Testimony 

Before the Committee on Banking, Housing 

and Urban Affairs, United States Senate 

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Tuesday, May 18, 2004 TERRORISM INSURANCE

Effects of the Terrorism 

Risk Insurance Act of 2002 

Statement of Richard J. Hillman, Director 

Financial Markets and Community Investment 

GAO-04-806T 
www.gao.gov/cgi-bin/getrpt?GAO-04-806T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard Hillman 

at 202-512-8678, hillmanr@gao.gov. 

Highlights of GAO-04-806T, a testimony

before the Senate Committee on Banking, 

Housing, and Urban Affairs. 

May 18, 2004

TERRORISM INSURANCE 

Effects of the Terrorism Risk Insurance 

Act of 2002 

Treasury and industry participants have made significant progress in 

implementing TRIA to date, although Treasury has important actions to 

complete in order to comply with its responsibilities under TRIA. 

Treasury has issued regulations on TRIA, created and staffed the 

Terrorism Risk Insurance Program office, and begun mandated studies 

and data collection efforts. However, Treasury has not yet made a 

decision on whether to extend the mandate that insurers “make 

available” terrorism coverage, using terms not differing materially from 

other coverage, for policies issued or renewed in 2005. Treasury’s 

ongoing studies and data collection efforts will provide further insight 

into TRIA’s effectiveness. 

TRIA has enhanced the availability of terrorism insurance for 

commercial policyholders, largely fulfilling a principal objective of the 

legislation. In particular, TRIA has benefited commercial policyholders 

in major metropolitan areas perceived to be at greater risk for a terrorist 

attack, largely because of the requirement in TRIA that insurers offer 

coverage for terrorism. Prior to TRIA, GAO reported concern that some 

development projects had already been delayed or cancelled because of 

the unavailability of insurance and continued fears that other projects 

also would be adversely impacted. GAO also conveyed the widespread 

concern that general economic growth and development could be slowed 

by a lack of available terrorism insurance. Largely because of TRIA, 

these problems no longer appear to be major concerns. 

Despite increased availability of coverage, limited industry data suggest 

that most commercial policyholders are not buying terrorism insurance, 

perhaps because they perceive their risk of losses from a terrorist act as 

being relatively low. The potential negative effects of low purchase 

rates, in combination with the probability that those most likely to be the 

targets of terrorist attacks may also be the ones most likely to have 

purchased coverage, would become evident only in the aftermath of a 

terrorist attack. Such negative effects could include more difficult 

economic recovery for businesses without terrorism coverage or 

potentially significant financial problems for insurers. Moreover, those 

that have purchased terrorism insurance may still be exposed to 

significant risks that have been excluded by insurance companies, such 

as nuclear, biological, or chemical events. Finally, although insurers and 

some reinsurers have cautiously reentered the terrorism risk market to 

cover insurers’ remaining exposures, industry sources indicated no 

progress to date toward finding a reliable method for pricing terrorism 

insurance and little movement toward any mechanism that would enable 

insurers to provide terrorism insurance to businesses without 

government involvement. 

After the terrorist attacks of 

September 11, 2001, insurance 

coverage for terrorism largely 

disappeared. Congress passed the 

Terrorism Risk Insurance Act 

(TRIA) in 2002 to help commercial 

property-casualty policyholders 

obtain terrorism insurance and give 

the insurance industry time to 

develop mechanisms to provide 

such insurance after the act expires 

on December 31, 2005. Under 

TRIA, the Department of Treasury 

(Treasury) caps insurer liability 

and would process claims and 

reimburse insurers for a large share 

of losses from terrorist acts that 

Treasury certified as meeting 

certain criteria. As Treasury and 

industry participants have operated 

under TRIA for more than a year, 

GAO was asked to assess 

Treasury’s progress in 

implementing TRIA and describe 

how TRIA affected the terrorism 

insurance market. 

GAO recommends that the 

Secretary of the Treasury, as part 

of Treasury’s study of the 

effectiveness of TRIA and after 

consultation with insurance 

industry participants, identify for 

Congress alternatives that may 

exist for expanding the availability 

and affordability of terrorism 

insurance after TRIA expires. 

These alternatives could assist 

Congress during deliberations on 

the insurance industry’s capacity to 

provide terrorism insurance. 
Page 1 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to discuss our report on the implementation 

of the Terrorism Risk Insurance Act of 2002 (TRIA) and the act’s impact 

on the terrorism insurance market and, more generally, the economy.1

 The 

terrorist attacks of September 11, 2001, drastically changed the way 

insurers viewed the risk of terrorism. An industry that had considered the 

risk of terrorism so low that it did not identify or price terrorism risk 

separate from property and casualty coverage will ultimately pay 

approximately $40 billion for losses arising from September 11, according 

to industry experts. Responding to terrorism risk after September 11, 

reinsurers began excluding terrorism from coverage as contracts between 

reinsurers and insurers came up for renewal.2

 Without reinsurance, 

insurers retained greater levels of risks than they could responsibly carry, 

and their reaction was to exclude these risks from commercial policies as 

they were renewed. In short, believing that neither the frequency nor 

magnitude of terrorism losses could be estimated, insurance companies 

withdrew from the market. 

In the aftermath of September 11, we reported that terrorism insurance 

was disappearing in the marketplace, particularly for large businesses and 

those perceived to be at some risk.3

 We also reported significant concern 

that some development projects had already been delayed or cancelled 

because of the unavailability of insurance and fears that others would 

follow. Furthermore, there was widespread concern that general 

economic growth and development would be slowed by a lack of 

insurance availability and uncertainty in the marketplace. Because of 

concerns about the lack of available and affordable terrorism insurance, 

 1

U.S. General Accounting Office, Terrorism Insurance: Implementation of the Terrorism 

Risk Insurance Act of 2002, GAO-04-307 (Washington, D.C.: Apr. 23, 2004), and Terrorism 

Insurance: Effects of the Terrorism Risk Insurance Act of 2002, GAO-04-720T

(Washington, D.C.: Apr. 28, 2004). 

2

Reinsurance is a mechanism that insurance companies routinely use to spread risk 

associated with insurance policies. Simply put, it is insurance for insurance companies. 

Reinsurance is a normal business practice that satisfies a number of needs in the insurance 

marketplace, including the need to expand capacity and obtain protection against potential 

catastrophes. 

3

U.S. General Accounting Office, Terrorism Insurance: Alternative Programs for 

Protecting Insurance Consumers, GAO-02-199T (Washington, D.C.: Oct. 24, 2001), and 

Terrorism Insurance: Rising Uninsured Exposure to Attacks Heightens Potential 

Economic Vulnerabilities, GAO-02-472T (Washington, D.C.: Feb. 27, 2002). 
Page 2 

Congress passed TRIA, which took effect on November 26, 2002. TRIA is 

currently scheduled to expire at the end of 2005. 

Our report on the implementation of TRIA has two objectives. First, we 

describe the progress made by the Department of the Treasury (Treasury) 

and insurance industry participants in implementing TRIA. Second, we 

discuss the changes in the market for terrorism insurance coverage under 

TRIA. As requested, my statement today discusses both of these 

objectives. Additionally, I have included an appendix to this statement 

that provides background information on TRIA. 

In summary, Treasury and industry participants have made significant 

progress in implementing TRIA to date, although Treasury has important 

actions to complete in order to fully comply with its responsibilities under 

TRIA. Treasury’s progress includes issuing regulations on TRIA, staffing 

the Terrorism Risk Insurance Program (TRIP) office, and beginning 

mandated studies and data collection efforts. For example, in compliance 

with one such study, Treasury decided not to extend TRIA to group life 

based on its determination that insurers had continued to provide group 

life coverage, although the availability of reinsurance was reduced. 

Treasury also issued proposed rules defining a framework for the claims 

process and litigation management under TRIA. Additionally, Treasury 

recently hired a contractor to provide claims payment services, according 

to a Treasury official. However, insurers have expressed reservations 

about Treasury’s implementation of TRIA. Specifically, insurers are

concerned about the potential length of time it may take for the Secretary 

of the Treasury to certify a terrorist event, potential inefficiencies and time 

lags in processing and paying claims once an event is certified, and TRIA’s 

impending expiration at the end of 2005.4

 The industry has also expressed 

concern about the timing of Treasury’s pending decision to extend the 

“make available” requirement to policies issued or renewed in 2005.5

 4

TRIA provides that the Secretary of the Treasury, in concurrence with the Secretary of 

State and the Attorney General of the United States, shall determine whether an event 

should be certified as an act of terrorism, based on certain criteria. For example, “an 

individual or individuals acting on behalf of any foreign person or foreign interest” must 

commit the act. Under TRIA, insurers can claim reimbursement only for losses in events 

thus certified. See Appendix I for more information. 

5

TRIA defines “make available” to mean that the coverage must be offered for insured 

losses arising from terrorist events and that coverage not differ materially from the terms, 

amounts, and limitations applicable to coverage for losses arising from other types of 

events. 
Page 3 

TRIA has largely achieved Congress’s first goal—to ensure that business 

activity did not suffer materially from a lack of available terrorism 

insurance. Since TRIA was enacted in November 2002, terrorism 

insurance generally has been available to businesses; however, most 

commercial policyholders are not buying terrorism coverage. According to 

insurance industry experts, purchase rates have been higher in areas 

considered to be at high risk of another terrorist attack. Many 

policyholders with businesses or properties not located in perceived high–

risk locations may not be buying coverage because they view any price for 

terrorism insurance as high relative to their perceived risk exposure. 

Industry experts view overall low purchase rates in combination with a 

high concentration of purchases in areas thought to be most at risk as 

increasing the potential for negative effects should a terrorist event 

occur—either making economic recovery more difficult for those not 

insured or causing financial problems for insurers with many policies in 

the affected area. Further, those that have bought terrorism insurance 

remain exposed to significant perils because insurers have broadened 

longstanding policy exclusions for nuclear, biological, and chemical (NBC) 

events. Finally, Congress’ second key goal in establishing TRIA—to give 

private industry a transitional period during which it could begin pricing 

terrorism insurance and develop ways to cover losses after TRIA expires—

has not yet been achieved. Industry sources indicated that under TRIA, 

insurance market participants have made no progress to date toward the 

development of reliable methods for pricing terrorism risks and little 

movement toward any mechanism that would enable insurers to provide 

terrorism insurance to businesses without government involvement. 

In conducting our work, we reviewed and analyzed relevant information 

concerning state legislation and publicly available and proprietary industry 

data and studies on the terrorism insurance market. We interviewed 

officials at Treasury, the National Association of Insurance Commissioners 

(NAIC), and state insurance regulators from six states with high insurance 

sales volumes. We also interviewed representatives of insurance 

companies, reinsurance companies, brokers for insurance and reinsurance 

companies, industry associations, property owners and developers, and 

insurance filing services and credit rating agencies.6

 In our discussions 

with these organizations, we endeavored to gain an understanding of their 

experience in implementing TRIA requirements, obtain their views on the 

effects of TRIA on the terrorism insurance market, and identify 

 6

Filing services perform many services for insurance companies, including submitting to 

state insurance regulators the documents required to sell a line of insurance. 
Page 4 

developments within the industry to address terrorism risks after TRIA 

expires. We conducted this work in Chicago, New York City, and 

Washington, D.C., from January 2003 through April 2004 in accordance 

with generally accepted government auditing standards. 

More than a year after TRIA’s enactment, Treasury and insurance industry 

participants have made progress in implementing and complying with its 

provisions, although Treasury has yet to fully implement the 3-year 

program. Treasury has issued regulations (final rules) to guide insurance 

market participants, fully staffed the TRIP office, and begun collecting 

data and performing studies mandated by TRIA. For example, Treasury 

complied with a mandate to collect and assess data on the availability of 

group life insurance and reinsurance; based on that data, Treasury 

determined that group life would not be covered by TRIA. However, 

Treasury has yet to make the claims payment function fully operational, 

although it has recently hired contractors to perform claims payment 

functions. Moreover, even though the act does not require Treasury to 

make a decision about whether to extend the “make available” 

requirement through 2005 until September of this year, some insurers 

expressed concerns about whether such a late decision would allow them 

sufficient time to make and implement changes to policy rates and terms. 

Additionally, insurers have voiced concerns about the time Treasury might 

take to certify an act of terrorism as eligible for reimbursement under 

TRIA and pay claims after an act was certified. Finally, as TRIA’s 

midpoint nears, many insurers and other market participants are 

concerned whether TRIA will be extended or not and the timing of such a 

decision. 

To implement TRIA and make TRIP functional, Treasury has taken 

numerous regulatory and administrative actions that include rulemaking, 

staffing a program office, and collecting and analyzing data. To date, 

Treasury has issued several final and proposed rules to implement TRIA; 

these rules were preceded by four sets of interim guidance issued between 

December 2002 and March 2003 to address time-sensitive requirements. 

As of March 1, 2004, Treasury had issued three final rules that provided 

uniform definitions of TRIA terms, explained disclosure (that is, 

notification to policyholder) requirements, and determined which insurers 

were subject to TRIA. Currently, Treasury is soliciting public comments on 

additional proposed rules addressing claims processes and litigation 

management issues. Also, as of September 2003 Treasury had fully staffed 

the TRIP office. The office develops and oversees the operational aspects 

of TRIA, which encompass claims management—processing, review, and 

payment—and auditing functions. Staff will also oversee operations 

Treasury and Insurers 

Have Made Progress 

in Implementing 

TRIA, although 

Important Work 

Remains 

Treasury Has Issued 

Regulations, Staffed the 

TRIP Office, and Begun 

Studies and Data 

Collection Efforts 
Page 5 

performed by the contractors that actually pay claims and audit insurers 

that have filed claims. Additionally, TRIP staff perform ongoing work such 

as issuing interpretive letters in response to questions submitted by the 

public and educating regulators, industry participants and the public about 

TRIA provisions. 

Treasury completed a TRIA-mandated study on group life insurance and 

has begun other mandated studies and data collection efforts. 

Specifically, TRIA mandated that Treasury provide information to 

Congress in four areas: (1) the effects of terrorism on the availability of 

group life insurance, (2) the effects of terrorism on the availability of life 

and other lines of insurance, (3) annual data on premium rates, and (4) the 

effectiveness of TRIA. After Treasury completed an assessment of the 

availability of group life insurance and reinsurance, it decided not to make 

group life insurance subject to TRIA because it found that insurers had 

continued to provide group life coverage, although the availability of 

reinsurance was reduced.7

 Treasury has not yet reported to Congress the 

results of a mandated study concerning the effects of terrorism on the 

availability of life and other lines of insurance. The study was to have 

been completed by August 2003, but as of March 2004 the report had not 

been issued. Also, in November 2003 and January 2004, Treasury began 

sending surveys to buyers and sellers, respectively, of insurance to collect 

data on annual premium rates as well as other information for the study 

that will assess the effectiveness of TRIA. 

Before TRIA will be fully implemented, Treasury has to make certain 

decisions and make additional TRIP functions operational. As of April 

2004, Treasury had not yet decided whether to extend the “make available” 

requirement to policies issued or renewed in 2005. TRIA gave Treasury 

until September 1, 2004, to decide if the “make available” requirement 

should be extended for policies issued or renewed in 2005, the third and 

final year of the act. Treasury did clarify in a press release that the “make 

available” requirement for annual policies issued or renewed in 2004 

 7

According to life insurance experts, life insurers have continued to sell group life policies 

in order to maintain customer relations that would be difficult to reestablish if the coverage 

were discontinued. Additionally, life insurance experts noted that business from other 

lines of insurance would be lost if insurers were to discontinue group life, which is 

typically sold as part of a package with disability and medical coverage. 

Treasury Has Tasks to 

Complete before TRIA Can 

Be Fully Implemented 
Page 6 

extends until the policy expiration date, even though the coverage period 

extends into 2005. 

In addition, Treasury has not fully established a claims processing and 

payment structure. Treasury has issued a proposed rule that would 

establish an initial framework for the claims process, which includes 

procedural and recordkeeping requirements for insurers. However, the 

actual claims processing and payment function is not fully operational. A 

Treasury official said it has recently hired a contractor that would perform 

payment functions in the aftermath of a terrorist attack, but has not yet 

written regulations to cover the latter stages of the claims process such as 

adjusting over- and underpayments or hired a separate contractor to 

review claims and audit insurers after an event to ensure that underlying 

documents adequately support the claims paid by Treasury. Treasury 

officials anticipate awarding this audit and review contract in the fourth 

quarter of fiscal year 2004. 

Insurers have expressed some concerns about Treasury’s implementation 

of TRIA. Insurers are concerned that Treasury has not already made a 

decision about extending the “make available” requirement through 2005. 

They are also concerned about the potential length of time it may take for 

the Secretary of the Treasury to certify a terrorist event, potential 

inefficiencies and time lags in processing and paying claims once an event 

is certified, and the issue of TRIA expiration. As discussed already, TRIA 

gives Treasury until September 2004 to make a decision about the “make 

available” requirement for policies issued or renewed in 2005. Insurers 

have stated that this deadline does not give them enough time to make 

underwriting decisions and evaluate and possibly revise prices and terms, 

actions they normally would want to undertake in mid-2004. Moreover, in 

most states insurers will have to obtain regulatory approval for such 

changes because TRIA’s preemption of the states’ authority to approve 

insurance policy rates and conditions expired on December 31, 2003. 

Thus, insurers are concerned that delay of Treasury’s announcement on 

the “make available” extension until the legal deadline may cost both 

companies and policyholders money because policy changes will not be 

implemented in time to issue or renew policies. 

Insurers are also concerned that delays in the payment of claims by 

Treasury, whether because of the length of time taken to certify that an act 

of terrorism met the requirements for federal reimbursement or to process 

and pay claims, might seriously impact insurer cash flows or, in certain 

circumstances, solvency. While TRIA does not specify the length of time 

available for determining whether an event meets the criteria for 

Insurers Have Expressed 

Some Concerns Related to 

TRIA’s Implementation 
Page 7 

certification, an NAIC official told us that insurers are bound by law and 

regulations in most states to pay claims in a timely manner. As a result, an 

insurer may have to pay policyholder claims in full while still awaiting a 

certification decision, which could create a cash flow problem for 

insurers. Insurers identified the anthrax letter incidents as an example 

where law enforcement officials still have not identified the source, 

whether foreign or domestic, more than 2 years after the incidents. 

Moreover, if Treasury decided not to certify an event after insurers had 

already paid policyholder claims, some insurers could become insolvent. 

Unless the policyholder had paid for coverage of all terrorist events—

including those caused by domestic terrorists, which would be excluded 

from reimbursement under TRIA—insurers would have paid for losses for 

which they had collected no premium. An NAIC official explained that 

insurers would have no way to recover payments already made to 

policyholders for losses associated with the event other than to seek 

remedies through the courts. Treasury officials have said that they 

understand the difficulties facing insurers but cannot impose a time frame 

on the certification process because it could involve complex fact-finding 

processes. To facilitate the certification process, Treasury has met with 

relevant individuals within the Department of Justice and the Department 

of State to discuss their roles in the certification process. Insurers are 

similarly concerned that the length of time Treasury may take to process 

and pay claims could impact insurers’ cash flow. In response to this 

concern, Treasury has decided to use electronic fund transfers to insurer’s 

accounts to speed reimbursement to insurers with approved claims. 

Treasury expects this method could speed payment of claims and reduce 

potential cash flow problems for insurers. 

Finally, insurance industry officials are worried that uncertainty about the 

extension of TRIA past its stated expiration date of December 2005 would 

impede their business and planning processes. Although TRIA does not 

contain any specific extension provisions, industry participants are 

concerned that a late decision on whether or not to extend TRIA would 

deny them the time needed to tailor business operations and plans to an 

insurance environment that either would or would not contain TRIA. 
Page 8 

While TRIA has improved the availability of terrorism insurance, 

particularly for high-risk properties in major metropolitan areas, most 

commercial policyholders are not buying the coverage. Limited industry 

data suggest that 10–30 percent of commercial policyholders are 

purchasing terrorism insurance, perhaps because most policyholders 

perceive themselves at relatively low risk for a terrorist event. Some 

industry experts are concerned that those most at risk from terrorism are 

generally the ones buying terrorism insurance. In combination with low 

purchase rates, these conditions could result in uninsured losses for those 

businesses without terrorism coverage or cause financial problems for 

insurers, should a terrorist event occur. Moreover, even policyholders who 

have purchased terrorism insurance may remain uninsured for significant 

risks arising from certified terrorist events—that is, those meeting 

statutory criteria for reimbursement under TRIA—such as those involving 

NBC agents or radioactive contamination. Finally, although insurers and 

some reinsurers have cautiously reentered the terrorism risk market, 

insurance industry participants have made little progress toward 

developing a mechanism that could permit the commercial insurance 

market to resume providing terrorism coverage without a government 

backstop. 

TRIA has improved the availability of terrorism insurance, especially for 

some high-risk policyholders. According to insurance and risk 

management experts, these were the policyholders who had difficulty 

finding coverage before TRIA. TRIA requires that insurers “make 

available” coverage for terrorism on terms not differing materially from 

other coverage. Largely because of this requirement, terrorism insurance 

has been widely available, even for development projects in high-risk areas 

of the country. Although industry data on policyholder characteristics are 

limited and cannot be generalized to all policyholders in the United States, 

risk management and real estate representatives generally agree that after 

TRIA was passed, policyholders—including borrowers obtaining 

mortgages for “trophy” properties, owners and developers of high-risk 

properties in major city centers, and those in or near “trophy” properties—

were able to purchase terrorism insurance. 

Additionally, TRIA contributed to better credit ratings for some 

commercial mortgage-backed securities. For example, prior to TRIA’s 

passage, the credit ratings of certain mortgage-backed securities, in which 

the underlying collateral consisted of a single high-risk commercial 

property, were downgraded because the property lacked or had 

inadequate terrorism insurance. The credit ratings for other types of 

Although Available, 

Few Are Buying 

Terrorism Insurance 

and the Industry Has 

Made Little Progress 

Toward Post-TRIA 

Coverage 

TRIA Has Improved the 

Availability of Terrorism 

Insurance, Particularly for 

Some High-Risk 

Policyholders 
Page 9 

mortgage-backed securities, in which the underlying assets were pools of 

many types of commercial properties, were also downgraded but not to 

the same extent because the number and variety of properties in the pool 

diversified their risk of terrorism. Because TRIA made terrorism insurance 

available for the underlying assets, thus reducing the risk of losses from 

terrorist events, it improved the overall credit ratings of mortgage-backed 

securities, particularly single-asset mortgage-backed securities. Credit 

ratings affect investment decisions that revolve around factors such as 

interest rates because higher credit ratings result in lower costs of capital. 

According to an industry expert, investors use credit ratings as guidance 

when evaluating the risk of mortgage-backed securities for investment 

purposes. Higher credit ratings reflect lower credit risks. The typical 

investor response to lower credit risks is to accept lower returns, thereby 

reducing the cost of capital, which translates into lower interest rates for 

the borrower. 

To the extent that the widespread availability of terrorism insurance is a 

result of TRIA’s “make available” requirement, Treasury’s decision on 

whether to extend the requirement to year three of the program is vitally 

important. While TRIA has ensured the availability of terrorism insurance, 

we have little quantitative information on the prices charged for this 

insurance. Treasury is engaged in gathering data through surveys that 

should provide useful information about terrorism insurance prices. TRIA 

requires that they make the information available to Congress upon 

request. In addition, TRIA also requires Treasury to assess the 

effectiveness of the act and evaluate the capacity of the industry to offer 

terrorism insurance after its expiration. This report is to be delivered to 

Congress no later than June 30, 2005. 

Although TRIA improved the availability of terrorism insurance, relatively 

few policyholders have purchased terrorism coverage. We testified 

previously that prior to September 11, 2001, policyholders enjoyed “free” 

coverage for terrorism risks because insurers believed that this risk was so 

low that they provided the coverage without additional premiums as part 

of the policyholder’s general property insurance policy. After September 

11, prices for coverage increased rapidly and, in some cases, insurance 

became very difficult to find at any price. Although a purpose of TRIA is to 

make terrorism insurance available and affordable, the act does not 

specify a price structure. 

However, experts in the insurance industry generally agree that after the 

passage of TRIA, low-risk policyholders (for example, those not in major 

Most Policyholders Have 

Not Bought Terrorism 

Insurance 
Page 10 

urban centers) received relatively low-priced offers for terrorism 

insurance compared to high-risk policyholders, and some policyholders 

received terrorism coverage without additional premium charges.8

 Yet 

according to insurance experts, despite low premiums, many businesses 

(especially those not in “target” localities or industries) did not buy 

terrorism insurance. Some simply may not have perceived themselves at 

risk from terrorist events and considered terrorism insurance, even at low 

premiums (relative to high-risk areas), a bad investment.9

 According to 

insurance sources, other policyholders may have deferred their decision to 

buy terrorism insurance until their policy renewal date. 

Some industry experts have voiced concerns that low purchase rates may 

indicate adverse selection—where those at the most risk from terrorism 

are generally the only ones buying terrorism insurance. Although industry 

surveys are limited in their scope and not appropriate for marketwide 

projections, the surveys are consistent with each other in finding low 

“take-up” rates, the percentage of policyholders buying terrorism 

insurance, ranging from 10 to 30 percent. According to one industry 

survey, the highest take-up rates have occurred in the Northeast, where 

premiums were generally higher than the rest of the country. 

The combination of low take-up rates and high concentration of purchases 

in an area thought to be most at risk raises concerns that, depending on its 

location, a terrorist event could have additional negative effects. 

• If a terrorist event took place in a location not thought to be a terrorist 

“target,” where most businesses had chosen not to purchase terrorism 

insurance, then businesses would receive little funding from insurance 

claims for business recovery efforts, with consequent negative effects 

on owners, employers, suppliers, and customers. 

• Alternatively, if the terrorist event took place in a location deemed to 

be a “target,” where most businesses had purchased terrorism 

insurance, then adverse selection could result in significant financial 

 8

According to industry experts, the insurers that provided “free” terrorism insurance likely 

did so for policies already in place at the time TRIA was enacted and may have deferred 

operational changes and difficult pricing decisions because they lacked the resources to do 

so. 

9

Howard Kunreuther, Erwann Michel-Kerjan, and Beverly Porter, Assessing, Managing 

and Financing Extreme Events: Dealing with Terrorism (National Bureau of Economic 

Research: December 2003), 13. 
Page 11 

problems for insurers. A small customer base of geographically 

concentrated, high-risk policyholders could leave insurers unable to 

cover potential losses, facing possible insolvency. If, however, a higher 

percentage of business owners had chosen to buy the coverage, the 

increased number of policyholders would have reduced the chance that 

losses in any one geographic location would create a significant 

financial problem for an insurer.10

Since September 11, 2001, the insurance industry has moved to tighten 

long-standing exclusions from coverage for losses resulting from NBC 

attacks and radiation contamination. As a result of these exclusions and 

the actions of a growing number of state legislatures to exclude losses 

from fire following a terrorist attack, even those policyholders who choose 

to buy terrorism insurance may be exposed to potentially significant 

losses. Although NBC coverage was generally not available before 

September 11, after that event insurers and reinsurers recognized the 

enormity of potential losses from terrorist events and introduced new 

practices and tightened policy language to further limit as much of their 

loss exposures as possible. (We discuss some of these practices and 

exclusions in more detail in the next section.) State regulators and 

legislatures have approved these exclusions, allowing insurers to restrict 

the terms and conditions of coverage for these perils. Moreover, because 

TRIA’s “make available” requirements state that terms for terrorism 

coverage be similar to those offered for other types of policies, insurers 

may choose to exclude the perils from terrorism coverage just as they 

have in other types of coverage. According to Treasury officials, TRIA 

does not preclude Treasury from providing reimbursement for NBC 

events, if insurers offered this coverage. However, policyholder losses 

from perils excluded from coverage, such as NBCs, would not be “insured 

losses” as defined by TRIA and would not be covered even in the event of 

a certified terrorist attack. 

In an increasing number of states, policyholders may not be able to 

recover losses from fire following a terrorist event if the coverage in those 

states is not purchased as part of the offered terrorism coverage. We have 

previously reported that approximately 30 states had laws requiring 

coverage for “fire-following” an event—known as the standard fire policy 

 10Casualty Actuarial Society, Foundations of Casualty Actuarial Science, 4th ed. (United 

Book Press, Inc.: 2001), 51, 86. 

Tighter Exclusions Leave 

Policyholders Exposed to 

Significant Perils 
Page 12 

(SFP)—irrespective of the fire’s cause. Therefore, in SFP states fire 

following a terrorist event is covered whether there is insurance coverage 

for terrorism or not. After September 11, some legislatures in SFP states 

amended their laws to allow the exclusion of fire following a terrorist 

event from coverage. As of March 1, 2004, 7 of the 30 SFP states had 

amended their laws to allow for the exclusion of acts of terrorism from 

statutory coverage requirements.11 However as discussed previously, the 

“make available” provision requires coverage terms offered for terrorist 

events to be similar to coverage for other events. Treasury officials 

explained that in all non-SFP states, and the seven states with modified 

SFPs, insurers must include in their offer of terrorism insurance coverage 

for fire following a certified terrorist event because coverage for fire is 

part of the property coverage for all other risks. Thus, policyholders who 

have accepted the offer would be covered for fire following a terrorist 

event, even though their state allows exclusion of the coverage. However, 

policyholders who have rejected their offer of coverage for terrorism 

insurance would not be covered for fire following a terrorist event. 

According to insurance experts, losses from fire damage can be a 

relatively large proportion of the total property loss. As a result, excluding 

terrorist events from SFP requirements could result in potentially large 

losses that cannot be recovered if the policyholder did not purchase 

terrorism coverage. For example, following the 1994 Northridge 

earthquake in California, total insured losses for the earthquake were $15 

billion—$12.5 billion of which were for fire damage. According to an 

insurance expert, policyholders were able to recover losses from fire 

damage because California is an SFP state, even though most policies had 

excluded coverage for earthquakes. 

Under TRIA, reinsurers are offering a limited amount of coverage for 

terrorist events for insurers’ remaining exposures, but insurers have not 

been buying much of this reinsurance. According to insurance industry 

sources, TRIA’s ceiling on potential losses has enabled reinsurers to return 

cautiously to the market. That is, reinsurers generally are not offering 

coverage for terrorism risk beyond the limits of the insurer deductibles 

and the 10 percent share that insurers would pay under TRIA (see app. I). 

In spite of reinsurers’ willingness to offer this coverage, company 

representatives have said that many insurers have not purchased 

 11According to the National Association of Mutual Insurance Companies, Louisiana, 

Michigan, Minnesota, Nebraska, New Hampshire, Oklahoma, and Virginia have amended 

their standard fire policies to allow for exclusion of terrorism from statutory fire coverage. 

State legislators in Massachusetts have introduced a similar bill. 

Reinsurers Have 

Cautiously Returned to the 

Market, but Many Insurers 

Have Not Bought 

Reinsurance 
Page 13 

reinsurance. Insurance experts suggested that the low demand for the 

reinsurance might reflect, in part, commercial policyholders’ generally low 

take-up rates for terrorism insurance. Moreover, insurance experts also 

have suggested that insurers may believe that the price of reinsurance is 

too high relative to the premiums they are earning from policyholders for 

terrorism insurance. 

The relatively high prices charged for the limited amounts of terrorism 

reinsurance available are probably the result of interrelated factors. First, 

even before September 11 both insurance and reinsurance markets were 

beginning to harden; that is, prices were beginning to increase after 

several years of lower prices. Reinsurance losses resulting from 

September 11 also depressed reinsurance capacity and accelerated the rise 

in prices.12 The resulting hard market for property-casualty insurance 

affected the price of most lines of insurance and reinsurance. A notable 

example has been the market for medical malpractice insurance.13 The 

hard market is only now showing signs of coming to an end, with a 

resulting stabilization of prices for most lines of insurance. In addition to 

the effects of the hard market, reinsurer awareness of the adverse 

selection that may be occurring in the commercial insurance market could 

be another factor contributing to higher reinsurance prices. Adverse 

selection usually represents a larger-than-expected exposure to loss. 

Reinsurers are likely to react by increasing prices for the terrorism 

coverage that they do sell. 

In spite of the reentry of reinsurers into the terrorism market, insurance 

experts said that without TRIA caps on potential losses, both insurers and 

reinsurers likely still would be unwilling to sell terrorism coverage 

because they have not found a reliable way to price their exposure to 

terrorist losses. According to industry representatives, neither insurers nor 

reinsurers can estimate potential losses from terrorism or determine 

prices for terrorism insurance without a pricing model that can estimate 

both the frequency and the severity of terrorist events. Reinsurance 

experts said that current models of risks for terrorist events do not have 

enough historical data to dependably estimate the frequency or severity of 

terrorist events, and therefore cannot be relied upon for pricing terrorism 

insurance. According to the experts, the models can predict a likely range 

 12Capacity is the amount of reinsurance or insurance that is available for a defined risk. 

13U.S. General Accounting Office, Medical Malpractice Insurance: Multiple Factors Have 

Contributed to Increased Premium Rates, GAO-03-702 (Washington, D.C.: June 27, 2003). 
Page 14 

of insured losses resulting from the damage if specific event parameters 

such as type and size of weapon and location are specified. However, the 

models are unable to predict the probability of such an attack. 

Even as they are charging high prices, reinsurers are covering less. In 

response to the losses of September 11, industry sources have said that 

reinsurers have changed some practices to limit their exposures to acts of 

terrorism. For example, reinsurers have begun monitoring their exposures 

by geographic area, requiring more detailed information from insurers, 

introducing annual aggregate and event limits, excluding large insurable 

values, and requiring stricter measures to safeguard assets and lives where 

risks are high.14 And as discussed previously, almost immediately after 

September 11 reinsurers began broadening NBC exclusions beyond 

scenarios involving industrial accidents, to include events such as nuclear 

plant accidents and chemical spills and encompass intentional destruction 

from terrorists. For example, post-September 11 exclusions for nuclear 

risks include losses from radioactive contamination to property and 

radiation sickness from dirty bombs. 

As of March 1, 2004, industry sources indicated that there has been little 

development or movement among insurers or reinsurers toward 

developing a private-sector mechanism that could provide capacity, 

without government involvement, to absorb losses from terrorist events. 

Industry officials have said that their level of willingness to participate 

more fully in the terrorism insurance market in the future will be 

determined, in part, by whether any more events occur. Industry sources 

could not predict if reinsurers would return to the terrorism insurance 

market after TRIA expires, even after several years and in the absence of 

further major terrorist attacks in the United States. They explained that 

reinsurers are still recovering from the enormous losses of September 11 

and still cannot price terrorism coverage. In the long term and without 

another major terrorist attack, insurance and reinsurance companies 

might eventually return. However, should another major terrorist attack 

take place, reinsurers told us that they would not return to this market—

with or without TRIA. 

 14Christian Brauner and Georges Galey, “Terrorism Risks in Property Insurance and Their 

Insurability after 11 September 2001,” (Swiss Reinsurance Company: 2003), 25. 
Page 15 

Congress had two major objectives in establishing TRIA. The first was to 

ensure that business activity did not suffer from the lack of insurance by 

requiring insurers to continue to provide protection from the financial 

consequences of another terrorist attack. Since TRIA was enacted in 

November 2002, terrorism insurance generally has been widely available 

even for development projects in high-risk areas of the country, in large 

part because of TRIA’s “make available” requirement. Although most 

businesses are not buying coverage, there is little evidence that 

commercial development has suffered to a great extent—even in lowerrisk areas of the county, where purchases of coverage may be lowest. 

Further, although quantifiable evidence is lacking on whether the 

availability of terrorism coverage under TRIA has contributed to the 

economy, the current revival of economic activity suggests that the 

decision of most commercial policyholders to decline terrorism coverage 

has not resulted in widespread, negative economic effects. As a result, the 

first objective of TRIA appears largely to have been achieved. 

Congress’s second objective was to give the insurance industry a 

transitional period during which it could begin pricing terrorism risks and 

developing ways to provide such insurance after TRIA expires. The 

insurance industry has not yet achieved this goal. We observed after 

September 11 the crucial importance of reinsurers for the survival of the 

terrorism insurance market and reported that reinsurers’ inability to price 

terrorism risks was a major factor in their departure from the market. 

Additionally, most industry experts are tentative about predictions of the 

level of reinsurer and insurer participation in the terrorism insurance 

market after TRIA expires. Unfortunately, insurers and reinsurers still 

have not found a reliable method for pricing terrorism insurance, and 

although TRIA has provided reinsurers the opportunity to reenter the 

market to a limited extent, industry participants have not developed a 

mechanism to replace TRIA. As a result, reinsurer and consequently, 

insurer, participation in the terrorism insurance market likely will decline 

significantly after TRIA expires. 

Not only has no private-sector mechanism emerged for supplying 

terrorism insurance after TRIA expires, but to date there also has been 

little discussion of possible alternatives for ensuring the availability and 

affordability of terrorism coverage after TRIA expires. Congress may 

benefit from an informed assessment of possible alternatives—including 

both wholly private alternatives and alternatives that could involve some 

government participation or action. Such an assessment could be a part of 

Treasury’s TRIA-mandated study to “assess...the likely capacity of the 

Conclusions 
Page 16 

property and casualty insurance industry to offer insurance for terrorism 

risk after termination of the Program.” 

As part of the response to the TRIA-mandated study that requires Treasury 

to assess the effectiveness of TRIA and evaluate the capacity of the 

industry to offer terrorism insurance after TRIA expires, we recommend 

that the Secretary of the Treasury, after consulting with the insurance 

industry and other interested parties, identify for Congress an array of 

alternatives that may exist for expanding the availability and affordability 

of terrorism insurance after TRIA expires. These alternatives could assist 

Congress during its deliberations on how best to ensure the availability 

and affordability of terrorism insurance after December 2005. 

Mr. Chairman, this concludes my prepared statement, and I would be 

pleased to respond to any questions that you or other members of the 

Committee may have. 

For further information regarding this testimony please contact Richard J. 

Hillman, Director, or Lawrence D. Cluff, Assistant Director, Financial 

Markets and Community Investment, (202) 512-8678. Individuals making 

key contributions to this testimony include Rachel DeMarcus, Barry Kirby, 

Tarek Mahmassani, Angela Pun, and Barbara Roesmann. 

Recommendation for 

Executive Action 

Contacts and 

Acknowledgments 
Page 17 

Under TRIA, Treasury is responsible for reimbursing insurers for a portion 

of terrorism losses under certain conditions. Payments are triggered when 

(1) the Secretary of the Treasury certifies that terrorists acting on behalf of 

foreign interests have carried out an act of terrorism and (2) aggregate 

insured losses for commercial property and casualty damages exceed 

$5,000,000 for a single event.1 TRIA specifies that an insurer is responsible 

(that is, will not be reimbursed) for the first dollars of its insured losses—

its deductible amount. TRIA sets the deductible amount for each insurer 

equal to a percentage of its direct earned premiums for the previous year.2

Beyond the deductible, insurers also are responsible for paying a 

percentage of insured losses. Specifically, TRIA structures pay-out 

provisions so that the federal government shares the payment of insured 

losses with insurers at a 9:1 ratio—the federal government pays 90 percent 

of insured losses and insurers pay 10 percent—until aggregate insured 

losses from all insurers reach $100 billion in a calendar year (see fig. 1). 

Thus, under TRIA’s formula for sharing losses, insurers are reimbursed for 

portions of the claims they have paid to policyholders. Furthermore, TRIA 

then releases insurers who have paid their deductibles from any further 

liability for losses that exceed aggregate insured losses of $100 billion in 

any one year. Congress is charged with determining how losses in excess 

of $100 billion will be paid. 

 1

Aggregate insured losses are the sum of insured property and casualty losses from all 

commercial policyholders that result from a certified act of terrorism. 

2

Section 102(4) of TRIA defines direct earned premiums as “a direct earned premium for 

property and casualty insurance issued by any insurer for insurance against losses ...” 

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 percentage of the direct earned premium allowed as an insurer deductible 

varies over the program years: 7 percent in 2003, 10 percent in 2004, and 15 percent in 2005. 

Appendix I: TRIA Background 
Page 18 

Figure 1: Prerequisites for and Limits of Coverage Under TRIA 

a

The percentage of direct earned premiums increases each year: 7 percent in 2003, 10 percent in 

2004, and 15 percent in 2005. 

TRIA also contains provisions and a formula requiring Treasury to recoup 

part of the federal share if the aggregate sum of all insurers’ deductibles 

and 10 percent share is less than the amount prescribed in the act—the 

“insurance marketplace aggregate retention amount.” TRIA also gives the 

Secretary of the Treasury discretion to recoup more of the federal 

payment if deemed appropriate.3

 Commercial property-casualty 

policyholders would pay for the recoupment through a surcharge on 

 3

According to Treasury officials, the formula for the mandatory portion of the recoupment 

is intended to ensure that the insurance industry is financially responsible for a prescribed 

level of the first dollars of losses. The prescribed loss levels are as follows: $10 billion in 

2003, $12.5 billion in 2004, and $15 billion in 2005. Therefore, if the sum of insurers’ 

aggregate payments for deductibles and the 10 percent share—the amounts paid by 

industry—is less than the level prescribed for that year, then a recoupment would be 

required to collect the difference. On the other hand, if the amounts paid by industry 

exceed the prescribed level, then a recoupment would not be needed. 

0

$100B "Cap"

Criteria for TRIP payments

10% 90%

Event occurs

Secretary of Treasury

certifies the event as an

act of foreign terrorism

Aggregate insured losses

for commercial property

and casualty damages

exceed $5,000,000

Losses from an event

$5M

Percent of insurers' direct earned premiumsa

Payment responsibilities

Federal government reimbursement to insurers

Insurer payments to policyholders

(not federally reimbursed)

Source: GAO analysis of Terrorism Risk Insurance Act of 2002.
Page 19 

premiums for all the property-casualty policies in force after Treasury 

established the surcharge amount; the insurers would collect the 

surcharge. TRIA limits the surcharge to a maximum of 3 percent of annual 

premiums, to be assessed for as many years as necessary to recoup the 

mandatory amount. TRIA also gives the Secretary of the Treasury 

discretion to reduce the annual surcharge in consideration of various 

factors such as the economic impact on urban centers. However, if 

Treasury makes such adjustments, it has to extend the surcharges for 

additional years to collect the remainder of the recoupment. 

Treasury is funding the Terrorism Risk Insurance Program (TRIP) office 

—through which it administers TRIA provisions and would pay claims—

with “no-year money” under a TRIA provision that gives Treasury 

authority to utilize funds necessary to set up and run the program.4

 The 

TRIP office had a budget of $8.97 million for fiscal year 2003 (of which 

TRIP spent $4 million), $9 million for fiscal year 2004, and a projected 

budget of $10.56 million for fiscal year 2005—a total of $28.53 million over 

3 years. The funding levels incorporate the estimated costs of running a 

claims-processing operation in the aftermath of a terrorist event: $5 

million in fiscal years 2003 and 2004 and $6.5 million in fiscal year 2005, 

representing about 55–60 percent of the budget for each fiscal year. If no 

certified terrorist event occurrs, the claims-processing function would be 

maintained at a standby level, reducing the projected costs to $1.2 million 

annually, or about 23 percent of the office’s budget in each fiscal year. Any 

funds ultimately used to pay the federal share after a certified terrorist 

event would be in addition to these budgeted amounts. 

 4

“No-year money” is budget authority that remains available for obligation until expended, 

usually until the objectives for which the authority was made available are attained. 

(250201) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs