United States Government Accountability Office

GAO Report to Congressional Committees

TERRORISM 

INSURANCE 

Status of Efforts by 

Policyholders to 

Obtain Coverage 

September 2008 

 

GAO-08-1057 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2008

TERRORISM INSURANCE

Status of Efforts by Policyholders to Obtain Coverage 

Highlights of GAO-08-1057, a report to 

congressional committees 

The Terrorism Risk Insurance Act 

of 2002 (TRIA) specifies that the 

federal government assume

significant financial responsibility

for insured losses on commercial

properties resulting from future

terrorist attacks. While TRIA has 

been credited with stabilizing

markets for terrorism insurance 

after the September 11, 2001,

attacks, questions remain as to

whether certain policyholders, 

especially those located in large

urban areas viewed as being at high 

risk of attack, may still face 

challenges in obtaining coverage.

GAO was asked to conduct a study 

to describe (1) whether the 

availability of terrorism insurance

for commercial properties is

constrained in any geographic 

markets, (2) factors limiting

insurers’ willingness to provide 

coverage, and (3) advantages and

disadvantages of selected public 

policy options to increase the

availability of such insurance. 

To address these objectives, GAO 

analyzed available data and 

interviewed industry participants, 

including those with expertise in

specific geographic markets 

considered to be at high, moderate, 

or low risk of attack (Atlanta, 

Boston, Chicago, New York, San 

Francisco, and Washington, D.C.). 

GAO provided a draft of this report 

to the Department of the Treasury

and the National Association of

Insurance Commissioners (NAIC). 

Treasury and NAIC said the report 

was informative and useful.

While some owners of high-value properties in major cities may face initial 

challenges obtaining terrorism insurance coverage compared with most 

policyholders nationwide, they generally have reported that they could meet 

current coverage requirements through a variety of approaches. Many 

industry participants said that terrorism insurance is currently available 

nationwide at prices viewed as reasonable and that the TRIA program was a 

key reason for these favorable conditions. However, some policyholders that

own large, high-value properties in densely built urban areas viewed as at high

risk of attack, particularly in Manhattan and to a lesser extent in Chicago and 

San Francisco, may still face initial challenges obtaining desired amounts of 

coverage at prices viewed as reasonable, according to industry participants. 

To address these challenges, some policyholders purchased coverage from a

large number of insurers, which can be a time-consuming and complicated 

process for policyholders and their insurance brokers. Others purchased 

coverage in a separate policy (rather than as part of an overall property 

insurance package) which may be more costly, or self-insured. 

While TRIA specifies that the federal government assume substantial financial 

responsibility for insured losses associated with future terrorist attacks, the 

steps insurers take to manage the risks they do face appear to be the primary

reason some policyholders face challenges in obtaining coverage. Insurers

said they seek to mitigate potential terrorism losses by limiting the amount of 

property coverage that they offered in specific areas of cities, such as

downtown locations or areas considered to be at high risk of attack. These 

risk mitigation efforts generally make obtaining coverage more difficult or 

costly for policyholders with high-value properties in these areas, according to

a variety of sources GAO contacted. Industry participants also said that the 

availability of reinsurance (insurance for insurers) and the views of rating 

agencies can limit the availability of coverage in such cities. 

Industry participants had no consensus on whether TRIA should be modified 

or additional actions taken to increase the availability of terrorism coverage,

and identified advantages and disadvantages of selected policy proposals that 

have been included in legislation, discussed in prior GAO reports, or 

suggested by industry participants to increase such coverage. A proposal to 

increase the federal government’s current responsibility under TRIA for the 

insured losses associated with a future attack could make insurers more 

willing to offer coverage in affected areas. For example, one large insurer 

said that the proposal might make the company more willing to immediately 

offer additional coverage in cities viewed as at high risk of attack. However, 

any such benefits might be limited for reasons including the widespread 

insurance market disruptions that may result from another attack. This 

proposal, along with several other proposals analyzed in the report, also 

would increase the federal government’s exposure to the losses associated 

with terrorist attacks, which is already 85 percent of losses up to $100 billion 

annually, after an industry deductible. 

To view the full product, including the scope 

and methodology, click on GAO-08-1057. 

For more information, contact Yvonne D. 

Jones at (202) 512-8678 or jonesy@gao.gov. 
Contents 

Letter 1

Results in Brief 4 

Background 6

Terrorism Insurance Generally Is Available Nationwide, although 

Some Policyholders Had to Take Additional Steps to Obtain 

Coverage 9

Insurer and Reinsurer Efforts to Mitigate Their Risks Appeared to 

Be Why Certain Policyholders Faced Initial Challenges in 

Obtaining Terrorism Insurance Coverage 16 

Various Proposals to Increase the Availability and Affordability of 

Terrorism Insurance Coverage Have Both Advantages and 

Disadvantages 22

Agency Comments 32 

Appendix I Objectives, Scope, and Methodology 33 

Appendix II GAO Contact and Staff Acknowledgments 36

Tables 

Table 1: Current TRIA Deductibles of Five Large Insurers versus 

Deductibles under a Recent Legislative Proposal 23 

Table 2: Examples of National and State Reinsurance Programs 27 

Figures 

Figure 1: Examples of Structuring Options for Commercial 

Property Insurance 8 

Figure 2: Purchase and Cost Rates of Property Terrorism Insurance 10 

Figure 3: Example of an Insurer’s Underwriting Decision Based on 

Aggregation of Risk in Small, Defined Areas 19 

Page i GAO-08-1057 Terrorism Insurance Availability
Abbreviations 

FHCF Florida Hurricane Catastrophe Fund

ISO Insurance Services Office 

NAIC National Association of Insurance Commissioners 

Pool Re Pool Reinsurance Company, Limited

REMIC Real Estate Mortgage Investment Conduits 

SFP Standard Fire Policy 

TRIA Terrorism Risk Insurance Act 

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Page ii GAO-08-1057 Terrorism Insurance Availability
United States Government Accountability Office

Washington, DC 20548 

September 15, 2008 

The Honorable Christopher J. Dodd 

Chairman 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, and Urban Affairs 

United States Senate 

The Honorable Barney Frank 

Chairman 

The Honorable Spencer Bachus 

Ranking Member 

Committee on Financial Services 

House of Representatives 

The terrorist attacks of September 11, 2001, are estimated to have resulted

in insured losses amounting to $32.5 billion, as of 2006.1

 Subsequent to the

attacks, insurers largely stopped offering terrorism insurance coverage to 

commercial property owners, which raised significant concerns about 

potential negative economic consequences. For example, existing real 

estate development projects faced delays and cancellations following 

September 11 because they could not get terrorism coverage, which led to 

concerns that the economy, which was already suffering as a result of the 

attacks, would further deteriorate. To help restore confidence and stability 

in property insurance markets, Congress enacted and the President signed 

the Terrorism Risk Insurance Act of 2002 (TRIA).2

 Under TRIA, insurers

generally are required to offer terrorism insurance to their commercial 

clients on the same terms they offer other types of insurance, and, in the

event of a future terrorist attack, are responsible for paying a deductible of 

20 percent of their direct earned premiums from the previous year to cover 

 1

Department of the Treasury, Board of Governors of the Federal Reserve System, U.S.

Securities and Exchange Commission, and Commodity Futures Trading Commission,

Terrorism Risk Insurance: Report of the President’s Working Group on Financial

Markets (Washington, D.C., September 2006), 8.

2

Pub. L. No. 107-297, 116 Stat. 2322 (Nov. 26, 2002). 

Page 1 GAO-08-1057 Terrorism Insurance Availability
related losses.

3

 The federal government is responsible for covering 85 

percent of the insured losses up to a maximum of $100 billion on an annual 

basis after insurance companies pay the deductible. While TRIA, which was 

reauthorized in 2005 and again in 2007, generally has been credited with 

stabilizing markets for commercial property insurance, some building 

owners, Members of Congress, and others remain concerned that there may 

still be gaps in coverage.4

 In particular, they have expressed concerns about 

the ability of policyholders that are located in large urban areas viewed as 

being at high risk of attack to obtain terrorism insurance coverage. 

To assist the committees in their oversight efforts of the insurance 

industry, you asked that we conduct a study to determine if specific 

markets in the United States have any unique constraints on the amount of

terrorism insurance available and evaluate options to enhance coverage.

As agreed with your staff, we are providing a report that describes 

(1) whether the availability of terrorism insurance for commercial 

properties is constrained in any geographic markets and the effect of any 

constraints on pricing and coverage amounts, (2) factors limiting insurers’ 

willingness to provide coverage, and (3) advantages and disadvantages of 

some public policy options to increase the availability of property 

terrorism insurance.5

 3

Department of the Treasury regulation codified at 31 C.F.R. § 50.5(d) defines direct earned 

premiums as a direct earned premium for all commercial property and casualty insurance

issued by any insurer for insurance against all losses, including losses from an act of

terrorism, occurring at locations within the United States, or on U.S. air carriers or U.S. flag

vessels, or at the premises of any U.S. mission. The Department of the Treasury provided

further clarification that direct earned premiums are “earned as reported to the NAIC in the 

Annual Statement in column 2 of Exhibit of Premiums and Losses (commonly known as 

Statutory Page 14)” and cover all risks, not only for risks from terrorism. The NAIC is the 

National Association of Insurance Commissioners, which is an organization representing

state insurance regulators.

4

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

(Dec. 22, 2005) and Terrorism Risk Insurance Program Reauthorization Act of 2007, Pub. L. 

No. 110-160, 121 Stat. 1839 (Dec. 26, 2007). 

5

Under the 2007 statute that reauthorized TRIA coverage, GAO was required to report to

Congress on similar objectives by June 23, 2008. See 15 U.S.C. § 6701 note (Terrorism

Insurance Program § 108(g)(3)). To satisfy this mandate, we made presentations to the 

Committee on Financial Services of the House of Representatives and the Committee on 

Banking, Housing, and Urban Affairs of the U.S. Senate on June 20 and June 23, 2008,

respectively. The presentation, GAO, Initial Results on Terrorism Insurance Availability

in Specific Geographic Markets, GAO-08-919R (Washington, D.C.: July 11, 2008) is 

available on GAO’s Web site at http://www.gao.gov. This report is based largely on our 

prior work. However, we added additional information and analysis, including information 

on two additional public policy options that were not discussed in our prior work. 

Page 2 GAO-08-1057 Terrorism Insurance Availability
To assess whether the availability of terrorism insurance for commercial 

properties is constrained in any geographic markets, we compiled and 

analyzed available data on insurance and reinsurance companies, 

terrorism insurance take-up rates, and terrorism insurance pricing.6

 We 

also interviewed more than 100 industry participants with nationwide 

perspective and expertise in specific geographic markets, including 

Atlanta, Boston, Chicago, New York, San Francisco, and Washington, D.C. 

We selected these high-, moderate-, and low-risk markets based on an 

industry analyst’s ranking of cities by risk of terrorism. Our interviews 

included insurer and policyholder trade associations, policyholders in a 

variety of industries, national and regional insurance and reinsurance 

brokers, insurance and reinsurance companies, and state regulators. To 

identify the factors that may contribute to insurers’ willingness or ability 

to provide terrorism insurance coverage, we selected large, national 

insurance companies to interview based on their market share in the 

states we studied. These national insurance companies held from 37 to 52

percent of the market share in the states we studied. In addition, we 

interviewed representatives of regional insurance companies in our 

selected markets. We also spoke with risk modeling firms and credit rating 

agencies. To obtain views on the advantages and disadvantages of some 

public policy options that have been proposed in legislation, discussed in 

our prior reports, or suggested by industry participants to increase 

insurers’ capacity (that is, their willingness or ability) to provide terrorism 

coverage, we relied on our interviews with industry participants described 

above. We also interviewed academics who have written on the topic of 

terrorism insurance, research organizations, and consumer interest 

groups. Although we selected industry participants to provide broad 

representation of market conditions geographically and by industry, the 

number of participants may not necessarily be representative of the 

universe of insurers, insurance brokers, policyholders, and regulators. As a 

result, we could not generalize the results of our analysis to the entire 

national market for commercial property terrorism insurance. Appendix I 

contains additional details of our objectives, scope, and methodology. 

We conducted our audit in California, Georgia, Illinois, Massachusetts, 

New York, and Washington, D.C., from January 2008 to September 2008, in

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

 6

Reinsurance companies provide insurance to insurers. 

Page 3 GAO-08-1057 Terrorism Insurance Availability
obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

While some owners of high-value properties in major cities may face initial 

challenges obtaining desired amounts of terrorism coverage compared to 

most policyholders nationwide, they generally have reported being able to

meet their current coverage requirements through a variety of approaches. 

Many industry participants and policyholders said that terrorism insurance 

currently is available nationwide at prices viewed as reasonable, and they 

cited the TRIA program and the current “soft,” or competitive, insurance 

market for these generally favorable conditions. However many industry 

participants also said that certain policyholders, especially those seeking 

large policies in areas viewed as at higher risk of terrorist attack, may face

initial challenges obtaining full coverage for terrorism at rates viewed as 

reasonable. According to policyholders and brokers, these policyholders 

typically own large, high-value properties such as office towers or hotels 

in urban areas where many large buildings are clustered and that are 

viewed as at high risk of attack, particularly in Manhattan, and to a lesser 

extent certain areas of other major cities such as Chicago and San 

Francisco. To address these challenges and satisfy their current coverage 

requirements, policyholders and insurance brokers we contacted reported

adopting one or more of several different approaches. For example, some 

policyholders purchased coverage from a larger number of insurers in 

complex insurance programs, adding to what can be a time-consuming and 

complicated process for the policyholders and their brokers. Moreover, 

some policyholders purchased coverage in a separate terrorism-only 

policy (rather than including the coverage in their standard all-risk 

property insurance package) for a portion or all of their insurance needs, 

which may be more costly than the traditional approach. Other 

policyholders, typically large corporations, self-insured a portion or all of

their terrorism coverage requirements through what are known as 

“captive” insurance companies that have been set up to insure the risks of 

their owners. 

Results in Brief 

While TRIA limits insurers’ financial exposure in future terrorist attacks, 

several insurers said they remained concerned about the exposure they 

retained, and their efforts to minimize potential losses appear to be a 

primary reason why some policyholders faced challenges in obtaining 

coverage. Insurers said they seek to mitigate potential losses from a single 

terrorism attack by limiting the amount of property coverage that they 

offer in specific areas of cities, such as downtowns or financial districts 

where many large buildings are clustered, or other areas considered to be

at high risk of attack, such as parts of Manhattan. These exposure limits, 

Page 4 GAO-08-1057 Terrorism Insurance Availability
referred to here as aggregation limits, generally make obtaining coverage

more difficult or costly for certain policyholders in these areas, according 

to a variety of sources we contacted. For instance, an insurer could 

decline to cover a property in a certain area, offer a lower coverage

amount, or charge a higher premium rate. Industry participants also said 

the limited availability of reinsurance (insurance for insurers) and the 

views of credit rating agencies can affect the availability and cost of 

terrorism insurance in cities viewed as at high risk of attack. Reinsurers 

we contacted said that they also have established aggregation limits in 

certain cities to mitigate their risks, and rating agency officials said that 

their credit ratings for insurers often depend, in part, on their ability to 

manage the potential losses associated with terrorist attacks in major 

urban areas.

Insurance industry participants and analysts we contacted had no 

consensus on whether TRIA should be modified or additional actions 

taken to increase the availability of terrorism insurance coverage. They 

also identified advantages and disadvantages of various policy proposals 

that have been made in legislation, discussed in our prior reports, or 

suggested by industry participants to increase terrorism coverage. For 

example, one recent legislative proposal involves lowering the TRIA 

deductible to 5 percent (from 20 percent) for insurers experiencing losses 

from a future terrorist attack that results in more than $1 billion in 

damages. Supporters of this proposal argue that lowering the TRIA 

deductible could make insurers more willing to offer coverage following 

an attack, which would stabilize insurance markets in affected areas and 

facilitate rebuilding and recovery efforts. In addition, a large insurer said 

that the legislative proposal, if adopted, might make it immediately more

willing to offer terrorism insurance coverage to policyholders in certain 

cities where some policyholders currently face initial challenges in 

obtaining coverage. While not necessarily opposed to the proposal, other 

industry participants and analysts cautioned that its effects may be 

limited. For example, they said that several large insurers already seek to

manage their potential losses from a potential terrorist attack, through 

aggregation limits, to levels well below the current TRIA deductible of 20

percent. As a result, even lowering the deductible to 5 percent would not 

necessarily result in a significant increase in the coverage offered by such 

insurers. Further, insurance market disruptions associated with another 

terrorist attack could limit the supply and cost of coverage even if the 

federal government assumed greater responsibility for such losses. 

Industry participants also identified both advantages and disadvantages 

associated with other proposals to increase terrorism insurance 

availability. The proposals are: permitting insurers to establish taxdeductible reserves for terrorism-related loses, forming a group of insurers 

Page 5 GAO-08-1057 Terrorism Insurance Availability
to pool assets for terrorism risks, facilitating the use of catastrophe bonds 

for terrorism through amendments to the federal tax code, and limiting 

certain state regulation of property insurance premiums or amending 

coverage requirements. We note that while several of these proposals (for 

example, establishing tax-deductible reserves) might enhance the 

availability and price of terrorism coverage, any such effects likely would 

take place over the longer term and not immediately address challenges 

that certain policyholders initially may face in obtaining coverage. Further,

all of the proposals, except amending state regulations, also could 

increase the federal government’s exposure to potential terrorism-related 

losses or otherwise reduce federal revenues. 

We provided a draft of this report to the Department of the Treasury and 

the National Association of Insurance Commissioners (NAIC) for their 

review and comment. In oral comments, Department of the Treasury and 

NAIC officials said that they found the report informative and useful. They 

also provided technical comments that were incorporated where 

appropriate.

TRIA requires private insurers to offer terrorism coverage in commercial 

property and casualty insurance, including workers’ compensation 

insurance policies. Insurers must make terrorism coverage available to 

their policyholders on the same terms and conditions, including coverage 

levels, as other types of insurance coverage. For example, an insurer 

offering $100 million in commercial property coverage must offer $100 

million in coverage for property damage from a certified terrorist attack.7

However, insurers could impose an additional charge for the coverage and 

policyholders, except in workers’ compensation policies, generally have 

the option of not purchasing it. 

Background 

Under TRIA, the federal government is to reimburse insurers for a portion 

of their losses from certified terrorist acts. Specifically, the federal 

 7

TRIA defines an “act of terrorism” as any act that is violent or dangerous to human life, 

property, or infrastructure and is certified as an act of terrorism by the Secretary of the 

Treasury, in concurrence with the Secretary of State, and the Attorney General of the 

United States, which has resulted in damage within the United States, or outside of the

United States in the case of an air carrier or vessel (as defined for purposes of TRIA) or to

the premises of a U.S. mission, and was committed by an individual or individuals, as part 

of an effort to coerce the civilian population of the United States or to influence the policy 

or affect the conduct of the U.S. government by coercion. Acts of war and losses that in 

the aggregate do not exceed $5,000,000 are specifically excluded. See 15 U.S.C. § 6701 note

(Terrorism Insurance Program § 102(1)). 

Page 6 GAO-08-1057 Terrorism Insurance Availability
government would reimburse insurers for 85 percent of their losses after 

the insurers pay a deductible amounting to 20 percent of the previous 

year’s direct earned premiums.8 The federal funding is activated when 

aggregate industry losses exceed $100 million and is capped at an annual

amount of $100 billion.9

Originally enacted as a 3-year program, Congress has reauthorized the 

program twice and recently extended it until 2014. In December 2005, 

Congress passed the Terrorism Risk Insurance Extension Act that 

increased the required amount insurers would have to pay in the aftermath 

of a terrorist attack. In December 2007, Congress approved the Terrorism 

Risk Insurance Program Reauthorization Act and eliminated the 

distinction between terrorist acts carried out by foreign and domestic 

actors. It also clarified language on insurers’ liability, stating that insurers 

are not responsible for losses that exceed the federal government’s annual 

liability cap of $100 billion.10

Commercial property insurance policies can be simple or complex, 

depending on the value and location of the properties being insured. 

Property owners may insure properties individually or consolidate 

multiple properties in a portfolio and insure them with a single policy. The 

benefits of grouping properties include spreading the cost (premium) 

across more than one building on the premise that all buildings in a 

portfolio are unlikely to be damaged by the same peril in the same event.

Policies with high insured values can require multiple insurers to provide 

coverage, with each providing a portion of the coverage up to the full 

amount of the policy, because the total insured value is too great for any 

one insurer to absorb (see fig. 1). According to a representative of a large 

brokerage firm, policyholders typically buy property coverage, including

terrorism coverage, through one all-risk policy, which insures losses from

multiple perils. 

 8

15 U.S.C. § 6701 note (Terrorism Insurance Program §§ 102(7)(F) and 103(e)(1)(A)). 

9

15 U.S.C. § 6701 note (Terrorism Insurance Program § 103(e)). 

10See 15 U.S.C. § 6701 note (Terrorism Insurance Program § 103(e)(2)(A)(ii)).

Page 7 GAO-08-1057 Terrorism Insurance Availability
Figure 1: Examples of Structuring Options for Commercial Property Insurance 

Source: GAO.

400

800

1,000

400

800

1,000

400

800

1,000

Insurer A

Insurer A Insurer

A

Insurer

B

Insurer

C

Insurer

D

Insurer

I

Insurer

J

Insurer

E

Insurer

F G

H

Insurer B

Insurer C

Layer 1

Layer 2

Layer 3

Layer 1

Layer 2

Layer 3

Single insurer / single layer Multiple insurers / multiple layers Multiple insurers

within multiple layers

Dollars in millions

Policyholders generally do not purchase terrorism insurance in amounts 

that would cover the total replacement value of the insured property, but 

rather purchase insurance in amounts that reflect the maximum amount of 

foreseeable losses that could occur in a terrorist attack. Also,

policyholders may determine the amount of terrorism coverage to 

purchase based on amounts required by a lender providing the mortgage 

on the property. 

States have primary responsibility for regulating the insurance industry in 

the United States, and state insurance regulators coordinate their activities 

in part through the NAIC. The degree of oversight of insurance varies by

state and insurance type. In some lines of insurance, insurers may file 

insurance policy forms with state regulators that help determine the extent 

of coverage provided by a policy by approving the wording of policies, 

including the explicit exclusions of some perils. According to a NAIC 

representative, while practices vary by state, state regulators generally

regulate prices for personal lines of insurance and workers’ compensation 

policies but not for commercial property/casualty policies. In most cases, 

state insurance regulators perform neither rate nor form review for large 

commercial property/casualty insurance contracts because it is presumed 

that businesses have a better understanding of insurance contracts and 

pricing than the average personal-lines consumer. Reinsurers generally are 

not required to get state regulatory approval for the terms of coverage or 

the prices they charge. 

Page 8 GAO-08-1057 Terrorism Insurance Availability
According to a variety of sources, commercial property terrorism 

insurance currently appears to be widely available on a nationwide basis 

at rates viewed as reasonable, largely due to the TRIA program and the 

current “soft” insurance market. However, some policyholders in urban 

areas viewed as being at higher risk of a terrorist attack, particularly in 

Manhattan and to a lesser extent in some other high-risk cities such as 

Chicago and San Francisco, may be forced to take additional steps to 

overcome challenges they may have initially faced in obtaining desired 

amounts of coverage at prices viewed as reasonable. Policyholders 

generally have been able to obtain desired or required amounts of 

terrorism coverage by increasing the number of carriers in what already 

may be large and complex insurance programs, adding to what can be a 

time-consuming and complicated process for policyholders and their 

insurance brokers. Others secure needed coverage by purchasing all or a

portion of their terrorism coverage in a separate insurance policy, or selfinsuring through a captive insurance company. 

Terrorism Insurance 

Generally Is Available 

Nationwide, although 

Some Policyholders 

Had to Take 

Additional Steps to 

Obtain Coverage 

Terrorism Insurance 

Generally Is Available 

Nationwide at Rates 

Viewed as Affordable 

Largely Due to the TRIA 

Program and the Soft 

Insurance Market 

According to data compiled by two large insurance brokers, a majority of 

their commercial clients nationwide purchase terrorism insurance 

coverage, and the premium rates for such coverage generally have been 

stable in recent years. As shown in figure 2, one of these brokers reported 

that approximately 60 percent of its clients purchased some form of 

terrorism coverage each year from 2005 through 2007. Another large 

insurance broker reported that take-up rates for its large property clients 

have remained between 60 percent and 65 percent since 2004. According

to a large broker, the Northeast, which includes New York City, has the 

largest percentage of companies that purchase terrorism coverage for 

properties, with about 70 percent having purchased it in 2007.11 Real estate 

companies account for the largest percentage of clients that purchased 

terrorism insurance coverage, with more than 80 percent of these clients

having done so in 2007. Manufacturing and construction companies had 

the lowest purchase rates, with 45 percent and 34 percent, respectively, 

having purchased coverage in 2007. Data collected by one of these large

brokers also show that the premiums that their clients paid for terrorism

coverage, expressed as a percentage of the commercial property 

 11Representatives of this broker noted that these data are limited because locations are 

typically recorded where the client is headquartered, not necessarily where the insured 

properties are located. For example, a company headquartered in New York City would be

included in New York even if the vast majority of the company’s property holdings are

located elsewhere. 

Page 9 GAO-08-1057 Terrorism Insurance Availability
premiums, generally have been stable at around 4 percent since 2003 (fig. 

2). Another large broker also reported that premiums have been stable at

around 4 percent, on average, since 2006. 

Figure 2: Purchase and Cost Rates of Property Terrorism Insurance 

An official from one of these brokerages told us steady purchase rates 

between 2005 and 2007 may indicate that policyholders who want to 

purchase terrorism coverage have been able to purchase it. According to 

representatives from these two brokers, the primary reason why 

approximately 40 percent of clients did not purchase terrorism coverage is

that they may not have perceived themselves at risk of a terrorist attack, 

particularly those in nonurban areas or those in industries perceived to be

at lower risk of attack, such as manufacturing. Other reasons clients may 

not have purchased coverage include the absence of lender requirements 

or the cost of coverage, according to one large broker.12

Information we collected in a range of interviews with policyholders, 

national and regional brokers, insurers, and others was consistent with the 

view that terrorism insurance coverage is available nationwide at premium 

 12According to a national trade association representing lenders, commercial real estate 

lenders typically require that terrorism insurance be included as part of the mortgaged

property’s all-risk insurance policy and that property insurance, including terrorism 

coverage, is maintained for the property for the duration of the loan. 

Page 10 GAO-08-1057 Terrorism Insurance Availability
rates viewed as reasonable. Several policyholders we contacted that own 

large and small portfolios of real estate throughout the United States, 

including national hotel chains, sports stadiums, office towers, shopping 

malls, and residential buildings, told us they could obtain as much 

terrorism coverage as they sought to obtain. Some policyholders and 

regional brokers also said that terrorism insurance premiums continue to

decline while the quality of coverage improves. For example, a 

representative from a commercial real estate company that owns large 

office towers, a luxury resort, and an industrial property in major U.S. 

cities said the company recently increased its terrorism coverage by more 

than 50 percent and decreased its premium by more than 20 percent. In at 

least one state, an insurer and state regulator told us terrorism coverage 

may be provided at no additional cost to policyholders, especially those 

with properties perceived to be at low risk of a terrorist attack. 

Insurers, policyholders, and other industry participants cited the TRIA 

program and the current soft, or competitive, market as the key reasons 

that terrorism coverage generally has been available nationwide. Without 

the federal backstop for potential insurance losses related to terrorism, 

industry participants said that coverage availability could decline 

substantially. For example, some insurers told us the amount of terrorism 

coverage they provide would decline—by more than 95 percent for one 

insurer—without the TRIA provision that provides reimbursement for 

insured losses that exceed the amount of an insurer’s TRIA deductible. In

a soft market, insurance is widely available and sold at a lower cost, 

making it easier for buyers to obtain insurance. According to insurance 

industry participants, recent strong profits, increases in investment 

income, and a lack of large losses from major catastrophes have 

contributed to insurers’ ability to increase their capital levels in recent 

years. According to some brokers, high levels of capital have increased 

insurers’ capacity and willingness to provide terrorism insurance 

coverage. 

However, some interviewees cautioned that another terrorist attack or 

“hardening” of the general terrorism insurance market could reduce the

current supply of terrorism insurance coverage and increase pricing. In the 

past, insurers frequently have responded to catastrophic events by cutting 

back coverage significantly or substantially increasing premiums for 

policyholders. For example, such reactions took place in the Florida 

market after Hurricane Andrew in 1992, in California after the Northridge 

earthquake of 1994, and more widely following the September 11 attacks. 

A broker with a large national firm told us that the insurance industry has 

remained highly sensitive to the potential financial consequences of 

Page 11 GAO-08-1057 Terrorism Insurance Availability
another terrorist attack since September 11. According to one industry 

analyst, even a modest terrorist attack in the future could cause significant 

fear and concern in the market and lead to increases in prices and 

restrictions on availability. Moreover, some industry analysts said that 

insurers could suffer significant losses for a variety of other reasons, such 

as the costs of a large hurricane or earthquake or declines in the values of 

their investment portfolios, which might make them less willing to offer 

terrorism coverage under current terms and pricing. 

Some Policyholders in 

Major Cities Have Faced 

Initial Challenges in 

Obtaining Desired 

Terrorism Coverage at 

Rates Viewed as Favorable 

While terrorism insurance coverage generally is available nationwide, 

many industry participants reported that some policyholders in major 

cities viewed as being at higher risk of terrorist attack, particularly in 

Manhattan, may initially experience challenges in obtaining desired 

amounts of coverage.13 Specifically, industry participants said that owners 

of large, high-value properties in financial districts or downtown locations, 

or near government offices or transit hubs, may face initial challenges in 

obtaining coverage in their all-risk property policies. For example, a 

policyholder with large office and retail properties in New York, San 

Francisco, and Chicago told us only a few insurers were willing to offer it 

coverage that it considered expensive and that provided only half of the 

$1.5 billion in coverage sought. In spite of these initial challenges, this 

policyholder was able to obtain the needed coverage by taking other 

approaches that will be discussed later in this report. 

Brokers and policyholders mentioned these difficulties have been more 

severe in certain locations in Manhattan than anywhere else. In particular,

they said the area surrounding Times Square—or midtown—and lower 

Manhattan, which contained the World Trade Center, presents difficulties 

because of the dense concentration of buildings, perceived risk of a future 

terrorist attack, and the overlapping insurance needs of building owners 

and tenants. For example, one broker active in the New York market told 

us of an approximately 15-block stretch of midtown Manhattan with a high 

concentration of property values in which each property is valued at $1 

billion or more, creating strong demand by building owners for limited and 

expensive coverage. Another broker told us the availability of terrorism 

coverage is most constrained in the area surrounding the World Trade 

 13According to a national insurer trade association, insurance policies are typically in force 

for a 1-year period. The process of putting an insurance contract out for bid or negotiating 

new terms and conditions of the contract can take several months. 

Page 12 GAO-08-1057 Terrorism Insurance Availability
Center site in lower Manhattan. The brokers said retail clients that would 

like to establish themselves in this area worry about not enough coverage

being available for terrorism, flood, and fire damage. 

Representatives from large national brokers, as well as insurance 

companies and other industry participants, said that certain policyholders

in Chicago and San Francisco also may face initial challenges in obtaining 

terrorism insurance coverage, although to a lesser extent than in 

Manhattan. As is the case in Manhattan, these policyholders typically own 

large buildings in proximity to other buildings and generally are located in

financial districts or downtown locations. While owners of large buildings 

in such locations may face challenges in obtaining coverage, a broker told 

us that even a small building might be difficult to insure for terrorism risk 

if it were located near larger properties in high-risk areas. 

Many industry participants reported that premiums were higher in cities 

considered to face greater financial risks from the likelihood of terrorist 

attacks occurring there, adding to the challenge of obtaining terrorism 

coverage. For example, according to one large insurance broker, terrorism 

insurance premiums in New York City can be twice as high as prices for 

similar buildings in other cities considered to be at high risk of a terrorist 

attack, and more than five times higher than prices in lower-risk cities. The 

premium amount dedicated to insuring properties in certain locations 

against terrorism risks may, on a relative basis, significantly exceed the 

amount necessary to cover such risks in other geographic areas. For 

example, a broker in the San Francisco Bay area told us average terrorism 

pricing for owners of certain buildings there can be from 20 to 30 percent

of the all-risk property premium, whereas the national median was around 

4 percent in 2007. 

While some policyholders in high-risk cities face challenges, we note that

this is not necessarily the case in all such cities. In particular,

policyholders we contacted with properties in Washington D.C. said while 

it may have been difficult or more expensive to obtain terrorism coverage

immediately following September 11, coverage is now readily available 

and affordable. For example, policyholders we interviewed that own 

properties in the city said they were able to include full terrorism coverage 

in their all-risk property policies even though they own or manage 

commercial and residential properties in proximity to potential targets 

such as the White House, the Capitol, subway stops, or foreign embassies. 

Industry participants said that policyholders generally experience fewer 

challenges in Washington, D.C. because the buildings are not as high or as 

densely concentrated as in downtown areas of other high-risk cities. 

Page 13 GAO-08-1057 Terrorism Insurance Availability
Policyholders that have experienced initial difficulty obtaining terrorism 

coverage in their primary all-risk property policies generally have been 

able to meet current terrorism insurance requirements by one of several

approaches or a combination thereof, according to industry participants. 

For example, some policyholders and brokers reported obtaining coverage 

from a greater number of insurers in what may already have been a 

complex insurance program. As discussed earlier, policies with high 

insured values can require multiple insurers to provide portions of 

coverage up to the full amount of the policy. However, a few

policyholders told us more insurers are now required to assemble 

terrorism coverage because insurers are taking smaller amounts of risk 

(that is, offering smaller amounts of coverage), requiring a greater number 

of insurers to fill out an insurance program and adding to what can be a 

time-consuming and complicated process for policyholders and their 

insurance brokers. Some policyholders said more than 20 insurers may 

participate in a single insurance program. One policyholder told us more 

than 40 insurers participate in its property insurance policy. Layering an 

insurance program has costs, especially for large and complex programs. 

A representative of a large hotel chain told us that layering insurance is 

“painful” because of the effort involved in convincing insurers to become 

comfortable with a risk. 

To Obtain Full Terrorism 

Coverage, Policyholders 

May Add Additional 

Carriers to Existing 

Insurance Programs, 

Purchase Terrorism-only 

Policies, or Self-Insure 

Moreover, several brokers and policyholders reported purchasing property 

terrorism insurance in a stand-alone policy to cover portions or all of the 

required coverage.14 For example, the owner of multiple large office 

buildings in Manhattan’s midtown and downtown financial districts told us 

the company purchased all of its terrorism coverage as a stand-alone 

insurance policy because it could obtain just half of the $800 million in 

coverage sought. Another policyholder that owns a nationwide chain of 

hotels, with properties in Manhattan, Chicago, and San Francisco, decided 

to purchase all of its terrorism coverage in a stand-alone policy to avoid 

the high and inconsistent cost of embedding terrorism coverage in its allrisk policy. A representative of this policyholder noted that cost was a 

particular issue following the 2005 hurricane season when property 

insurance prices generally increased. Some policyholders told us standalone terrorism coverage was more expensive than obtaining coverage as 

part of an all-risk property policy. However, data from a national broker 

show that the difference in pricing between stand-alone coverage and 

 14A stand-alone terrorism insurance policy limits coverage to losses from terrorist attacks, 

in contrast to an all-risk policy that would cover losses from multiple risks or perils.

Page 14 GAO-08-1057 Terrorism Insurance Availability
coverage included in an all-risk policy was small for most of 2007, with the 

median price for stand-alone coverage at 5 percent of the overall property 

premium compared to around 4 percent for coverage in the all-risk 

program. 

Finally, according to brokers and policyholders some policyholders have 

used self-insurance as a means to assemble coverage. That is, they placed

all or a portion of their terrorism coverage in a captive insurance 

company, which insures the risks of the owner.15 For the purpose of 

insuring property terrorism risk, a captive insurer would generally be a 

wholly owned insurance company within the corporate structure of the 

property owner. The typical owners of captives used for insuring terrorism 

risk are large corporations that own large or well-known buildings in 

major urban areas and have not been able to obtain coverage through 

other means. For example, a policyholder we contacted sought to obtain 

$1.2 billion in property coverage for multiple buildings in Manhattan, 

including terrorism coverage, which would cover the total replacement 

cost of the largest building in its portfolio.16 However, a representative of 

this policyholder told us the company could obtain just $500 million of allrisk property insurance that included terrorism coverage, leaving a gap of 

$700 million in coverage for terrorism risk. The policyholder considered 

filling the gap by obtaining terrorism coverage in the form of a more 

expensive stand-alone insurance policy, but decided instead to establish a 

captive insurance company to supplement the coverage provided in the 

all-risk policy and make up the $700 million difference. Another 

 15Captive insurance companies provide value to large corporations using them for terrorism

coverage. Under TRIA, insurers required to participate in the program are defined as 

entities “licensed or admitted to engage in the business of providing primary or excess 

insurance in any state.” See TRIA Section 102(6). Because captives are licensed and 

admitted by the states, just like traditional insurance companies, captives are “insurers” 

under TRIA and participate in the program. Captives receive compensation for insured

losses under the program, enabling captive owners to transfer a significant portion—85 

percent—of their terrorism exposure to the federal government for qualifying terrorist

attacks, after paying a deductible. Captives also have direct access to the private 

reinsurance market, enabling captive owners to transfer a portion of their exposure to 

private insurers, according to a reinsurer and captive manager. Finally, policyholders can 

reduce their insurance costs by creating captive insurers and setting premium rates 

according to their own claims experience. However, there are significant costs to 

establishing and maintaining captive insurers, as well as the possibility of the parent 

company experiencing significant financial losses. 

16Policyholders generally determine the amount of coverage to purchase based on lender

requirements or the amount of losses that could result in a terrorist attack, which for some

is the total replacement cost of the largest building in a portfolio. 

Page 15 GAO-08-1057 Terrorism Insurance Availability
policyholder with a lender requirement to purchase about $1.6 billion in 

coverage on a single building in midtown Manhattan was unable to obtain

sufficient terrorism coverage in an all-risk policy in 2008. This policyholder 

purchased an all-risk policy that excluded terrorism risk and assembled 

property coverage for terrorism risk in the form of a $250 million standalone policy and about $1.3 billion in a newly formed captive insurance 

company. Although these examples show policyholders may create 

captive insurance companies for the sole purpose of insuring terrorism 

risk, this approach may not be typical of the way in which captives are 

used.17 Representatives of two large insurance brokers said most 

companies simply add terrorism risk to captives that already have been 

established to cover other insurance risks, such as environmental and 

product-recall risks. 

While TRIA limits insurers’ potential losses from a terrorist attack, the 

efforts of insurers’ to manage the remaining risks they faced appeared to

be the primary reasons for certain policyholders experiencing initial 

challenges in obtaining desired amounts of coverage at prices they viewed 

as reasonable. To mitigate their risks, many insurers set limits on the 

amount of coverage that they would provide to policyholders in confined

geographic areas within a city, such as downtown locations or financial 

districts where many large buildings are clustered, or in specific areas of 

cities considered to be at high risk of attack. According to a variety of 

sources we contacted, these limits generally make obtaining coverage 

more difficult or costly for certain policyholders in these areas. Further, 

industry participants and analysts said that the availability of reinsurance 

and the views of credit rating agencies also may limit the supply and 

increase the price of terrorism insurance coverage in certain high-risk 

cities. 

Insurer and Reinsurer 

Efforts to Mitigate 

Their Risks Appeared 

to Be Why Certain 

Policyholders Faced 

Initial Challenges in 

Obtaining Terrorism 

Insurance Coverage 

 17In a September 2004 letter interpreting its implementation of TRIA, the Department of the

Treasury raised questions regarding the integrity of forming or utilizing captive insurers to

only provide stand-alone, single-risk TRIA-only coverage for losses from acts of terrorism. 

In this letter, the department explained that it would continue to monitor developments in 

the market for terrorism risk insurance to determine if future rulemaking is needed to

address the role of captives under TRIA. The letter stated that the Department of the

Treasury has concerns about the possibility that captives may be used as a tool for avoiding

the program’s requirements and deductible because captives providing stand-alone 

terrorism coverage would be able to access reimbursements through TRIA at a much lower

level than other insurers writing multiple lines of insurance. This is because the deductible 

is calculated on all lines of coverage written, not only coverage for terrorism. The 

department’s letter is online at http://www.treas.gov/offices/domestic-finance/financialinstitution/terrorism-insurance/pdf/0924_2.pdf. 

Page 16 GAO-08-1057 Terrorism Insurance Availability
Representatives from several insurance companies we contacted said that 

despite the TRIA financial backstop, they remain significantly concerned

that a future terrorist attack would result in substantial losses. In the event 

of another terrorist attack, industry participants said that certain large 

insurers may face TRIA deductibles that would result in losses of billions 

of dollars. For example, one of the largest insurers providing commercial 

property coverage would face a $5 billion TRIA deductible based on 2007 

data. The representative of one large insurer said that the company’s TRIA 

deductible was three times the net losses the company suffered due to the 

September 11 attacks. Furthermore, even a terrorist attack that caused 

losses below the $100 million TRIA program trigger could cause 

substantial losses to a small insurer. For example, the company surplus 

might be exhausted from paying the entire loss, according to the 

representative of a small insurer.18

Insurers’ Concerns about 

Amounts of Future 

Terrorism Losses Influence 

Their Willingness to 

Provide Coverage, 

Affecting Availability and 

Price in Certain Cities 

Insurers said that they seek to mitigate potential losses from a single 

terrorism attack by limiting the amount of property coverage that they 

offer in confined geographic areas within cities. For example, some 

insurers told us that they would not insure certain types of properties, 

buildings over a certain size, or buildings near others that might be 

considered terrorist targets. In addition, several large insurers and brokers 

told us that insurers limit the terrorism insurance they provide in these 

areas to amounts well below their TRIA deductible. 

To help insurers determine how much risk, or coverage, they can write in 

any given location, several industry participants we interviewed said 

insurers often use computer models to estimate the effect, or severity, of 

terrorist attacks on their existing book of business. Using models available 

from risk-modeling firms, insurers can map the locations of properties 

they cover as well as other types of coverage they provide in the area such

as building contents, business interruption, or workers’ compensation. 

Therefore, insurers can consider the extent to which one terrorist attack 

could trigger losses among multiple lines of insurance. The models also 

can map the locations of nearby properties considered to be potential 

terrorist targets. With these mapped locations, an insurer is then able to 

identify areas where it has the greatest aggregated exposure within a city. 

The modeling program places a circle around a specific location, such as a 

 18An insurer’s surplus is the difference between its assets and liabilities, or the company’s 

net worth. The surplus is the financial cushion that insurers can draw on in case of 

unexpectedly high policyholder claims. 

Page 17 GAO-08-1057 Terrorism Insurance Availability
building in the insurer’s book or a potential terrorist target, and aggregates 

the amount of exposure an insurer has within this defined area. These 

models take into account the severity of various attack scenarios on 

properties in the area (for example, a 5- or 10-ton truck bomb) and allow 

users to quantify potential losses under different attack scenarios. 

Insurers we interviewed noted that they are not as comfortable with the 

estimates of the probability, or frequency, of an attack, from these models 

and, therefore, make more limited use of this information. While insurers 

and risk-modeling firms have access to large historical databases and 

scientific studies of the frequency and severity of natural catastrophes, 

such as hurricanes, the data on terrorist attacks are limited. Furthermore, 

according to industry analysts, the tactics, strength, and effectiveness of 

terrorist groups can be very unpredictable, so predicting the frequency of 

such attacks is very difficult and perhaps impossible. For example, 

terrorists might respond to increased security measures in one area by

shifting attention to more vulnerable targets in another. Without more 

information, industry analysts note that it is difficult for modeling firms to 

make projections about the capability and opportunities of terrorists to 

undertake future attacks. 

While insurers find estimates of the probability of a terrorist attack of 

limited use, they often use the estimates of the severity of potential attacks 

in determining the amount of coverage they are willing to provide. 

Considering potential attack scenarios and estimated losses from the 

models, insurers impose internal limits, referred to here as aggregation 

limits, on the amount of all types of coverage they will offer in defined 

areas. Depending on the amount of capital and risk tolerance of the 

company, insurers determine the amount of coverage they are willing to 

provide in defined geographic areas within a city, such as in 250-foot, 500-

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

insurer has high concentrations of risk. Insurers then monitor the amount 

of coverage that they provide in these areas on an ongoing basis to ensure 

that they do not exceed their aggregation limits. As shown in figure 3, an 

insurer might decline to provide any coverage for a new property since 

adding the property to the book of business would exceed the insurer’s 

aggregation limit on exposures within the defined area. Alternatively, an 

insurer might charge a higher price or offer a lower coverage limit if 

adding the property would exceed the aggregation limit. 

Page 18 GAO-08-1057 Terrorism Insurance Availability
Figure 3: Example of an Insurer’s Underwriting Decision Based on Aggregation of Risk in Small, Defined Areas 

New property

to be insured

Properties

already insured

500 ft. radius

Value of

properties

already insured

$225 million

Value of

new property

to be insured

$50 million

Insurer’s

risk limit: 

$250 million

Insurance

denied

Insurance

offered

Value of properties

already insured

(within 500 ft. radius

of new property

to be insured)

Value of new

property to be

insured

Source: GAO.

The amount of coverage insurers are willing to provide in these defined 

areas may change frequently as new clients or properties are added to or 

removed from their books of business. An insurer may have available 

capacity in a specific area one month, but be near its limit the next. For 

example, one policyholder noted that her real estate investment company 

contacts its insurer before considering acquiring a new property to 

determine if the insurer has capacity where the new property is located. 

Although the insurance company may decide it can provide property 

insurance for the building at the time of the request, the policyholder said

that when the acquisition is completed several months later, the insurance 

company may no longer have the capacity available to insure the building.

In that case, the policyholder said that the company might have to 

Page 19 GAO-08-1057 Terrorism Insurance Availability
purchase a stand-alone terrorism policy for that particular building, which 

the policyholder reported as being more expensive than simply adding it to

the existing portfolio. As a result, the policyholder said it might no longer 

be profitable for the company to acquire the new building. In some cases, 

this policyholder said the company has canceled or deferred an acquisition 

until it simultaneously disposed of a building in the same area to be sure 

that the insurer would have capacity available for the new building. 

However, several other policyholders we interviewed said that any 

concern about the availability of insurance has not affected their 

companies’ acquisitions or development projects.

Availability of Reinsurance 

Also Can Affect Insurers’ 

Willingness to Provide 

Terrorism Coverage 

Insurers and other industry analysts cited the limited availability of 

reinsurance as another factor influencing insurers’ willingness to provide 

terrorism coverage in certain areas. Reinsurance plays a crucial role in 

insurance markets by permitting primary insurers to transfer some of the 

risks that they incur in offering coverage. In so doing, reinsurance may 

allow primary insurers to offer additional coverage than otherwise would

be the case while mitigating potential losses.19

Insurers and other industry participants we contacted said that 

reinsurance for terrorism risk, which largely was unavailable after 

September 11, continues to be expensive and available in limited amounts. 

In a 2004 report, we found that reinsurers had reentered the terrorism 

insurance market cautiously, but that the amount of coverage offered to 

primary insurers was limited and the premium rates were viewed as high.20

In conducting our current work, reinsurers and industry analysts said that 

reinsurance capacity for terrorism has continued to increase for a variety

of reasons including an influx of new capital into the industry, the absence 

of another terrorist attack, and improvements in insurers’ ability to 

underwrite the risk.21 However, insurance brokers and large insurers with 

 19For terrorism insurance, primary insurers typically purchase reinsurance up to the

difference between what the primary insurers are willing to lose in a terrorist attack and 

their TRIA deductibles as well as coverage for their 15 percent co-share under the program.

20GAO, Terrorism Insurance: Implementation of the Terrorism Risk Insurance Act of 

2002, GAO-04-307 (Washington, D.C.: Apr. 23, 2004).

21According to a trade insurance association representative, the capacity of the global 

reinsurance market has increased significantly in recent years. The representative said that 

a wave of $20 billion in new capital entered Bermuda companies after the September 11 

attacks. Similarly, a second wave of $43 billion in new capital entered the market after 

Hurricane Katrina. 

Page 20 GAO-08-1057 Terrorism Insurance Availability
significant exposures in urban areas told us that terrorism often still is 

excluded in reinsurance contracts and that insurers have been able to 

purchase only limited amounts of very expensive coverage. A recent 

Congressional Budget Office report similarly found that the ability of 

primary insurers to transfer terrorism risk to reinsurers is limited.22

As has been the case with primary insurers, the efforts of reinsurers to 

manage their aggregation levels appear to be why the coverage that they 

offer for terrorism is limited. The provision in TRIA requiring insurers to 

offer terrorism coverage at terms and conditions that do not differ 

materially from other coverage does not apply to reinsurance transactions, 

so these companies have discretion in deciding how much terrorism 

coverage to offer to primary companies. Reinsurance company 

representatives told us that the location of the insured risks is an 

important factor that influences whether they will offer reinsurance and at

what price. For example, one reinsurance company representative said 

that the company was less willing to write contracts covering properties in 

cities viewed to be at high risk of terrorist attack. Others said that while 

their companies still would be willing to reinsure an insurer’s book of 

business with concentrations of risk in multiple high-risk cities, they might

offer more expensive coverage to compensate for the increased risk and 

the increased capital they need to maintain to back up the risk. 

Views of Rating Agencies 

Also May Influence the 

Availability of Terrorism 

Insurance for Some 

Policyholders in Areas 

Viewed as at High Risk of 

Attack 

Insurers and reinsurers cited the views of rating agencies on the amount of 

capital insurers allocate to terrorism risk and the location of risks they 

insure as other factors influencing their willingness to provide terrorism 

coverage. Rating agencies assess the financial strength of companies and 

the credit quality of their obligations. Maintaining a high rating can be very 

important for an insurance company’s business because a firm with a low 

rating may, among other things, pay a higher interest rate on its debt. In 

addition, several policyholders and lenders told us many lenders that 

require their mortgagees to carry terrorism coverage also require that they

use only highly rated insurers. A variety of industry participants and 

analysts told us that rating agencies’ views can be very influential on the 

amount of capacity insurers decide to allocate to terrorism risk, affecting 

how much coverage they provide to policyholders. For example, one 

reinsurance industry analyst noted that the amount of capital rating 

agencies required insurers to maintain to support terrorism risk was 

 22Congressional Budget Office, Federal Reinsurance for Terrorism Risks: Issues in

Reauthorization (Washington, D.C., August 2007). 

Page 21 GAO-08-1057 Terrorism Insurance Availability
significant. The representative said that these requirements may 

encourage insurers not to offer this type of business because it is difficult 

to maintain large amounts of capital and earn an adequate return on the 

money. 

In conducting their assessments, representatives of the rating agencies we 

interviewed said they look closely at insurers’ terrorism exposures. They 

request specific information about the types of policies insurers write, the 

risks in their books of business, the steps insurers take to manage their 

risks, and whether they have concentrations of risk in any areas, including

large urban areas or cities considered to be high risk. With workers’-

compensation insurers, the rating agencies request information about the 

number of employees at different locations across the different insureds. 

As a result of discussions with the rating agency about the company’s 

rating, rating agency representatives said that some companies have 

purchased additional reinsurance or divested risk. 

Insurance industry participants and analysts did not express consensus on 

whether TRIA should be modified or additional actions taken to increase 

the availability of terrorism insurance coverage. They cited a variety of

advantages and disadvantages associated with five proposals that have 

been offered in legislation, discussed in our prior reports, or suggested by

industry participants to increase the availability and perhaps limit the cost 

of terrorism insurance. These proposals include lowering insurers’ TRIA 

deductibles following large terrorist attacks, permitting insurers to 

establish tax-deductible reserves for future terrorism losses, forming a 

group of insurance companies to pool assets for terrorism losses, 

facilitating the issuance of onshore catastrophe bonds through changes in 

the tax code, and limiting certain state regulations and requirements. We 

note that improvements in terrorism insurance coverage and pricing that 

might result from the adoption of some of these proposals (such as taxdeductible reserves, insurance pools, and catastrophe bonds) likely would 

take place over the longer term and that such proposals could increase the 

federal government’s exposure to terrorist-related losses or otherwise 

reduce federal revenues. 

Various Proposals to 

Increase the 

Availability and 

Affordability of 

Terrorism Insurance 

Coverage Have Both 

Advantages and 

Disadvantages 

Page 22 GAO-08-1057 Terrorism Insurance Availability
Option 1: Lowering 

Insurers’ TRIA Deductibles 

following Large Terrorist 

Attacks 

One recent legislative proposal to increase the availability of terrorism 

insurance coverage involved lowering the TRIA deductible for insurers 

from future terrorist attacks after they experience losses.23 Under this 

proposal, if there were a terrorist attack that resulted in more than $1 

billion in damages, the insurer deductible under TRIA immediately would

be reduced to 5 percent (from 20 percent) for those insurers suffering 

losses in the attack.24 Table 1 below shows the potential effect on the 

deductibles of five large insurers under this proposal. 

Table 1: Current TRIA Deductibles of Five Large Insurers versus Deductibles under 

a Recent Legislative Proposal

Dollars in billions 

Direct written

premiums 

Current TRIA 

deductible 

Proposed TRIA

deductible in case of 

attack 

Insurer A 24.8 4.9 1.2

Insurer B 14.6 2.9 0.732

Insurer C 14.4 2.8 0.721

Insurer D 12.7 2.5 0.635

Insurer E 7.5 1.5 0.375

Source: GAO analysis of Insurance Information Institute data. 

Note: The legislative proposal—as outlined in S. 2621, 110th Cong. § 2 (2008) and H.R. 4721, 110th

Cong. § 2 (2007)—would reset the TRIA deductible after a large terrorist attack where aggregate 

industry insured losses exceeded $1 billion. 

Because this proposal was designed to significantly reduce potential 

industry losses, some insurers and industry participants we contacted said 

that it might make them more willing to offer coverage in areas affected by

a future attack. As a result, supporters of the proposal argue that it would 

stabilize insurance markets in affected areas and facilitate rebuilding and 

recovery efforts. Moreover, the representative of one large insurer said 

that if the deductible was lowered to 5 percent, the insurer immediately 

would be willing to write more terrorism coverage, especially in 

downtown areas of larger cities. Since the insurer would be able to access 

the federal reimbursement at a lower level, the insurer’s potential losses 

 23See S. 2621, 110th Cong. § 2 (2008) and H.R. 4721, 110th Cong. § 2 (2007). The proposal 

would reset the TRIA deductible after a large terrorist attack where aggregate industry

insured losses exceed $1 billion.

24The proposal also would increase the deductible by 0.5 percent in each subsequent year

with no terrorist attack. 

Page 23 GAO-08-1057 Terrorism Insurance Availability
on its current book of business would be lower, thus freeing up additional 

capacity for terrorism coverage without having to purchase reinsurance 

from the private market to cover the additional risk. 

While other insurers and industry participants we contacted were not 

necessarily opposed to this proposal, they remarked that its effects might 

be limited. As discussed previously, some large insurers already try to limit 

potential losses associated with a future terrorist attack to levels well 

below their current TRIA deductible of 20 percent of direct premiums. 

Therefore, it is not clear what effect lowering the TRIA deductible would 

have for such insurers in terms of the terrorism coverage that they are

willing to offer. Second, as also discussed earlier, there may be significant 

market disruptions associated with another terrorist attack, which could

limit coverage availability even if the federal government did assume 

greater liability for associated losses. For example, reinsurers, which are 

not subject to TRIA’s requirements to make terrorism coverage available,

again might limit the coverage they were willing to provide in the wake of 

another attack, which might limit the amount of coverage that primary 

insurers could offer. In addition, as happened following Hurricane Katrina, 

ratings agencies might increase the capital requirements or other 

standards insurers must follow to maintain and improve their ratings, 

potentially further limiting insurers’ willingness to continue providing 

terrorism coverage in certain areas. Further, we note that lowering the 

TRIA deductible would increase the federal government’s potential 

liability for terrorism-related losses. 

Option 2: Permitting 

Insurers to Establish TaxDeductible Reserves for 

Future Terrorism Losses 

Another option would permit insurers to establish tax-deductible reserves, 

over a period of years, to cover the potential losses associated with future 

terrorist attacks. Under current federal tax law, insurers can take a 

deduction for losses that already have occurred and for setting aside 

reserves for fair and reasonable estimates of the amount the insurer will 

be required to pay on future losses. However, reserves for uncertain future

losses are not currently tax deductible. Because the size and timing of 

terrorist attacks are uncertain, any reserves set aside for potential 

Page 24 GAO-08-1057 Terrorism Insurance Availability
terrorism losses would be taxed as corporate income in the year in which 

they were set aside.25

We have reported previously that amending the tax code and permitting 

insurers to establish tax-deductible reserves could provide insurers with 

financial incentives to increase their capital and thereby expand their 

capacity to cover catastrophic risks, such as terrorism.26 We also reported 

that supporters of this proposal argued that establishing such reserves 

would lower the costs associated with providing coverage and encourage

insurers to charge lower premiums, which could increase coverage among 

policyholders. In addition, industry participants we interviewed said if 

insurers were able to establish tax-deductible reserves, a large terrorist 

attack could cause less of a strain or shock to industry surplus, or capital, 

which could help prevent insurer insolvencies in the wake of an attack. 

However, several important challenges and tradeoffs may be associated 

with this option. For example, some industry participants we contacted

said it would be difficult for insurers to determine the amount of funds to 

contribute to such a reserve each year because of the significant 

challenges associated with estimating the frequency of potential terrorist 

attacks. Without a reliable method for conducting such estimates, insurers 

would lack an analytical basis for reserving funds to cover potential 

losses. 

Furthermore, we have reported that overall terrorism insurance capacity

might not increase because insurers might use the reserves as a substitute 

for reinsurance that may have been purchased previously to manage the 

risks of potential terrorist attacks (reinsurance premiums are already taxdeductible).27 Because reserving also would convey tax advantages, some 

insurers might feel that they could limit the expense of purchasing 

reinsurance. To the extent that insurers reduced their reinsurance 

coverage in favor of tax-deductible reserves, the industry’s overall capacity 

 25A “property casualty company loss reserve” is an accounting entry, a liability on the

balance sheet, for the amount of money the company expects to pay out in the future to

cover indemnity payments that will come due on policies already written for losses that 

already have been incurred and the costs of dealing with the associated claims. Loss 

reserves do not reflect the pattern of future claims payments. Premium payment funds that

cannot be put into loss reserves must be treated as underwriting profits.

26GAO, Catastrophe Risk: U.S. and European Approaches to Insure Natural Catastrophe

and Terrorism Risks, GAO-05-199 (Washington, D.C.: Feb. 28, 2005). 

27GAO-05-199. 

Page 25 GAO-08-1057 Terrorism Insurance Availability
would not necessarily increase. Insurers also might use the reserves to 

shield a portion of their existing capital (or retained earnings) from the 

corporate income tax or inappropriately use tax-deductible reserves to 

manage their financial statements by increasing the reserves during good 

economic times and decreasing them in bad times. Finally, we note that

this proposal likely would reduce federal tax revenues. 

Option 3: Forming a Group 

of Insurance Companies to 

Pool Assets for Terrorism 

Risks 

Another proposal involves establishing a group of insurance companies to 

pool their assets, which may allow them to provide a greater amount of 

terrorism insurance coverage than could be provided by individual 

companies acting independently of one another. Insurance pools typically 

are formed to cover large risks, such as hurricanes, which traditional 

insurance markets do not address readily. For example, a pool could be 

created at the national level or state level; it could involve mandatory or 

voluntary participation from insurers; it could be prefunded or postfunded; 

and if losses exceed the reserves of the pool, the government could 

provide a financial guarantee or the pool could draw on some other 

method such as issuing bonds or borrowing funds to make up any 

shortfall. Table 2 shows that insurance pools have been established in 

Florida to cover hurricane risks and in the United Kingdom for terrorism 

risks. 

Page 26 GAO-08-1057 Terrorism Insurance Availability
Table 2: Examples of National and State Reinsurance Programs 

Program Program description Coverage

Reinsurance or

insurance 

Government

backstop

Voluntary or

mandatory

participation

Florida Hurricane 

Catastrophe Fund 

(FHCF) 

The State of Florida created the 

FHCF after Hurricane Andrew. 

FHCF is a state-administered

reinsurance program for insurers 

that offers residential 

property/casualty insurance in the 

state. Its purpose is to ensure 

reinsurance will remain available 

at relatively stable rates in the

aftermath of hurricanes. 

Residential 

property in case

of hurricane in 

Florida 

Reinsurance None. FHCF may 

issue bonds, 

collect 

reimbursement

premiums, or 

impose 

assessments on 

Florida insurance 

companies if funds 

are insufficient to 

meet obligations

Mandatory 

Pool Reinsurance 

Company, Limited 

(Pool Re) 

A mutual reinsurer in the United 

Kingdom that provides pooled 

industrywide reinsurance of 

terrorism risks after a specified 

industry retention level. Pool Re 

was formed in 1993 following

reductions in reinsurance 

availability after terrorist bombings 

in London. 

Commercial 

property, 

business 

interruption, and 

consequential 

losses for acts of 

terrorism 

Reinsurance Full government

guarantee if pool 

resources are 

exhausted, after a 

10 percent call 

upon insurers 

Voluntary 

Source: GAO analysis of information from Coalition to Insure Against Terrorism. 

In addition to these programs, one large insurance broker, in consultation

with several industry groups, has developed a proposal to form a $40 

billion national reinsurance pool for commercial property terrorism risk.28

Under this proposal, all insurance policies would cover losses from acts of 

terrorism and insurers would continue to charge policyholders their own 

rates for terrorism coverage in accordance with state laws. Insurers would 

purchase reinsurance coverage from the pool, which would determine its 

reinsurance premium rate based on analysis of a range of potential losses 

in urban, suburban, and rural areas. The claim reserves of the pool would 

be tax-exempt, allowing it to accumulate reserves tax-free from which to 

pay future losses. In the event of a certified terrorist attack, the insurance 

industry would pay 5 percent of losses and the pool would pay 95 percent 

of losses up to $40 billion. In the event the pool did not have the resources 

to pay its share of losses, the pool would be funded through the issuance 

 28Aon, Property Terrorism Update, TRIA in the Balance (New York, N.Y.: October 2005). 

Page 27 GAO-08-1057 Terrorism Insurance Availability
of bonds.29 The federal government would be responsible for losses in 

excess of $40 billion up to $100 billion. According to the plan, losses above 

$100 billion would be reviewed by Congress. 

Some industry participants we contacted expressed general support of an

insurer pool to enhance the availability of terrorism insurance coverage. 

For example, they said a pool could allow insurers to transfer a significant 

portion of their terrorism-related risk to an outside entity over time, and 

they could use the accumulated surplus in the pool to provide higher 

amounts of coverage in the future. Industry participants also noted that a 

national pool would spread out terrorism risk across a wider base of 

policyholders of varying risk levels than individual insurers could do alone

and would allow insurers to better manage their total accumulations of 

terrorism risk. 

However, several challenges and disadvantages also may be associated 

with this option. For example, as is the case with tax-deductible reserves,

it may be difficult to develop a reliable basis for determining the 

appropriate size of the pool because of the inherent challenges in 

estimating the frequency of terrorist attacks. Moreover, other information 

suggests that insurance pools would not necessarily increase the 

industry’s capacity or ability to offer additional terrorism insurance 

coverage. According to a study by a global consulting firm on a proposed 

workers’-compensation pool for terrorism risk and other industry 

participants, a reinsurance pool might not create new industry capacity or

bring in additional capital to support writing more business.30 The study 

notes that if the industry as a whole does not have enough capital to 

manage terrorism risk, then neither can an industry pool that simply 

combines existing industry capital in a new structure. Furthermore, we 

note that if premiums paid to the pool were tax deductible as are 

traditional reinsurance premiums, insurers simply might substitute pool 

 29The plan specifies that the U.S. government would provide a contingent guarantee to buy 

bonds issued by the pool if bonds could not be sold in the open market due to a terrorist

attack. The bonds would be repaid by assessments levied on all policies from covered lines 

during the life of the bonds. The bonds would be tax-exempt and have a maturity of up to

30 years. 

30The Tillinghast and Reinsurance businesses of Towers Perrin, Workers’ Compensation 

Terrorism Reinsurance Pool Feasibility Study, Summary of Study Findings and

Conclusions (March 2004). The study was facilitated by the American Insurance 

Association and funded by 14 insurers that account for roughly 40 percent of the workers’-

compensation market. 

Page 28 GAO-08-1057 Terrorism Insurance Availability
reinsurance for traditional reinsurance, as might be the case with taxdeductible reserves for individual insurers. Finally, if the pool was a taxexempt entity, tax-deductible reserves for an insurance pool could reduce 

federal revenues. 

Option 4: Facilitating the 

Issuance of Onshore 

Catastrophe Bonds 

through Revisions to the 

Federal Tax Code 

Another proposal is that the federal government establish certain tax 

advantages for catastrophe bonds, which supporters argue could facilitate 

their use for covering terrorist attacks.31 Catastrophe bonds generally have 

been issued to cover natural events, such as earthquakes or hurricanes, 

rather than terrorist attacks and historically have been created in offshore 

jurisdictions where they are not subject to income or other tax. Under this 

proposal, tax treatment of catastrophe bonds would be similar to the 

treatment received by certain issuers of asset-backed securities, which 

generally are not subject to tax on the income from underlying assets that 

is passed on to investors.32 We previously reported that the total costs of 

issuing catastrophe bonds—including transaction costs such as legal 

fees—significantly exceed the costs of traditional reinsurance, which may 

have limited the expansion of the market.33 Facilitating the creation of 

onshore transactions by changing the tax code to encourage issuance of 

catastrophe bonds within the United States could reduce transaction 

costs. 

Some insurance industry participants we contacted said that catastrophe 

bonds, by tapping into the securities markets, offered the opportunity to 

 31Catastrophe bonds are risk-based securities that pay relatively high interest rates and

provide insurance companies with a form of reinsurance to pay catastrophe losses. A 

catastrophe bond offering typically is made through an investment entity that may be

sponsored by an insurance or reinsurance company. The investment entity issues bonds or

debt securities for purchase by investors, thus spreading risk. 

32Asset-backed securities, for example, are backed by loans or accounts receivable 

originated by banks, credit card companies, or other providers of credit. Certain issuers of 

these securities, Real Estate Mortgage Investment Conduits (REMIC), are generally not

subject to federal income tax. Instead the income of the REMIC is taxable to the holders of 

interests in the REMIC. See 26 U.S.C. §§ 860A-860G; GAO, Catastrophe Insurance Risks:

The Role of Risk-Linked Securities and Factors Affecting Their Use, GAO-02-941 

(Washington, D.C.: Sept. 24, 2002). 

33For additional information about catastrophe bonds and related tax issues, see 

GAO-02-941; Catastrophe Insurance Risks: Status of Efforts to Securitize Natural 

Catastrophe and Terrorism Risk, GAO-03-1033 (Washington, D.C.: Sept. 24, 2003); Natural 

Disasters: Public Policy Options for Changing the Federal Role in Natural Catastrophe

Insurance, GAO-08-7 (Washington, D.C.: Nov. 26, 2007); and GAO-05-199. 

Page 29 GAO-08-1057 Terrorism Insurance Availability
expand the pool of capital available to cover terrorism risk. They also said

that amending the tax code to facilitate the bonds’ issuance in the United 

States could be beneficial in achieving that goal. However, many industry 

participants said, consistent with findings in our previous reports, that the 

development of catastrophe bonds for terrorism risks involves significant 

challenges. These challenges may greatly exceed any benefit that would be 

derived from amending the tax code. As with other options discussed 

previously, the industry participants said that because of the difficulties 

associated with estimating the frequency of terrorist attacks, it would be

very difficult to structure a catastrophe bond for terrorism that would be 

acceptable to investors. Data are available on the historical frequency and

severity of natural events, such as hurricanes and earthquakes, which 

helps investors assess the risks that they face in purchasing catastrophe 

bonds for such risks. Without similar data for terrorist attacks, it is 

unlikely that a viable market for catastrophe bonds will be established 

regardless of revisions to the tax code that are designed to help ensure 

such an outcome. We also have previously reported that the federal 

government could lose tax revenue under this option and that the 

proposed changes to the tax code might create pressure from other 

industries for similar tax treatment. 

Option 5: Revising Certain 

State Regulations and 

Insurance Coverage 

Requirements 

Some industry participants have suggested that states could take certain 

actions to revise their insurance statutes or regulations to increase insurer 

capacity for terrorism risk, including amending rate regulation policies 

and laws on coverage requirements. While, according to information from 

NAIC, most state insurance regulators do not review rates for large 

commercial property/casualty insurance contracts, several insurance 

company representatives said that their ability to charge risk-based prices

for terrorism coverage was constrained by insurance statutes and 

regulations in certain states and the prices these states approved did not

reflect the risk to which the insurers were exposed.34 Additionally, a few 

industry participants said that terrorism insurance availability may be 

 34According to information provided by NAIC, the following 10 states and district require

prior approval of commercial property rates: California, Hawaii, Iowa, Maryland, Michigan, 

New Mexico, New York, North Carolina, North Dakota, South Carolina, and Washington,

D.C. While the State of Michigan has a prior approval law, an NAIC representative said that 

the Commissioner has exempted insurers from filing rates and forms for commercial lines 

insurance products. Some states, like New York, also have exceptions for large commercial 

risks, which are discussed in this report. 

Page 30 GAO-08-1057 Terrorism Insurance Availability
limited in states that have adopted the Standard Fire Policy (SFP).35 Under 

the SFP, property insurers are required to cover losses from fire regardless 

of the cause of the fire, including a terrorist attack, even if the 

policyholder declined terrorism coverage. Consequently, the industry 

participants said that the SFP influences the amount of property insurance 

that insurers provide, including terrorism insurance, and the premiums 

that they charge in states that have adopted it. Therefore, some insurers 

have suggested that states amend their SFP statutes so that insurers would 

not be responsible for fire losses resulting from terrorism. 

While most states do not regulate prices for commercial property risks, 

where prices are regulated the state regulators are unlikely to disapprove 

insurers’ rate requests because insurers are in a better position to judge

the necessity of the price than the regulator, as long as the request is 

generally in line with current market prices, according to a representative

from NAIC. In addition, other available information suggests that state 

actions on rate regulation or coverage requirements may have a limited 

effect on the availability of terrorism insurance coverage. As discussed in 

this report, some policyholders, particularly in Manhattan, may face initial 

challenges in obtaining terrorism coverage at prices viewed as reasonable.

However, according to state regulatory officials, New York is one of the

states that generally does not regulate premium rates for large commercial 

properties, so state regulation does not appear to be a significant factor in

the city where insurance challenges appear to be most pronounced.36 On 

the other hand, unlike several other states, New York and California have 

not revised the SFP to limit insurer liability resulting from the fires 

associated with terrorist attacks, according to information from industry 

 35According to information from the Insurance Information Institute and the Insurance 

Services Office (ISO), states that do not allow exclusions to the SFP for terrorism, thereby 

requiring coverage for fire following an act of terrorism, are California, Georgia, Hawaii, 

Iowa, Illinois, Maine, Massachusetts, Missouri, North Carolina, New Jersey, New York, 

Oregon, Rhode Island, Washington, West Virginia, and Wisconsin. The Virgin Islands also

do not allow SFP exclusions for terrorism. Some of these states exempt the SFP 

requirements for the commercial inland marine line of business. Connecticut and Virginia 

enable an exclusion of fire following a certified act of terrorism. Fire coverage in both of

these states would be required if TRIA expired. 

36New York Insurance Department officials told us that large commercial property policies

(above $100,000 in premium) as well as certain types of other risks can operate in what is 

called a “Free Trade Zone” in the state, where insurers have more discretion on

determining the prices and terms of coverage they offer as long as they adhere to New 

York’s statute that they are “neither excessive, inadequate, nor unfairly discriminatory.” 

According to information from NAIC, several other states also have similar provisions

exempting large commercial risks from rate regulation. 

Page 31 GAO-08-1057 Terrorism Insurance Availability
analysts. While the SFP may therefore have an influence on the availability 

of terrorism insurance in such locations as Manhattan and San Francisco, 

it is difficult if not impossible to determine the influence as compared to 

other factors in these cities, particularly the potential losses associated 

with attacks on high-value buildings that may be in proximity to one 

another. 

We provided a draft of this report to Department of the Treasury and NAIC 

for their review and comment. In oral comments, Treasury and NAIC 

officials said that the report was informative and useful. They also 

provided technical comments that were incorporated where appropriate. 

We are sending copies of this report to the Department of the Treasury, 

NAIC, and other interested committees and parties. We will also make 

copies available to others upon request. In addition, the report will be 

available at no charge on GAO’s Web site at http://www.gao.gov. 

If you or your staffs have any questions about this report, please contact 

me at (202) 512-8678 or jonesy@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix II. 

Agency Comments 

Yvonne D. Jones 

Director, Financial Markets and Community Investment 

Page 32 GAO-08-1057 Terrorism Insurance Availability
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

Our objectives were to describe (1) whether the availability of terrorism 

insurance for commercial properties is constrained in any geographic 

markets and the effect of any constraints on pricing and coverage 

amounts, (2) factors limiting insurers’ willingness to provide coverage, and 

(3) advantages and disadvantages of some public policy options to 

increase the availability of property terrorism insurance. 

To assess whether the availability of terrorism insurance for commercial 

properties is constrained in any geographic markets and the effect of any 

constraints on pricing and coverage amounts, we reviewed relevant 

literature and compiled and analyzed available data on insurance and 

reinsurance industry capacity, terrorism insurance take-up rates, and 

terrorism insurance pricing. We also interviewed representatives of more 

than 100 organizations with knowledge of the nationwide terrorism 

insurance market and with expertise in specific geographic markets. 

Entities with a national perspective included insurer and policyholder 

trade associations, individual policyholders, national insurance and 

reinsurance brokers, and insurance and reinsurance companies. We 

obtained information on specific geographic markets from state 

regulators, regional insurance brokers and insurance companies, and local 

property owners. The geographic markets we studied represent locations 

considered to be at high, moderate, and low risk of exposure to terrorist 

attacks—Atlanta, Boston, Chicago, New York, San Francisco, and 

Washington, D.C. We selected these markets based on rankings of 

locations by risk of terrorism exposure that accounts for the risk of 

terrorist attacks and the potential for associated losses from the Insurance 

Services Office, an insurance industry analytics firm. We spoke with 

representatives of policyholders that own hundreds of properties 

nationwide, including 

• more than 200 properties in New York City, 

• more than 100 properties in Washington, D.C., 

• at least 30 properties each in Chicago and San Francisco, 

• about 30 properties in Boston and 60 in Atlanta, and 

• numerous properties across the United States including major cities such 

as Los Angeles and Houston. 

These properties included large office towers in major U.S. cities, 

properties in proximity to high-profile federal buildings, hotels, industrial 

Page 33 GAO-08-1057 Terrorism Insurance Availability
Appendix I: Objectives, Scope, and 

Methodology 

buildings, hospitals, sports stadiums, and residential properties in 

locations throughout the United States. The policyholders also 

represented a variety of industries that included real estate, 

transportation, financial services, health, hospitality, and entertainment. In 

addition to one-on-one interviews, we also conducted group discussions 

with representatives of 14 policyholders at the annual Risk and Insurance 

Management Society conference in San Diego, California, in April 2008.

Although we selected industry participants to provide broad 

representation of market conditions geographically and by industry, their 

responses may not necessarily be representative of the universe of 

insurers, insurance brokers, policyholders, and regulators. As a result, we 

could not generalize the results of our analysis to the entire national 

market for commercial property terrorism insurance. We determined that 

the selection of these sites and participants was appropriate for our 

objectives and that this selection would allow coverage of geographic 

areas, key markets, major insurers and policyholders, and other 

organizations related to terrorism insurance so as to generate valid and

reliable evidence to support our work. 

To identify the factors limiting insurers’ willingness to provide terrorism 

insurance coverage, we selected large, national insurance companies to 

interview based on their market share in the states we studied. These 

national insurance companies held from 37 to 52 percent of the market 

share in the states we studied, according to information provided by the 

Insurance Information Institute. In addition, we interviewed 

representatives of regional insurance companies in our selected markets. 

We also spoke to representatives of seven reinsurance companies, 

including two of the largest worldwide reinsurance companies, risk 

modeling firms, state regulators, and two credit rating agencies. Although

we selected insurers to provide broad representation of size and 

geographic scope, we could not generalize the results of our analysis to 

the entire population of commercial property insurers. 

To explore the advantages and disadvantages of some public policy 

options to increase the availability of property terrorism insurance, we 

relied on our interviews with the industry participants described above. 

We also interviewed academics who have written on the topic of terrorism 

insurance, and representatives of research organizations and consumer 

interest groups. We selected the option that would reduce insurers’ TRIA 

deductibles in areas affected by a future large terrorist attack from two 

recent legislative proposals. We selected the other options—allowing 

insurers to establish tax-deductible reserves, forming a group of insurance 

companies to pool assets, and facilitating the use of catastrophe bonds 

Page 34 GAO-08-1057 Terrorism Insurance Availability
Appendix I: Objectives, Scope, and 

Methodology 

through changes in the tax code and amending state regulations or 

statutes—from literature we reviewed, our prior reports, and interviews 

we conducted with industry participants. The selected options were 

representative of the range of possible options. We did not attempt to 

evaluate the prospective effect of these options and, therefore, did not 

come to any conclusions about the advisability of implementing these 

options. 

We conducted this audit in Atlanta, Georgia; Boston, Massachusetts; 

Chicago, Illinois; New York, New York; San Diego, California; San 

Francisco, California; and Washington, D.C., from January 2008 to 

September 2008, in accordance with generally accepted government 

auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable 

basis for our findings and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable basis for our 

findings and conclusions based on our audit objectives. 

Page 35 GAO-08-1057 Terrorism Insurance Availability
Appendix II: 

A

GAO Contact and Staff 

cknowledgments 

Page 36 GAO-08-1057 

Appendix II: GAO Contact and Staff 

Acknowledgments 

Yvonne D. Jones, (202) 512-8678 or jonesy@gao.gov

Wesley M. Phillips, Assistant Director; Farah Angersola; Joseph A. 

Applebaum; Rudy Chatlos; Andrea Clark; Katherine Bittinger Eikel; Barry 

Kirby; Rich LaMore; Marc Molino; Jill M. Naamane; Linda Rego; Barbara 

Roesmann; Kathryn Supinski; Thomas Taydus; and Shamiah Woods made 

key contributions to this report. 

GAO Contact 

Staff 

Acknowledgments 

(250407) Terrorism Insurance Availability
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