 2003). For alternative explanations of market 

disruptions after catastrophic events, see Dwight Jaffee and 

Thomas Russell, “Markets Under Stress: The Case of Extreme 

Event Insurance,” in Richard Arnott and others, eds., Economics 

for an Imperfect World: Essays in Honor of Joseph E. Stiglitz (Cambridge, Mass.: MIT Press, 2003), pp. 35-52; and Anne Gron and 

Andrew Winton, “Risk Overhang and Market Behavior,” Journal 

of Business, vol. 74, no. 4 (October 2001), pp. 591-612. For a current assessment of terrorism risk and the insurance industry, see 

Vinay Saqi and others, Correction: Assessing Insurers’ Terrorism Risk 

(New York: Morgan Stanley Equity Research, March 24, 2004).

52. Lloyd Dixon and Rachel Kaganoff Stern, Compensation for Losses 

from the 9/11 Attacks (Santa Monica, Calif.: RAND Institute for 

Civil Justice, November 2004), available at www.rand.org/

publications/MG/MG264/.

A

Terrorism Insurance Programs in Europe

Many European governments have taken an 

alternative approach to that of the Terrorism Risk Insurance Act. Instead of providing zero-premium reinsurance 

themselves, they financially back terrorism insurance and 

reinsurance pools created by insurers. The pools, which 

are a way of sharing risks among insurance companies, 

are typically intended to be permanent. With a pool system, individual insurers pay the first layer of claims, and 

the mutual reinsurance pool pays higher layers. Generally, 

the government picks up losses once a pool’s resources are 

exhausted; however, the government’s explicit liability is 

usually capped.1

Pools can be efficient ways to handle layers of risk that are 

hard to price. Some analysts believe that in the case of terrorism, the highest layers of risk—covering catastrophic 

losses—may be difficult to price effectively. However, 

pools can be sustainable if they set prices that differentiate between the relative risks of various properties. 

Postevent surcharges can cover some of a pool’s losses, 

with the government assuming the catastrophic losses. 

The United Kingdom’s Pool Re

In 1993, the United Kingdom established a governmentbacked terrorism reinsurance pool—known as Pool Re 

(for “reinsurance”)—to deal with property losses from 

bombings by the Irish Republican Army. After the attacks 

of September 11, 2001, the pool expanded its coverage of 

commercial property-damage and business-interruption 

losses to include many more risks, such as damage caused 

by chemical, biological, and nuclear contamination.2

 The 

expansion of coverage, plus the added risk of terrorism, 

resulted in a doubling of premiums. But insurers now 

know in advance that their losses will be capped, both annually and per event. Placing a cap on losses is important 

because it reduces uncertainty. Likewise, although the 

previous practice of paying rebates to member insurance 

companies in some years was discontinued, companies no 

longer face the possibility of paying surcharges after losses 

to Pool Re. 

Coverage by and participation in the pool remain optional for insurers. However, since September 11, participation in the pool has increased. For that reason and because of the higher premiums, the pool’s income from 

premiums grew more than threefold between 2001 and 

2004, and its reserves increased by more than one-third 

between the end of 2001 and the end of 2003.3

Various facets of the pool encourage competition in the 

insurance market. The maximum deductible has been 

raised—more than tripling between 2003 and 2006—to 

encourage private reinsurers to reenter the market. In addition, insurers are free to set premiums for the underlying terrorism policies, which has expanded competition. 

Premiums are highest in the financial district of central 

London. 

APPENDIX

1. In the United States, Florida and California have similar statesponsored reinsurance pools for natural disaster insurance; see 

Congressional Budget Office, Federal Reinsurance for Disasters

(September 2002), pp. 35-41.

2. War risks are not insured. In addition, damage to electronic components from hacking and computer viruses is excluded because of 

the likely inability to prove that such damage resulted from a terrorist attack. See HM Treasury, “Government Extends Remit of 

Pool Re” (press release no. 73/02, London, July 23, 2002), available at www.hm-treasury.gov.uk./newsroom_and_speeches/press/

2002/press_73_02.cfm. Also see HM Treasury, Changes to the Pool 

Re Scheme (summary paper, London, July 23, 2002), available at 

www.hm-treasury.gov.uk./media/648/AF/ACF1D0D.PDF.

3. Pool Re expected to earn £260 million (nearly $500 million) from 

premiums in 2004 versus £71 million in 2001. Pool Re’s reserves 

stood at about £1.1 billion at the end of 2001 and £1.5 billion 

($2.8 billion) at the end of 2003. Personal communication to the 

Congressional Budget Office by Steve Atkins, chief executive of 

Pool Re, July 21, 2004. 
22 FEDERAL TERRORISM REINSURANCE: AN UPDATE

Other Pools

Spain has a fund to pay for losses from the March 11, 

2004, bombings of several train stations in Madrid. 

Those attacks killed nearly 200 people and injured more 

than 1,500, but insured property losses were relatively 

small (about 35 million euros, or $47 million).4

 Spain’s 

insurance pool, which covers losses from natural disasters 

as well as from terrorism, was set up in 1941 during the 

Spanish Civil War. Participation by insurers is mandatory. 

Despite paying out more than 4.2 billion euros ($5.6 billion) between 1971 and 2003—mostly to cover floods, 

but also to cover bombings by Basque separatists—the 

pool has a surplus. 

France and Germany have created temporary terrorism 

reinsurance pools. Those programs share some attributes 

with each other but also have unique characteristics.5 For 

example, in France, all property owners must purchase 

coverage, and all insurers must join the pool. In Germany, by contrast, coverage is not compulsory. However, 

both nations set premiums on the basis of the amount of 

coverage purchased, so rates do not vary with location. 

Insurers bear the initial losses, and the middle layers of 

losses are covered by private reinsurance. The government 

bears the risk of catastrophic losses, although Germany 

caps the losses that the government will cover (France 

does not). In return, the government shares in the premiums.6

4. Ignacio Machetti, “The Spanish Experience in the Management 

of Extraordinary Risks, Including Terrorism” (presentation to the 

Organization for Economic Cooperation and Development Conference on Catastrophic Risks and Insurance, Paris, November 22-

23, 2004), available at www.oecd.org/dataoecd/59/24/33917485.

pdf; and “Preparing for the Worst,” Reactions (May 2004). 

5. Howard Kunreuther, Erwann Michel-Kerjan, and Beverly Porter, 

Assessing, Managing and Financing Extreme Events: Dealing with 

Terrorism, Working Paper No. 10179 (Cambridge, Mass.: 

National Bureau of Economic Research, December 2003), pp. 27-

28, available at http://papers.nber.org/papers/w10179.

6. Erwann Michel-Kerjan and Burkhard Pedell, Terrorism Risk Coverage in the Post-9/11 Era: A Comparison of New Public-Private 

Partnerships in France, Germany, and the U.S., Working Paper No. 

2004-029 (Philadelphia: University of Pennsylvania, Wharton 

Risk Management and Decision Process Center, October 2004), 

available at http://grace.wharton.upenn.edu/risk/downloads/

GP.TerrorismPaperWharton.Oct.2004.pdf.
B

Catastrophe Bonds for Natural Disaster

and Terrorism Risks

The ways in which insurers deal with the risk of natural disasters offers various pointers for managing the risk 

of terrorist attacks. For example, different kinds of catastrophe bonds have proved useful in helping insurers 

transfer the financial risk from natural disasters, and such 

bonds are beginning to play a role in spreading terrorism 

risk as well.

Standard Catastrophe Bonds

Companies—typically reinsurers—issue catastrophe 

bonds as a way to raise funds, with the understanding 

that if a specified catastrophe occurs, they will be partly 

or fully forgiven from making interest and principal payments on the bonds. Thus, after a covered event, the reinsurer can use the money that would have otherwise been 

paid to bondholders to instead pay catastrophe claims.1

Investors who purchase catastrophe bonds are compensated for the risk of not being fully repaid by receiving a 

relatively high interest rate before the disaster strikes. 

Because catastrophe bonds are collateralized—usually by 

Treasury securities—against the issuers’ default, primary 

insurers face no counterparty risk. (In contrast, insurers 

are at risk if reinsurers default on their obligations.) Most 

catastrophe bonds are for risks with less than a 1 percent 

likelihood of loss.

Prices for catastrophe bonds have been falling and volumes rising as investors gain more confidence in loss projections for natural disasters. Between 1997 and 2003, 54 

catastrophe bonds were issued, with total risk limits of 

almost $8 billion. In 2003 alone, $1.73 billion in catastrophe bonds were issued globally, a 42 percent increase 

from the volume in 2002.2

 Purchasing such bonds is a 

way for investors to reduce portfolio risk because their 

returns are not correlated with market returns. That is, 

natural disasters—unlike major terrorist attacks—generally do not cause stock and bond markets to fall. Catastrophe bond funds have also emerged; however, the large 

majority of bonds have been rated below investment 

grade by credit-rating agencies because of the risk of suspended interest and principal payments.3

Multiple-Event-Risk Bonds

Some analysts believe that a way to expand the risksecuritization market may be to issue bonds that are less 

likely to experience losses, such as catastrophe bonds that 

cover the risk of multiple events.4 Such bonds would generally require two separate disasters to occur before investors lost principal. (The bonds could be structured so that 

interest payments were suspended after the first disaster.) 

For example, a multiple-event bond might combine the 

risk of an earthquake in Tokyo with the risk of a hurricane in Florida. 

That multiple-event structure offers some advantages. 

First, the likelihood that two disasters will occur is lower 

than the likelihood that one will occur, so adding a secAPPENDIX

1. See Dwight M. Jaffee and Thomas Russell, “Catastrophe Insurance, Capital Markets, and Uninsurable Risks,” Journal of Applied 

Corporate Finance, vol. 10, no. 3 (Fall 1997), pp. 84-95. 

2. Christopher McGhee, Market Update: The Catastrophe Bond Market at Year-End 2003 (Guy Carpenter and Company and MMC 

Securities Corporation, April 2004), available at www.guycarp.

com/portal/extranet/pdf/Catbond2004b.pdf?vid=2. 

3. Ibid., p. 6. 

4. Gordon Woo, “A Catastrophe Bond Niche: Multiple Event Risk” 

(paper presented at the National Bureau of Economic Research 

Insurance Workshop, Cambridge, Mass., February 6-7, 2004), 

available at www.nber.org/~confer/2004/insw04/woo.pdf. 
24 FEDERAL TERRORISM REINSURANCE: AN UPDATE

ond triggering event may reduce concerns about the reliability of the estimates for the separate events. Second, 

such a structure would help a bond secure an investmentgrade rating, which would increase the number of institutional investors who could purchase it compared with a 

non-investment-grade (or “junk”) bond. Moreover, if one 

of the triggering disasters took place, there would be time 

for the bond to be traded or put on a watch list by a 

credit agency. Third, a sequence of two or more catastrophes in a short period could damage an insurance company’s credit rating or expose the company to the risk of 

insolvency, so protection against such a contingency 

would be a valuable tool to help insurers manage risk. 

The organizers of the next World Cup soccer tournament, scheduled to be played in Germany in 2006, were 

able to issue a bond that protects against the risk that the 

event will be cancelled for any of a variety of reasons and 

against the risk of losing $260 million in sponsorship revenue.5

 (The event had previously been covered by a global reinsurer, but the reinsurer cancelled its coverage after 

September 11, 2001.) That bond deal is essentially a 

second-event transaction—meaning that the debt forgiveness kicks in only with the second event—since the 

World Cup can be relocated elsewhere or postponed for a 

year, if necessary. Modelers’ best estimate of the risk of 

cancellation because of terrorism is 0.05 percent, or 5 

basis points, but the range of possibilities yields results as 

much as seven to eight times higher than that (37 basis 

points). The spread between those estimates is more than 

twice the usual spread of estimated risks for natural disasters, reflecting the greater uncertainty of terrorism risk.6

Catastrophic-Mortality-Risk Bonds

An international insurance company with heavy exposure 

in the United States, Swiss Re, has securitized the risk of 

catastrophic mortality, measured with respect to a mortality risk index. That practice is significant because workers’ compensation policies expose insurers to the catastrophic risk that large numbers of employees may be 

killed or injured from a terrorist attack. 

In Swiss Re’s security, payouts would be triggered by any 

series of events—or less likely, a single event—that resulted in 30 percent more deaths than the expected mortality risk (or as many as 750,000 additional deaths) 

through the end of 2006. Such events could include terrorist attacks with weapons of mass destruction, contaminations, or outbreaks of disease such as severe acute respiratory syndrome (SARS), influenza, or other respiratory 

illnesses. Bundling together those remote risks mitigates 

the ambiguity that surrounds the risk of a single event.7

In other words, investors might lack confidence in the 

estimates of expected losses from a single event but have 

more confidence in the joint probability of two remote 

events’ occurring.8

Securitizing Terrorism Risk

The issuance of multiple-event disaster bonds and the 

securitization of mortality risk suggest that workers’ compensation risk and terrorism risk could be securitized. For 

example, a workers’ compensation bond might cover an 

earthquake in Los Angeles and a terrorist attack, but it 

would cause a loss of principal only if both events 

occurred.9

5. That bond excludes certain risks: world war, radioactive contamination (unless caused by terrorism), a players’ strike, and the 

bankruptcy of the World Cup sponsors. Wyn Jenkins, “FIFA’s 

Golden Goal,” Reactions (November 2003), pp. 44-47.

6. Moody’s gave the bond an investment-grade rating of A3, but 

Standard & Poor’s declined to rate it. Woo, “A Catastrophe Bond 

Niche,” pp. 4-6. 

7. The security received investment-grade ratings from both 

Standard & Poor’s and Moody’s. Ibid., pp. 6-8. 

8. However, some analysts believe that bundling separate risks into 

one bond might limit demand for the bonds on the part of investors unless the market could separate the two disaster risks. Personal communication to the Congressional Budget Office by 

Jeffrey R. Brown, University of Illinois at Urbana-Champaign, 

November 3, 2004. 

9. Ibid., p. 11. 
C

Federal Disaster Assistance

After the September 11 Attacks

Federal disaster assistance to individuals, businesses, 

and state and local governments following the terrorist 

attacks of September 11, 2001, totaled $25 billion to $33 

billion or more, depending on which outlays are assumed 

to be contingent on the attacks. By any measure, however, that federal aid exceeds what has been spent after 

large natural disasters. Just over $20 billion of the aid was 

targeted to the New York City area—$15.7 billion in direct spending and $5 billion in tax benefits.1

 Another $7 

billion was paid to victims or their relatives from the September 11th Victim Compensation Fund, and $5 billion 

went to U.S. airlines. 

Overall Assistance

According to the Government Accountability Office (formerly the General Accounting Office), federal assistance 

to New York broke down as follows: 

B About $2.6 billion was spent on the initial response 

efforts, including search-and-rescue operations, debris 

removal, emergency transportation, and temporary 

repairs to utilities.

B Roughly $4.8 billion was spent for disaster-related 

costs and losses, including funds provided to New 

York City and New York State for rebuilding of facilities, to individuals for housing assistance, and to businesses for lost revenues. 

B Almost $5.6 billion was committed to restore New 

York’s public transportation system and utility infrastructure in lower Manhattan. The attacks destroyed a 

commuter train terminal underneath the World Trade 

Center and several surrounding subway stations. Repairing and resurfacing of roads damaged by the blast 

and falling debris were also financed.

B $5.5 billion was authorized for the revitalization of 

lower Manhattan’s economy, including $5 billion in 

tax benefits and $500 million in incentives to retain 

existing businesses and attract new ones.2

APPENDIX

1. See the letter from Dan. L. Crippen, Director, Congressional Budget Office, to the Honorable Carolyn B. Maloney, U.S. House of 

Representatives, October 29, 2002. CBO estimates that three 

emergency supplemental appropriation acts dealing with recovery 

from and response to terrorist attacks on the United States provided $15.7 billion in assistance to the city of New York. In addition, CBO and the Joint Committee on Taxation estimate that 

Public Law 107-147 provided businesses and individuals in New 

York City with about $5 billion in tax relief over the 2002-2012 

period. Also see General Accounting Office, September 11: Overview of Federal Disaster Assistance to the New York City Area, GAO04-72 (October 2003). The first emergency supplemental appropriation act in 2001 provided that at least half of the $40 billion 

available be used for disaster recovery and assistance related to the 

September 11 attacks. See M. Ann Wolfe, Homeland Security: 

9/11 Victim Relief Funds, CRS Report for Congress RL31716 

(Congressional Research Service, updated August 24, 2004). 

Other sources suggest that assistance may exceed $20 billion. 

RAND estimates that government compensation to victims and 

businesses from the attacks totaled $15.8 billion. That estimate 

excludes assistance to state and local governments for infrastructure and building repairs and site cleanup; however, it includes a 

relatively small amount of spending by those governments. See 

Lloyd Dixon and Rachel Kagonoff Stern, Compensation for Losses 

from the 9/11 Attacks (Santa Monica, Calif.: RAND Institute for 

Civil Justice, November 2004), available at www.rand.org/

publications/MG/MG264/. In general, the estimates do not 

include the value of all of the tax benefits to individuals receiving 

compensation for September 11 losses. 

2. See General Accounting Office, September 11: Overview of Federal 

Disaster Assistance to the New York City Area. Plans for spending 

the remaining funds were not finalized as of June 30, 2003, but 

those funds were likely to go to infrastructure restoration or economic revitalization.
26 FEDERAL TERRORISM REINSURANCE: AN UPDATE

Much of the disaster response and relief was coordinated 

by the Federal Emergency Management Agency (FEMA) 

in accordance with the Robert T. Stafford Disaster Relief 

and Emergency Assistance Act. In total, about $8.8 billion of the funding outlined above was appropriated to 

FEMA for the New York City area, of which $7.4 billion 

went for debris removal and infrastructure restoration, 

with the rest going to individuals and other nonpublic 

assistance.

In addition, the Air Transportation Safety and System 

Stabilization Act provided $5 billion in grants to U.S. 

passenger and cargo airlines as compensation for losses 

sustained as a direct result of the terrorist attacks.3

 That 

law also created the September 11th Victim Compensation Fund to provide monetary compensation for the 

economic and noneconomic losses (including pain, suffering, and loss of companionship) of people injured or 

killed in the attacks. The total payout from the fund was 

$7 billion, divided among 2,880 people who received 

death-benefit payments, and 2,677 who received disability payments. 

Assistance to Businesses

The pattern of federal disaster aid to companies after the 

September 11 attacks suggests that the Congress might 

provide additional assistance to uninsured firms following 

another terrorist attack. Most of the post-September 11 

assistance directed at firms was targeted toward the economic recovery of lower Manhattan. According to 

RAND Corporation, government assistance to businesses 

in New York City totaled $6.2 billion in subsidized loans, 

grants, and tax benefits.4

 New York businesses also received roughly three times that amount from insurance 

companies, for total benefits of $23.3 billion. 

The federal government assisted small businesses that had 

not purchased insurance, but studies suggest that such aid 

covered only a modest portion of their uninsured losses.5

Between two-thirds and three-quarters of retail businesses 

in lower Manhattan had insurance that covered losses 

from the attacks, but small businesses generally did not 

carry enough business-interruption coverage (which replaces business income lost because of physical disruptions). Federal aid to small businesses included about $90 

million in subsidized property-damage loans and Economic Injury Disaster Loans from the Small Business 

Administration.6

 Small firms also received $578 million 

in business-recovery grants from the Department of 

Housing and Urban Development to cover uninsured 

losses, such as damage to equipment, cleanup costs, and 

three days’ to 25 days’ worth of lost revenue. That grant 

program replaced only about 17 percent of the recipients’ 

revenue losses. 

The federal government also made $160 million in grants 

available to provide incentives to attract and retain small 

firms in lower Manhattan. Investor-owned utility companies received $750 million for damage to communications and energy infrastructure, which is typically not 

covered under the Stafford Act. And a World Trade Center job-creation and retention program paid $214 million 

to firms that committed to maintaining jobs in lower 

Manhattan. 

In addition, title III of the Job Creation and Worker Assistance Act of 2002 provides tax relief to businesses and 

individuals in New York City worth about $5 billion over 

10 years, the Congressional Budget Office and the Joint 

Committee on Taxation estimate. That federal tax relief 

includes the Liberty Zone tax-benefit program for businesses operating in Manhattan south of Canal Street—

the first time the Congress has passed a geographically 

targeted package of tax benefits after a disaster. The benefits include accelerated depreciation for assets located in 

the zone (worth $2.6 billion over 10 years), tax credits 

based on the number of employees in a firm ($630 million), and expanded authority to issue tax-exempt private-activity bonds to finance construction in the zone 

($1.2 billion).7

3. See Congressional Budget Office, Pay-As-You-Go Estimate for H.R. 

2926, Air Transportation Safety and System Stabilization Act 

(November 30, 2001). In addition, that law authorized the federal 

government to guarantee $10 billion in loans for the airlines.

4. Dixon and Stern, Compensation for Losses from the 9/11 Attacks, 

Table 7.5, p. 125. 

5. Ibid., p. xxix. Also see General Accounting Office, September 11: 

Small Business Assistance Provided in Lower Manhattan in Response 

to the Terrorist Attacks, GAO-03-88 (November 2002). 

6. The $90 million estimate comes from Dixon and Stern, Compensation for Losses from the 9/11 Attacks, p. 109. CBO has a higher 

estimate: $150 million for Small Business Administration (SBA) 

business loans for Manhattan provided in the 2002 defense appropriation act. In addition, the first 2001 emergency supplemental 

appropriation act provided $100 million in SBA disaster loans 

that went largely to individuals. Letter from Dan. L. Crippen to 

Carolyn B. Maloney, October 29, 2002. 

7. Those estimates come from the Joint Committee on Taxation, 

cited in Dixon and Stern, Compensation for Losses from the 9/11 

Attacks, p. 117. Adding in forgone tax revenues from provisions 

that allow advance refunding of municipal bonds brings the total 

cost of the Liberty Zone tax benefits to $5 billion.