TERRORISM 

INSURANCE

Treasury Needs to 

Collect and Analyze 

Data to Better 

Understand Fiscal 

Exposure and Clarify 

Guidance

Report to Congressional Requesters

May 2014

GAO-14-445

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-445, a report to 

congressional requesters

May 2014

TERRORISM INSURANCE

Treasury Needs to Collect and Analyze Data to Better

Understand Fiscal Exposure and Clarify Guidance

Why GAO Did This Study

Congress passed TRIA in 2002 to help 

ensure the availability and affordability 

of terrorism insurance for commercial 

property and casualty policyholders 

after the September 11, 2001, terrorist 

attacks. TRIA was amended and 

extended twice and currently will expire 

at the end of 2014. Under TRIA, 

Treasury administers a program in 

which the federal government and 

private sector share losses on 

commercial property and casualty 

policies resulting from a terrorist attack. 

Because the federal government will 

cover a portion of insured losses, the 

program creates fiscal exposures for 

the government. GAO was asked to 

review TRIA. 

This report evaluates (1) the extent of 

available data on terrorism insurance

and Treasury’s efforts in determining 

federal exposure, (2) changes in the 

terrorism insurance market since 2002, 

and (3) potential impacts of selected 

changes to TRIA. To address these 

objectives, GAO analyzed insurance 

data, information from 15 insurers

selected primarily based on size of 

insurer, interviewed Treasury staff and 

industry participants, updated prior 

work, and developed examples to 

illustrate potential fiscal exposure 

under TRIA.

What GAO Recommends

Treasury should collect and analyze 

data on the terrorism insurance market 

to assess the market, estimate fiscal 

exposure under different scenarios, 

and analyze the impacts of changing 

program parameters. Treasury agreed 

with these recommendations. 

What GAO Found

Comprehensive data on the terrorism insurance market are not readily available

and Department of the Treasury (Treasury) analysis to better understand federal

fiscal exposure under various scenarios of terrorist attacks has been limited. 

Treasury compiled some market data from industry sources, but the data are not 

comprehensive. Federal internal control standards state that agencies should 

obtain needed data and analyze risks, and industry best practices indicate that 

analysis of the location and amount of coverage helps understand financial risks. 

However, without more data and analysis, Treasury lacks the information needed

to help ensure the goals of the Terrorism Risk Insurance Act (TRIA) of ensuring 

the availability and affordability of terrorism risk insurance and addressing market 

disruptions are being met and to better understand potential federal spending

under different scenarios.

Available data show that terrorism insurance premiums and other market 

indicators are stable. For example, estimated terrorism insurance premiums have 

been relatively constant since 2010 (see figure). Insurers told GAO that, in 2012,

terrorism insurance premiums made up on average less than 2 percent of 

commercial property and casualty premiums. According to industry participants,

prices for terrorism coverage have declined, the percentage of businesses 

buying coverage seems to have leveled recently, and insurers’ ability to provide it 

has remained constant.

Estimated Terrorism Insurance Premiums by Total and Selected Insurance Lines, 2004-2012 

Insurers and other industry participants cited concerns about the availability and 

price of terrorism coverage if TRIA expired or was changed substantially, but 

some changes could reduce federal fiscal exposure. Some insurers GAO 

contacted said they would stop covering terrorism if TRIA expired. Changes such 

as increasing the deductible or threshold for required recoupment of the 

government’s share of losses through surcharges on all commercial

policyholders could reduce federal fiscal exposure. Most insurers GAO contacted 

expressed concerns about solvency and ability to provide coverage if their

deductible or share of losses increased. Insurers were less concerned about 

increases to the thresholds for government coverage to begin or to the required 

recoupment of the government’s share of losses.

View GAO-14-445. For more information, 

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

or garciadiazd@gao.gov.
Page i GAO-14-445 Terrorism Insurance

Letter 1

Background 4

Comprehensive Data on Terrorism Insurance Are Not Readily 

Available and Treasury’s Analysis to Better Understand Fiscal 

Exposure Has Been Limited 12

Insurance Market for Terrorism Risk Has Stabilized 20

TRIA Expiration or Modification Could Affect Availability of 

Terrorism Coverage and Federal Fiscal Exposure, but 

Additional Clarification of Covered Risks Is Needed 39

Conclusions 56

Recommendations for Executive Action 57

Agency Comments and Our Evaluation 57

Appendix I Objectives, Scope, and Methodology 60

Appendix II Comments from the Department of the Treasury 66

Appendix III GAO Contact and Staff Acknowledgments 69

Tables

Table 1: Terrorism Risk Insurance Act Eligible Insurance Lines 5

Table 2: Selected Coverage Provisions in Terrorism Risk 

Insurance Act and Its Reauthorizations 9

Table 3: Estimated Number of Insurers and Percentage of 

Premiums, 2012 24

Figures

Figure 1: Initial Loss-Sharing under Terrorism Risk Insurance Act 7

Figure 2: Terrorism Risk Insurance Program Spending History, 

2003-2013 10

Figure 3: Estimated Terrorism Insurance Premiums by Total and 

Selected Insurance Lines, 2004–2012 22

Figure 4: Terrorism Insurance Pricing, 2003–2013 (Median Rates 

per Million Dollars of Coverage) 27

Contents
Page ii GAO-14-445 Terrorism Insurance

Figure 5: Terrorism Insurance as a Percentage of Overall Property 

Premiums, 2003–2013 29

Figure 6: Terrorism Insurance Take-Up Rates, 2003–2013 31

Figure 7: Comparison of Terrorism Insurance Premiums and 

Take-up Rates, 2004–2012 33

Figure 8: Terrorism Risk Insurance Act Deductible as a 

Percentage of Estimated Surplus, 2003–2012 45

Figure 9: Potential Impacts of Increases to the Industry Aggregate 

Retention Amount and Insurers’ Deductible and Coshare 

Related to the Terrorism Risk Insurance Act 48

Figure 10: Examples of Reductions in Estimated Fiscal Exposure 

by Increasing Program Parameters, $50 Billion 

Terrorism-Related Insured Loss Event 49

Figure 11: Examples of Reductions in Estimated Fiscal Exposure 

by Increasing Program Parameters, $75 Billion 

Terrorism-Related Insured Loss Event 50

Abbreviations

ISO Insurance Services Office, Inc.

NAIC National Association of Insurance Commissioners

NBCR nuclear, biological, chemical, or radiological weapons

PWG President’s Working Group on Financial Markets

TRIA Terrorism Risk Insurance Act

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Page 1 GAO-14-445 Terrorism Insurance

441 G St. N.W.

Washington, DC 20548

May 22, 2014

The Honorable Randy Neugebauer

Chairman

Subcommittee on Housing and Insurance

Committee on Financial Services

House of Representatives

The Honorable Ed Royce

Chairman

Committee on Foreign Affairs

House of Representatives

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

total insured losses of roughly $43 billion (2013 dollars), drastically 

changed the way insurers viewed the risk of terrorism.1 Insurers must be 

able to predict the frequency and severity of insured losses with some 

reliability to best manage financial risk. Unpredictable and infrequent 

events, such as terrorist attacks, can cause severe losses that 

substantially deplete insurers’ capital. If a company determines that the 

risk of loss is unacceptably high relative to the premiums it can charge, 

the company may cease offering coverage. This was the case after 

September 11, 2001, when insurers generally stopped covering terrorism 

risk.

In November 2002, Congress enacted the Terrorism Risk Insurance Act 

of 2002 (TRIA) to help ensure the continued availability and affordability 

of commercial property and casualty insurance for terrorism risk and 

address concerns that the lack of terrorism insurance could have 

significant effects on the economy.2 TRIA requires the Department of the 

Treasury (Treasury) to administer a program in which the government 

would share some of the losses with private insurers in the event of a 

 1

Insurance Information Institute, (accessed on March 4, 2014) 

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

2

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

2007, see Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-144, 119 Stat. 

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

No. 110-160, 121 Stat. 1839 (2007). In this report, we collectively refer to the original act 

and its reauthorizations as TRIA.
Page 2 GAO-14-445 Terrorism Insurance

certified act of terrorism.3 In addition to requiring insurers to make 

terrorism coverage available to commercial policyholders, the program 

creates a public-private loss-sharing mechanism—through which private 

insurers pay deductibles and copayments (or coshares) in the event of a 

terrorist attack and the government shares a portion of the losses.4 The 

amount of government loss sharing depends on the size of the insured 

loss. The program was intended to be temporary (3 years), but was 

extended and modified twice––in 2005 and 2007––and expires on 

December 31, 2014. As of May 2014, no certified acts of terrorism had 

occurred to trigger the program. As a result, the program has not received 

any claims from insurers and made no payments.

Recently, policymakers and insurance industry experts have debated the 

role of the federal government in supporting insurance coverage for acts 

of terrorism. Some have raised questions about whether the program 

hinders the development of the private market and continues to expose 

the government (and thus taxpayers) to insurance losses on private 

property. Others in the insurance sector have stated that insurers would 

be unwilling to cover terrorism risk without the government program in 

place. In addition, some have indicated that because of recoupment the 

program was designed to be budget neutral under most circumstances 

(with the exception of very high insured losses that may result from a 

large-scale attack). Finally, recent congressional hearings focused on 

possible changes to the current program and debated the appropriate 

time frame of any potential reauthorization.

You asked us to review the program and market for terrorism risk 

insurance. This report (1) evaluates the extent of available data and 

Treasury’s efforts in determining the government’s exposure, (2) 

describes changes in the terrorism insurance market since 2002, and (3) 

evaluates potential impacts of selected changes to TRIA.

 3

TRIA states 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.

4

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

life and health. Property and casualty insurance is further divided into personal and 

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

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

liability, and workers’ compensation. TRIA solely applies to commercial property and 

casualty lines of insurance.
Page 3 GAO-14-445 Terrorism Insurance

To address these objectives, we obtained information and interviewed 

representatives from Treasury and the National Association of Insurance 

Commissioners (NAIC).5 We reviewed applicable laws, regulations, and

information about loss sharing created by the program and any 

corresponding government recoupment. Additionally, we obtained and 

reviewed available data on premiums, capacity, pricing, and take-up rates 

(the percentage of businesses buying terrorism coverage) from 2003 

through 2013 from insurance brokers Marsh and McLennan Companies, 

Inc. (Marsh) and Aon plc, the largest insurance brokers in the United 

States, and A.M. Best, an insurance rating agency. We interviewed 

representatives from Marsh, Aon, and A.M. Best about their data 

collection methods and reviewed related documentation to help ensure 

we had a clear understanding of their data and any limitations. The data 

from these sources, although not containing information from all insurers 

that provide terrorism coverage, capture a large portion of this segment of 

the insurance market. We found the data from these sources are the best 

available and are sufficiently reliable for our purposes.

We also obtained information as part of a questionnaire we sent to 15 

insurance companies (insurers), all of which had businesses purchase 

terrorism coverage from them in 2012. The 15 companies are not 

representative of the entire market, but represented a major portion––

roughly 40 percent of the commercial property and casualty market by 

direct earned premium volume for 2012, according to SNL Financial 

data.6 Through the questionnaire and follow-up interviews, we obtained 

proprietary data from the insurers about their terrorism coverage, 

premium volume, and underwriting decisions. Additionally, we obtained 

their views on potential modifications to TRIA and how any modifications 

would affect the market. For the purposes of this report, we aggregated 

and summarized responses from these insurers. Their responses may or 

may not be representative of all insurers in the property and casualty 

market, but their experiences and views offer insights directly into this 

group of insurers. We also interviewed industry participants about 

terrorism insurance, such as representatives from insurance trade 

associations, terrorism risk modeling firms, rating agencies, and 

 5

NAIC is a voluntary association of the heads of insurance departments from the 50 

states, District of Columbia, and five territories.

6

SNL Financial, through a partnership with NAIC, provides comprehensive statutory 

financial data for the insurance industry.
Page 4 GAO-14-445 Terrorism Insurance

insurance brokers.7 Finally, we developed illustrative examples to help 

demonstrate estimated changes in the magnitude of fiscal exposure 

under different, hypothetical parameters for the terrorism risk insurance 

program. To develop these examples, we consulted with experts from 

terrorism risk modeling firms, reviewed relevant literature, and made 

several assumptions. The illustrative examples are not specific 

determinations of federal fiscal exposure under TRIA. Appendix I of this 

report contains more detailed information about our objectives, scope,

and methodology.

We conducted this performance audit from July 2013 to May 2014 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.

From an insurance standpoint, measuring and predicting terrorism risk is 

challenging. According to standard insurance theory, four major principles 

contribute to the ability of insurers to estimate and cover future losses: the 

law of large numbers, measurability, fortuity, and the size of the potential 

losses.8 When determining whether to offer coverage for a particular risk 

and at what price, insurers evaluate whether sufficient information exists 

about each of these principles. To underwrite insurance—that is, decide 

whether to offer coverage and what price to charge—insurers consider

both the likelihood of an event (frequency) and the amount of damage it 

would cause (severity). As we have reported, measuring and predicting 

losses associated with terrorism risks can be particularly challenging for 

reasons including lack of experience with similar attacks, difficulty in 

 7

For the purposes of this report, “industry participants” refers to those entities with a role in 

the insurance industry.

8

Emmett J. Vaughan and Therese Vaughan, Fundamentals of Risk and Insurance, 9th ed. 

(Hoboken, NJ: John Wiley and Sons, 2003). Specifically, (1) there must be a sufficiently 

large number of homogeneous units exposed to random losses to make future losses 

reasonably predictable; (2) the loss must be definite and measurable; (3) the loss must be 

accidental, or resulting from chance; and (4) the loss must not be catastrophic; that is, it 

must not affect a very large percentage of an insurance company’s policyholders at the 

same time or be extraordinarily large relative to the exposure.

Background
Page 5 GAO-14-445 Terrorism Insurance

predicting terrorists’ intentions, and the potentially catastrophic losses that 

could result from terrorist attacks.

9 Increasingly, insurers use 

sophisticated modeling tools to assess terrorism risk, but there have been 

very few terrorist attacks, so there are little data on which to base 

estimates of future losses, in terms of frequency or severity, or both.10

When Congress passed TRIA in 2002, its purposes included making 

terrorism insurance widely available and affordable for businesses. As 

required by TRIA, insurers must make terrorism coverage available to 

commercial policyholders, although commercial policyholders are not 

required to buy it. As shown in table 1, many lines of commercial property 

and casualty insurance are eligible for TRIA, but the legislation 

specifically excludes certain lines. For example, the law excludes 

personal property and casualty insurance, as well as health and life 

insurance.

Table 1: Terrorism Risk Insurance Act Eligible Insurance Lines

Insurance line Description

Aircraft (all perils) Covers aircraft hulls, contents, and owners’ and manufacturers’ liability to passengers, 

airports, and third parties.

Allied lines Property insurance usually bought in conjunction with fire insurance; it includes wind, 

water damage, explosion, riot, vandalism and other coverage, and business interruption.

Boiler and machinery Insurance for the malfunction or breakdown of boilers, machinery, and electrical 

equipment, and associated business interruption.

Commercial multiperil (liability and 

nonliability)

Package policy for the entire commercial enterprise that includes various risk exposures, 

frequently including fire, allied lines, and business interruption. It can be purchased with 

or without liability portion.

Fire Coverage protecting property against damage from losses caused by a fire or lightning 

and loss of use (that is, business interruption).

Inland marine Coverage for shipments that do not involve ocean transport. Covers articles in transit by 

all forms of land and air transportation as well as bridges, tunnels, and other means of 

transportation and communication.

Ocean marine Coverage of all types of vessels and watercraft, for property damage to the vessel and 

cargo, business interruption, and for marine-related liabilities.

 9

GAO, Terrorism Insurance: Measuring and Predicting Losses from Unconventional 

Weapons Is Difficult, but Some Industry Exposure Exists, GAO-06-1081 (Washington, 

D.C.: Sept. 25, 2006).

10Insurance Information Institute, Terrorism Risk and Insurance, August 2013.
Page 6 GAO-14-445 Terrorism Insurance

Insurance line Description

Other liability Covers the policyholder against liability resulting from negligence, carelessness, or 

failure to act that causes property damage and personal injury to others.

Products liability Protects manufacturers’ and distributors’ exposure to lawsuits from a defective condition 

causing bodily injury or property damage through the use of the product.

Workers’ compensation Covers an employer’s liability for medical care and physical rehabilitation of injured 

workers and helps to replace lost wages while they are unable to work. State laws, which 

vary significantly, govern the amount of benefits paid and other compensation provisions.

Sources: Code of Federal Regulations (31 C.F.R. § 50.5(u)) and GAO analysis of Treasury information.

TRIA requires an insurer to make terrorism coverage available to its 

policyholders for insured losses that does not differ materially from the 

terms, amounts, and other coverage limitations applicable to losses 

arising from events other than acts of terrorism. For example, an insurer 

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

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

Insurers can charge a separate premium to cover terrorism risk, although 

some include the price in their base rates for all-risk policies.11

Under the current program, Treasury would reimburse insurers for a 

share of losses associated with certain certified acts of foreign or 

domestic terrorism. A single terrorist act must cause at least $5 million in 

insured losses to be certified; separately, the aggregate industry insured 

loss from certified acts must be at least $100 million for government 

coverage to begin (program trigger). If an event were to be certified as an 

act of terrorism and the insured losses exceed the program trigger, then 

an individual insurer that experienced losses would pay a deductible of 20 

percent of its previous year’s direct earned premiums in TRIA-eligible 

lines (insurer deductible). After the insurer pays its deductible, the federal 

government would reimburse the insurer for 85 percent of its losses and 

the insurer would be responsible for the remaining 15 percent (coshare). 

Annual coverage for losses is limited––aggregate industry insured losses 

in excess of $100 billion are not covered by private insurers or the federal 

government (cap). See figure 1 for an illustration of these program 

parameters.

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

coverage of terrorism risks. After September 11, insurers started including substantial 

charges to cover terrorism risk, or, excluded the coverage (with the exception of workers’

compensation––states require that workers’ compensation insurance cover terrorism and 

do not permit exclusions).

Public-Private Loss 

Sharing under TRIA
Page 7 GAO-14-445 Terrorism Insurance

Figure 1: Initial Loss-Sharing under the Terrorism Risk Insurance Act

Note: The insurer deductible is a jagged line because only those insurers that experience losses 

would pay a deductible and as a result, the amount would vary depending on the number of affected 

insurers.

The amount of federal loss-sharing varies with the amount of industry 

insured losses, as the following shows:

• In general, for an event with insured losses of less than $100 million, 

private industry covers the entire loss and the federal government 

faces no responsibility to cover losses.

• In general, for an event with insured losses from $100 million to $100 

billion private industry and the federal government initially share the 

losses, but TRIA includes a provision for mandatory recoupment of 

the federal share of losses when private industry’s uncompensated 

insured losses are less than $27.5 billion. Treasury must impose 

policyholder premium surcharges on all property and casualty 

insurance policies until total industry payments reached the 

mandatory recoupment amount or the government is fully repaid, 
Page 8 GAO-14-445 Terrorism Insurance

whichever comes first.12 The mandatory recoupment amount is the 

difference between $27.5 billion and the aggregate amount of 

insurers’ uncompensated insured losses. This industry aggregate 

retention amount was set in the 2005 reauthorization for the year 

2007 at $27.5 billion and extended as applicable for all future years 

under the program by the 2007 reauthorization.13 When the amount of 

federal assistance exceeds any mandatory recoupment amount, TRIA 

also allows for discretionary recoupment, if Treasury determines 

additional amounts should be recouped. Under TRIA, any 

discretionary recoupment would be based on the ultimate cost to 

taxpayers, the economic conditions in the marketplace, the 

affordability of insurance for small and medium-sized businesses, and 

any other factors Treasury considered appropriate.

As initially enacted, one of the purposes of TRIA was to provide a 

transitional period in which the insurance market could determine how to 

model and price terrorism risk. Congress reauthorized TRIA twice––in 

2005 and 2007. As shown in table 2, the reauthorizations changed 

several aspects of the terrorism risk insurance program, including the 

insurer deductible, lines of insurance covered, and types of terrorist acts 

covered (added domestic terrorism). TRIA covers insured losses resulting 

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

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

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

radiological weapons (NBCR) or from cyber terrorism.14

 12The federal government will collect an amount equal to 133 percent of the mandatory 

recoupment amount.

13The industry aggregate retention amount is the lesser of $27.5 billion or the aggregate 

amount for all insurers of insured losses due to acts of terror during the calendar year. 

Throughout the report, the $27.5 billion figure is utilized to encompass the industry 

aggregate retention definition.

14GAO, Terrorism Insurance: Status of Coverage Availability for Attacks Involving Nuclear, 

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

2008).
Page 9 GAO-14-445 Terrorism Insurance

Table 2: Selected Coverage Provisions in the Terrorism Risk Insurance Act and Its Reauthorizations 

Terrorism Risk Insurance 

Act of 2002 (Pub. L. No. 107-

297)

Terrorism Risk Insurance 

Extension Act of 2005 (Pub. L. 

No. 109-144)

Terrorism Risk Insurance 

Program Reauthorization Act of 

2007 (Pub. L. No. 110-160)

Program trigger $5 milliona $50 million (2006) 

$100 million (2007)

$100 million

Insurer deductible 7% (2003) 

10% (2004) 

15% (2005)

17.5% (2006) 

20% (2007)

20%

Coshare Insurers 10% 

Government 90%

Insurers 10% 

Government 90% (2006)

Insurers 15% 

Government 85% (2007)

Insurers 15% 

Government 85%

Terrorist acts covered Foreign Foreign Foreign and domestic 

Examples of commercial 

property and casualty 

insurance lines excluded

Crop, private mortgage, and 

life insurance

Crop, private mortgage, and life 

insurance, commercial automobile, 

burglary and theft, and professional 

liability

Crop, private mortgage, and life 

insurance, commercial automobile, 

burglary and theft, and 

professional liability

Source: GAO.

a

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

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

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

TRIA authorizes Treasury to administer the Terrorism Insurance Program. 

Specifically, the Terrorism Risk Insurance Program Office within 

Treasury’s Office of Domestic Finance administers the program and 

manages day-to-day operations, with oversight and assistance from the 

Federal Insurance Office, according to Treasury officials.15 In 2004, 

Treasury issued regulations to implement TRIA’s procedures for filing 

claims for payment of the federal share of compensation for insured 

losses.16 Upon certification of an act of terrorism, Treasury will activate a 

web-based facility for receiving claims from insurers and responding to 

 15Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act, 

Treasury’s Federal Insurance Office monitors the insurance sector and advises on 

important national and international insurance matters. According to Treasury officials, as 

of June 2011, the Federal Insurance Office started assisting the Treasury Secretary in 

administering the Terrorism Risk Insurance Program.

16Treasury issued the majority of the regulations for TRIA’s implementation in 2003.

Program Administration 

and Reporting 

Requirements
Page 10 GAO-14-445 Terrorism Insurance

insurers that seek assistance. According to Treasury, currently five staff 

work directly on the program and the program is assisted by others in 

Treasury. Staff responsibilities include managing contractors in place to 

process claims in the event of an attack and making any necessary 

changes to program regulations. According to Treasury, the spending for 

this program has generally declined since 2003 (see fig. 2).

Figure 2: Terrorism Risk Insurance Program Spending History, 2003-2013

TRIA mandates various studies and data compilation efforts. For 

example, TRIA requires GAO, Treasury, and the President’s Working 

Group on Financial Markets (PWG) to complete various studies related to 

terrorism risk insurance.17 We have completed and submitted to Congress 

 17PWG comprises the Secretary of the Treasury and the Chairs of the Board of Governors 

of the Federal Reserve System, Securities and Exchange Commission, and the

Commodity Futures Trading Commission (or their respective designees). The Secretary of 

the Treasury (or a designee) serves as PWG chair.
Page 11 GAO-14-445 Terrorism Insurance

several mandated studies on TRIA.18 Treasury completed an assessment

of the program and submitted a report to Congress in 2005.19 PWG must 

periodically report on terrorism market conditions (in 2006, 2010, and 

2013).20 TRIA also requires Treasury to annually compile information on 

the terrorism risk insurance premium rates of insurers for the preceding 

year. In the event that information is not otherwise available to Treasury, 

Treasury may require each insurer to submit that information to NAIC. We 

discuss data compilation requirements in more detail later in this report.

Insurance in the United States is primarily regulated at the state level.21

The insurance regulators of the 50 states, the District of Columbia, and 

the U.S. territories created and govern NAIC, which is the standardsetting and regulatory support organization for the U.S. insurance 

industry. Through NAIC, state insurance regulators establish standards 

and best practices, conduct peer review, and coordinate their regulatory 

oversight. According to NAIC, insurers set the rates for terrorism 

coverage, and state law requires insurers to file those rates (and to file 

insurance forms) with state regulators. Generally state insurance 

regulators receive information from insurers regarding the products the 

 18GAO, Terrorism Insurance: Status of Coverage Availability for Attacks Involving Nuclear, 

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

2008); Terrorism Insurance: Status of Efforts by Policyholders to Obtain Coverage, 

GAO-08-1057 (Washington, D.C.: Sept. 15, 2008); and Terrorism Insurance: 

Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-307 (Washington, 

D.C.: Apr. 23, 2004).

19Department of the Treasury, Assessment: The Terrorism Risk Insurance Act of 2002

(Washington, D.C.: June 30, 2005).

20See President’s Working Group on Financial Markets, Terrorism Risk Insurance

(Washington, D.C.: September 2006); Market Conditions for Terrorism Risk Insurance

(Washington, D.C.: 2010); and The Long-Term Availability and Affordability of Insurance 

for Terrorism Risk (Washington, D.C.: April 2014).

21The federal government retains the authority to regulate insurance, but has given 

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

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

as amended at 15 U.S.C. §§ 1011-1015. See also GAO, Ultimate Effects of McCarranFerguson Federal Antitrust Exemption on Insurer Activity Are Unclear, GAO-05-816R

(Washington, D.C.: July 28, 2005). Nevertheless, the federal government is involved in 

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

Insurance Program, and crop and terrorism insurance programs. In addition, the Board of 

Governors of the Federal Reserve System supervises insurers designated by the 

Financial Stability Oversight Council.

State Regulation of 

Insurance
Page 12 GAO-14-445 Terrorism Insurance

insurers plan to sell in the state. States vary with regard to timing and 

depth of the reviews of the insurers’ rates and contractual language. 

Many state laws have filing and/or review exemptions that apply to large 

commercial policyholders. For exempt commercial policyholders, state 

insurance regulators perform neither rate nor form reviews because it is 

presumed that these large businesses have a better understanding of 

insurance contracts and pricing than the average personal-lines 

consumer and as such, are able to effectively negotiate price and contract 

terms with the insurers.

Comprehensive data on the terrorism risk insurance market are not 

readily available. In general, individual insurers maintain data on the 

terrorism coverage they underwrite. While Treasury has obtained some 

market data from industry sources, those data are limited because they 

do not include information from the entire industry. Federal internal 

control standards state that agencies should identify and obtain relevant 

and needed data to be able to meet program goals. TRIA requires 

Treasury to annually compile information on the terrorism risk insurance 

premium rates of insurers, and if the information is not available permits 

Treasury to require insurers to submit that information to NAIC, but 

Treasury has not taken either action. Without comprehensive market 

data, including the number of insurers in the market and whether 

differences exist in pricing or take-up rates, Treasury may not have a full 

understanding of the terrorism risk insurance market and be unable to 

assess whether TRIA’s program goals of helping to ensure the continued 

widespread availability and affordability of terrorism risk insurance and 

addressing market disruptions are being met. Furthermore, Treasury has 

conducted limited analysis of the federal government’s fiscal exposure

under different scenarios of potential terrorist attacks. Analyzing such 

risks is a federal internal control standard and insurance industry best 

practice. Without additional analyses, Treasury does not have enough 

information to help understand the potential magnitude of federal fiscal 

exposure in the event of a certified terrorist attack, and will not be in the 

position to provide Congress with analysis to inform decisions about 

reauthorization, including any changes that would limit exposure.

Comprehensive Data 

on Terrorism 

Insurance Are Not 

Readily Available and 

Treasury’s Analysis to 

Better Understand 

Fiscal Exposure Has 

Been Limited
Page 13 GAO-14-445 Terrorism Insurance

Comprehensive market data on terrorism insurance, including premiums 

and the number of insurers underwriting terrorism risk, are not readily 

available.22 In general, individual insurers maintain data on the terrorism 

coverage they underwrite, including data on the percentage of policies 

with terrorism coverage and premiums for such coverage. However, 

these data are proprietary and are not publicly available. Further, NAIC 

manages an electronic system that many insurance companies use to file 

premium rates and policy language with state regulators for approval. But 

NAIC officials stated that they generally cannot extract terrorism coverage 

information from it, such as the number of insurers providing such 

coverage or the prices charged.23 Moreover, using the property and 

casualty information NAIC collects likely would overestimate any numbers 

on terrorism insurance because not all policies provide terrorism 

coverage. NAIC officials told us that obtaining a complete view of the 

terrorism insurance market would require reviewing insurers’ filings with 

each state.

Many insurance industry organizations are important sources of data on 

the terrorism insurance market, but data from these sources are also 

limited in some respects. For example, although A.M. Best, an insurancerating and information organization, and the Insurance Services Office, 

Inc. (ISO), an advisory organization and data and analytics provider, 

collect premium information from their clients, these data are not publicly 

 22For purposes of this report, market data also refer to take-up rates (percentage of 

businesses buying coverage), information on policyholder surplus, industrywide capacity, 

insurers with NBCR exposures, and insurers purchasing reinsurance for terrorism risks.

23According to NAIC representatives, the NAIC has license agreements with the states, 

and would, therefore, need permission from those states that use the system to access 

filing information.

Terrorism Insurance Data 

Available from Industry 

Sources Are Limited
Page 14 GAO-14-445 Terrorism Insurance

available and may not be representative of the entire industry.24 Insurance 

brokers also compile market data such as pricing, take-up rates, and 

coverage by industry sector from their clients. Similarly, some of these 

data are not publicly available and are not representative of the entire 

market.

Treasury officials told us they periodically consulted with industry 

participants to obtain information about the terrorism insurance market, 

such as take-up rates, pricing, and capacity, but noted that the industry 

relies on the two largest insurance brokers for this information. However, 

as discussed above, the information that brokers compile is not 

comprehensive because it does not include detailed data on terrorism 

coverage from the insurance industry as a whole. In addition, PWG also 

solicited comments from the insurance industry on the availability and 

affordability of terrorism risk insurance for three studies mandated by 

TRIA. For example, according to Treasury officials, 29 entities submitted 

comments for the 2014 PWG report. In addition, Treasury conducted 

numerous interviews with industry participants. However, the comments 

PWG solicited and received from industry participants for these studies 

generally were anecdotal representations from the organizations that 

chose to submit information, rather than comprehensive data 

representing the entire industry.25 Treasury officials acknowledged that

 24ISO is a leading source of information about property and casualty insurance risk. For a 

broad spectrum of personal and commercial lines of insurance, the company provides 

statistical, actuarial, and claims information; standardized policy language; information 

about specific locations; fraud-identification tools; and technical services. ISO 

representatives told us they collect data on losses and premiums, and that their data for 

commercial lines of insurance represent approximately two-thirds of the U.S. domestic 

industry’s premium volume. This represents the majority of property and casualty lines 

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

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

admitted or licensed to sell in a state). The main purpose of ISO’s terrorism data collection 

is to enable the data to be excluded from ratemaking for standard coverages. Coding was 

not intended to provide a detailed analysis of the terrorism exposure. A.M. Best provides 

news, credit ratings and financial data products and other services for the insurance 

industry. According to A.M. Best representatives, the company captures premium 

information through its annual supplemental rating questionnaire. A.M. Best 

representatives told us that although they do not know exactly what proportion of the 

market the estimated premiums charged for terrorism coverage equal, they believe the 

information encompasses the vast majority of the market.

25PWG also relied on data submitted by brokers. While the information that brokers 

compile is not anecdotal, it is also not representative of the entire insurance industry, as 

previously discussed.

Terrorism Insurance 

Information Treasury 

Collects Is Not 

Comprehensive, and 

Treasury Does Not 

Require Insurers to 

Provide Data
Page 15 GAO-14-445 Terrorism Insurance

their information on the terrorism insurance market could be 

supplemented with more detailed information.

Furthermore, TRIA requires Treasury to annually compile information on 

the terrorism insurance premium rates of insurers, and if the information 

is not available, also permits Treasury to require insurers to submit that 

information to NAIC, but Treasury has not taken either action.26 According 

to Treasury officials, Treasury has not compiled information on an annual 

basis, and has not collected market data on terrorism risk insurance 

directly from insurers. Treasury officials told us this was because the 

agency has periodically collected market data on terrorism risk insurance 

for the three PWG reports from industry sources, which has been 

sufficient for purposes of responding to TRIA’s reporting requirements.27 If 

the premium rate information was not otherwise available, TRIA states 

that Treasury may require each insurer to submit the information to NAIC, 

which then would make the information available to Treasury.28 Treasury 

officials noted that the premium rate data TRIA requires Treasury to 

compile may not be the only helpful data points for understanding the 

terrorism insurance market and said that additional baseline data would 

be crucial for a more detailed analysis. The officials said they may seek 

 26In general, a premium is the total amount paid by a policyholder to an insurer for a given 

amount of insurance coverage. A premium rate is the price per unit of coverage, such as 

the price per $1,000 of coverage. Premium rates are based on the insurer’s expectation of 

losses associated with a particular class of risk, and may be regulated by state insurance 

offices.

27Treasury last directly surveyed insurers in 2005 for a report to Congress. See 

Department of the Treasury, Assessment: The Terrorism Risk Insurance Act of 2002

(Washington, D.C.: June 30, 2005). To draft this 2005 report, Treasury contracted with a 

research firm to survey policyholders and insurers. Treasury also consulted with NAIC, a 

range of experts in the insurance industry, policyholders, and others. PWG reports list the 

sources of information on which Treasury relied.

28TRIA’s data compilation requirement for Treasury could be termed “pre-event.” In 

contrast, Treasury has regulatory authority to compile data following a terrorist event. For 

example, Treasury may issue a data call to insurers for insurer deductible and insured 

loss information by program year for purposes of determining initial or recalculated 

recoupment amounts (that is, the amounts Treasury would collect from insurers as 

repayment of the federal assistance provided under TRIA). Treasury also may issue a 

data call for insured loss information to determine an initial or recalculated pro-rata loss 

percentage. Other TRIA and regulatory provisions discuss how companies must maintain 

records, including information on premiums, and when they must provide them to 

Treasury.
Page 16 GAO-14-445 Terrorism Insurance

additional market data and evaluate whether the sources previously used 

were adequate.

While TRIA states that Treasury has the authorities necessary to carry 

out the terrorism risk insurance program, including prescribing regulations 

and procedures to effectively administer and implement it, whether these 

authorities allow Treasury to collect comprehensive market data directly 

from insurers is unclear. However, federal internal control standards state 

that agencies should identify and obtain relevant and needed data to be 

able to meet program goals.29 As stated earlier, the purposes of the 

terrorism insurance program include helping to ensure the continued 

widespread availability and affordability of property and casualty 

insurance for terrorism risk and addressing market disruptions. Without 

comprehensive, nationwide market data, including the number of insurers 

in the market and whether differences exist in pricing or take-up rates for 

companies of different sizes, industries, or geographic locations, Treasury 

might not have a full understanding of the terrorism risk insurance market, 

including how changing program parameters may impact the market. 

Treasury may also be unable to assess whether the program is meeting 

its goals of helping to ensure the continued widespread availability and 

affordability of terrorism risk insurance and addressing market 

disruptions.

Treasury has conducted limited analysis to help estimate the potential 

magnitude of the federal government’s fiscal exposure under TRIA under 

different scenarios of potential terrorist attacks. We developed a 

conceptual framework for fiscal exposures to aid discussion of long-term 

costs and uncertainties that present risks for the federal budget.30 Fiscal 

exposures vary widely by source, extent of the government’s legal 

commitment, and magnitude. Fiscal exposures may be explicit (the 

government is legally required to fund the commitment) or implicit 

(exposures arise not from a legal commitment, but from current policy, 

past practices, or other factors that may create the expectation for future 

 29See GAO, Standards for Internal Control in the Federal Government,

GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

30See GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and 

Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

Treasury Performs Limited 

Analysis to Help Estimate

Federal Fiscal Exposure 

under TRIA
Page 17 GAO-14-445 Terrorism Insurance

spending).31 The government’s legal commitment to pay losses when a 

certified terrorist event occurs makes the terrorism risk insurance program 

an explicit exposure. The amount of federal spending resulting from the 

fiscal exposure under the terrorism risk insurance program depends on 

the extent of insured losses.

In 2009, Treasury contracted with ISO to develop and implement a 

method for estimating total average annual insured terrorism losses in the 

aggregate for TRIA-eligible lines, review certain material, and advise on 

the appropriateness of its use for projecting potential payout rates of the 

federal share of insured losses.32 The study provides estimates (both 

gross and net) of the federal share of losses and was used to aid 

Treasury in its development of a federal budget item for the terrorism risk 

insurance program.33 ISO representatives stated that it was important to 

understand that the study provides an estimate of average annual losses 

in any given year, but in years with losses, the numbers likely would be 

significantly higher than the average. ISO representatives also noted that 

the study had some data limitations and relied on assumptions such as 

take-up rates for terrorism coverage that could affect the results of the 

analysis. This is the only study Treasury has commissioned that 

examines the potential overall fiscal exposure of the terrorism risk 

insurance program to the federal government.

In addition to the ISO study, Treasury officials provided us with a 

hypothetical loss scenario that shows private-sector and federal loss 

sharing under a specific set of circumstances.34 According to Treasury 

 31See GAO, Fiscal Exposures: Improving Cost Recognition in the Federal Budget, 

GAO-14-28 (Washington, D.C.: Oct. 29, 2013). 

32For example, ISO was asked to review projections of initial federal share as a 

percentage of total losses presented in another study, and advise whether the set of 

relationships derived by Treasury from that study were reasonable for budget projection 

purposes.

33As we previously reported, for programs in which the time between incurring a cost and 

the resulting payment is relatively short, the budget often provides sufficient information on 

and control over the government’s spending commitments. However, for some programs 

in which the government legally obligated itself to make future payments or incur losses if 

an event occurs, the generally cash-based measures used in the budget do not reflect the 

magnitude of the government’s legal commitment of future resources at the time decisions 

are made. See GAO-14-28.

34Treasury made certain assumptions for the scenario, including the amount of direct 

earned premiums, the number of insurers affected, and the amount of insured losses. 
Page 18 GAO-14-445 Terrorism Insurance

officials, this example was not an official work product and they 

emphasized that they developed the example purely to illustrate the 

recoupment calculations and it should not be considered as a projection 

of the fiscal exposure of a terrorist event to the government. The exact 

amount of government spending or the government’s obligation is difficult 

to predict because, among other factors, it depends on the distribution of 

losses among insurers. For example, the aggregated 20 percent 

deductible equaled $37 billion (20 percent of direct earned premiums for 

TRIA-eligible lines), according to our analysis of SNL Financial’s 2012 

insurance data. However, losses from a terrorist attack are highly unlikely 

to affect all insurers or be distributed evenly among all insurers. As a 

result, if fewer insurers had losses, the deductible amount would be lower 

and the government’s share of losses likely would be triggered at an 

amount less than the aggregated industry deductible. Therefore, the 

government’s spending or obligation likely would begin at an amount less 

than the industry’s aggregated deductible.35

Federal internal control standards state that agencies should identify and 

analyze risks associated with achieving program objectives, and use this 

information as a basis for developing a plan for mitigating the risks.36 For 

example, because the amount of the government’s fiscal exposure varies 

according to the specific program’s design and characteristics, estimates 

could be developed to better understand the potential costs of changes to 

certain program parameters under various scenarios of potential terrorist 

attacks.

37 This could increase the attention given to fiscal exposures, 

while also providing decision makers relevant information to consider 

when determining the best way to achieve various policy goals or design 

 35Additionally, according to Treasury officials, insurers vary greatly in size and smaller 

insurers will more likely trigger the program because larger insurers’ deductibles far 

exceed the program trigger. Similar to the example provided above, if smaller insurers 

trigger the program, the government’s share of losses is likely to be triggered at an 

amount less than the aggregated industry deductible.

36See GAO/AIMD-00-21.31. 

37See GAO-14-28. 
Page 19 GAO-14-445 Terrorism Insurance

a program.38 According to the insurers and other industry participants we 

spoke to, insurers’ best practices also show that an insurer’s analysis of 

the location and amount of coverage written is prudent for understanding 

the financial risks of a potential terrorist attack of a specific size. Insurers 

work with terrorism risk modeling firms to help understand their potential 

financial exposure from a future terrorist attack.39 For example, to help 

illustrate how an insurer would be financially affected after a terrorist 

event and how losses would be shared between the private sector and 

the federal government under TRIA, some industry participants have 

developed hypothetical scenarios. According to a study published by the 

Wharton Risk Management and Decision Processes Center, insurers use 

such scenarios to determine their maximum exposure to a range of 

possible attacks.40 Ultimately, the amount of fiscal exposure created by 

TRIA will be determined by the program parameters and the specific 

circumstances of a future attack (such as the number of insurers affected 

and number of businesses that had purchased terrorism coverage). 

However, these scenarios can be used to help understand risk and the 

impact of the financial losses under TRIA under specific scenarios of 

potential terrorist events, and to analyze losses if TRIA were not renewed 

(that is, if the private sector would be responsible for all losses). In 

 38All estimates of future spending introduce some degree of additional uncertainty into the 

budget and the ease of implementation differs. Some measures already may be used 

widely in other forms of reporting, whereas others are relatively new concepts for federal 

budget reporting and may involve developing new models and technical skills. Despite any 

implementation challenges, approximate estimates of the full cost to government may be 

preferable to some current measures that are incomplete or potentially misleading. 

Furthermore, a requirement to produce estimates for budget reporting may help improve 

the quality of estimates by drawing more attention to them. Although using estimates may 

introduce uncertainty in primary budget data, it would result in earlier cost recognition in 

the budget. This would help reinforce up-front controls in the budget process. See 

GAO-14-28.

39Representatives of a risk modeling firm with whom we spoke reported advances in 

terrorism risk insurance modeling over the past decade, including more information (such 

as information about U.S. intelligence agencies and counter-terrorism efforts), a better 

understanding of terrorist activity, and more data on the number of terrorist plots. We 

determined that because these advances make it possible for industry participants to 

better quantify the cost of potential terrorist attacks with specific estimated circumstances, 

these industry best practices were also relevant for assessing the impact on the insurance 

industry, and the potential magnitude of fiscal exposure to the government of specific 

scenarios of potential terrorist attacks.

40Wharton Risk Management and Decision Processes Center, The Wharton School, 

University of Pennsylvania, TRIA and Beyond: Terrorism Risk Financing in the U.S.

(Philadelphia, Penn.: 2005).
Page 20 GAO-14-445 Terrorism Insurance

addition to information on the type of attack (for example, damage from 2-

to-10 ton truck bombs), these scenarios can rely on estimates of insurers’ 

market share and direct premiums earned, among other data points. For 

public policy purposes, in 2014 the Reinsurance Association of America 

developed a model to help participants evaluate various loss scenarios. 

We also have developed hypothetical examples to help illustrate the 

potential magnitude of the federal government’s fiscal exposure, which 

will be discussed later in this report.

Treasury officials said that they have conducted limited analysis on the 

government’s fiscal exposure under TRIA because the amount of the 

government’s fiscal exposure is ultimately determined by program 

parameters and the risk modeling and exposure analyses used by 

insurers are not entirely applicable in understanding how to reduce 

federal exposure. According to Treasury officials, insurers manage risk by 

first understanding and then limiting their exposures by insurance line or 

geographic location. Fiscal exposure under TRIA is limited by the 

program parameters and the circumstances of a future attack (such as 

number of insurers affected and number of businesses that had 

purchased terrorism coverage). Treasury officials also said that the 

amount of fiscal exposure is difficult to determine because it is shaped by 

variables, such as geography, type of event, and number of affected 

insurers. However, Treasury officials acknowledged that hypothetical 

analyses that provide illustrative analyses and estimate the potential total 

amount of losses may be helpful in understanding fiscal exposure. 

Without analyzing comprehensive market data on the type and amount of 

coverage provided from all insurers participating in the market, Treasury 

does not have enough information to help understand potential federal 

spending under various scenarios of potential terrorist attacks. In addition, 

Treasury is not in the position to provide Congress with analysis to inform 

decisions about reauthorization and the future structure of the program, 

including any changes that would limit exposure, one of the goals that 

Treasury recently articulated in its 2015 budget justification. 

Available data on the market for terrorism risk insurance generally 

indicate a stable market in recent years. Total terrorism insurance 

premiums, which make up a small percentage of insurers’ overall 

premiums, increased after the original act and reached a high in 2007, 

then declined, and have stabilized since 2010. Insurers report capacity to 

provide terrorism coverage over the past decade has remained 

unchanged. In general, prices appeared to have decreased as the 

number of businesses buying terrorism coverage (take-up rates) 

Insurance Market for 

Terrorism Risk Has 

Stabilized
Page 21 GAO-14-445 Terrorism Insurance

increased from 2003 to 2006, but have been constant since 2010. The 

transference of terrorism risk through reinsurance or alternatives to 

reinsurance, such as insurance-linked securities (catastrophe bonds), has 

remained limited.

Available data show terrorism insurance premiums have stabilized over 

the past few years (see fig. 3).41 For instance, total premiums generally 

increased through 2007, then declined, and stabilized from 2010 through 

2012. In 2012, the most recent year for which data are available,42

estimated terrorism insurance premiums were $1.7 billion, down from a 

high of $2 billion in 2007. A.M. Best’s estimates about $17 billion was 

collected for terrorism insurance premiums from 2004 through 2012. 

Furthermore, terrorism insurance premiums collected on workers’ 

compensation and commercial property insurance lines each made up 

about 40 percent of the estimated total terrorism insurance premiums, 

with the remaining 20 percent from all other commercial lines. These 

proportions remained relatively stable in recent years.

 41Although these data may not reflect the entire market, they are the best available data 

because insurers are not required to report terrorism insurance premiums to Treasury or 

NAIC. In 2004, A.M. Best began collecting data on premiums charged for terrorism 

coverage as a part of its annual survey of insurers (specifically, the Supplemental Rating 

Questionnaire for U.S property and casualty). A.M. Best collects these data for insurance 

rating units that provide commercial lines on a primary basis, in which the commercial 

lines make up more than 10 percent of the rating units’ direct written premiums. A.M. Best 

does not know exactly what proportion of the market the estimated premiums charged for 

terrorism coverage equal, but company representatives believe the information 

encompasses the vast majority of the terrorism insurance market. 

42According to A.M. Best representatives, data for 2013 will not be available until June 

2014.

Terrorism Insurance 

Premiums Have Stabilized 

and Made Up a Small 

Percentage of Overall 

Premiums
Page 22 GAO-14-445 Terrorism Insurance

Figure 3: Estimated Terrorism Insurance Premiums by Total and Selected Insurance Lines, 2004–2012

Based on our analysis of A.M. Best and SNL Financial insurance data, 

trends in terrorism insurance premiums have not differed markedly from 

trends in other commercial insurance line premiums. For example, 

premiums for all commercial property and casualty lines showed the 

same pattern––increases until 2007, declines from 2007 through 2010, 

and then increases in 2011 and 2012. Commercial property and casualty 

generally follows an insurance industry cycle, characterized by periods of 

soft market conditions––a market with abundant willingness to write new 

policies (capacity), increasing competition, and rates (prices) that grow 

marginally or decrease––followed by periods of hard market conditions––

in which capacity is relatively low, competition decreases, rates increase, 

and capital is scarce. This cyclical nature of the property and casualty 

industry likely plays a role in the hardness or softness of the terrorism 

insurance market. For example, the similarity in trends in premiums 

indicates that the terrorism insurance market is closely related to the 

overall commercial property and casualty market. The 2007-2009 

financial crisis affected the overall commercial property and casualty 

market and most likely affected the terrorism insurance market in similar 
Page 23 GAO-14-445 Terrorism Insurance

ways. For instance, the financial crisis generally affected commercial 

property and casualty insurers through decreased net income, as 

underwriting and investment results deteriorated.43 However, making an 

accurate assessment of the terrorism insurance market is challenging. 

According to industry participants, uncertainty surrounding the two 

previous TRIA reauthorizations––whether the program would be 

reauthorized and if so, with what changes––led to periods of market 

instability.

Insurers told us their terrorism insurance premiums made up a very small 

amount of their overall premiums. As previously mentioned, we obtained 

information from 15 insurers as part of a questionnaire. According to the 

responses, on average terrorism insurance premiums made up less than 

2 percent of commercial property and casualty premiums, or roughly $1.7 

billion in calendar year 2012 (the range for the 15 insurers was 0.7 to 3 

percent).44 An insurer told us terrorism insurance premiums have not 

significantly affected overall capital levels because premiums collected for 

terrorism risk have been low and insurers use some of the terrorism 

insurance premiums to account for reinsurance, expenses, and taxes.

A.M. Best and SNL Financial data also indicate that, in terms of the share 

of total premium, coverage for terrorism risk is concentrated among the 

largest insurers.45 In the case of terrorism insurance premiums, according 

to A.M. Best data, 10 insurers made up roughly 70 percent of premium 

volume (see table 3). The same 10 insurers accounted for 44 percent of 

premiums in all insurance lines subject to TRIA and 39 percent of 

 43For many insurers, direct exposure to the financial crisis, the U.S. mortgage market, and 

related securities appeared to have been limited. But the financial crisis nonetheless had 

an impact on the insurance industry, primarily on their investment portfolios.

44We calculated this number ($1.7 billion) based on each insurer’s response to our 

questionnaire about the percentage of overall commercial property and casualty premiums 

that terrorism coverage constitutes and multiplied those responses by each insurer’s 

entire commercial property and casualty premiums in 2012 (according to SNL Financial 

insurance data). The $1.7 billion matches A.M. Best’s estimate for terrorism insurance 

premiums discussed earlier in this report. Both A.M. Best’s estimate for terrorism 

insurance premiums and our calculation of terrorism insurance premiums from the 

questionnaire data are minimum estimates because neither is representative of the entire 

market.

45For the purposes of this report section and table 3, “insurers” means insurance groups—

A.M. Best and SNL Financial report data by groups. For example, SNL Financial analysts 

review ownership structure as a basis for the SNL insurance groups.
Page 24 GAO-14-445 Terrorism Insurance

premiums in all commercial property and casualty lines. An industry 

representative with whom we spoke said only the largest insurers have 

the ability to underwrite large terrorism risks and hence account for a 

large portion of the industry’s terrorism insurance premiums. The 

composition of the terrorism insurance market resembles other insurance 

markets that the Federal Insurance Office has characterized as 

concentrated. For example, according to the Federal Insurance Office’s 

2013 annual report, 10 insurers made up 47 percent of the property and 

casualty market (both commercial and personal) and 72 percent of the life 

and health insurance market, in 2012—both of which the report 

characterizes as concentrated markets.46

Table 3: Estimated Number of Insurers and Percentage of Premiums, 2012

Estimated number of 

insurers

Percentage of premiums earned by

Top 10 insurers Top 20 insurers

Premiums in all commercial property and casualty 

insurance lines

1,091 39% 53%

Premiums in commercial property and casualty 

insurance lines subject to TRIA

867 44% 58%

Premiums for terrorism coverage 226 70% 75%

Source: GAO analysis of A.M. Best and SNL Financial insurance data.

Note: We defined the top insurers by their direct earned premiums in 2012 in the insurance lines 

subject to the Terrorism Risk Insurance Act. The top insurers in insurance lines subject to TRIA differ

slightly from the top insurers in the commercial property and casualty market as a whole. Insurers 

means insurance groups—A.M. Best and SNL Financial report data by groups.

Although we present an estimated number of insurers that provide 

coverage for terrorism risk, identifying the precise number of insurers in 

this market is difficult because of the lack of comprehensive data. As 

noted previously, insurers are not required to report data about terrorism 

risks to Treasury or NAIC. As shown in table 3, according to SNL 

Financial data, more than 800 insurers reported premiums in insurance 

lines subject to TRIA and therefore, by law, offered coverage.47 A.M. 

Best’s survey data provides further context for this market. For 2012, A.M. 

Best estimated more than 200 insurers provided coverage for terrorism 

 46Federal Insurance Office, Department of the Treasury, Annual Report on the Insurance 

Industry (Washington, D.C.: June 2013).

47Using SNL Financial insurance data for 2012, we compiled company-level data for direct 

earned premiums for the insurance lines subject to TRIA (see table 1). 
Page 25 GAO-14-445 Terrorism Insurance

risk. Insurers providing coverage in the insurance lines subject to TRIA 

must offer terrorism coverage, but businesses are not required to buy it. 

Therefore, the number of insurers offering coverage in the insurance lines 

subject to TRIA (more than 800) and the number of insurers covering 

terrorism risk and collecting terrorism insurance premiums (estimated at 

more than 200) will differ.

According to an insurance broker, capacity seems to have improved, but 

insurers report that capacity has remained the same and that they limit 

capacity as needed to manage their overall exposure. Capacity is the 

amount that insurers are willing to allocate to underwrite a specific risk. 

Terrorism coverage typically is embedded in an all-risk property policy 

and therefore available terrorism capacity is tied to overall capacity for allrisk property policies. According to information from an insurance broker, 

the reported market capacity for terrorism risk seems to have increased.48

According to an Aon report, in 2013 about $14 billion per risk was 

available to any one insured for an all-risk property policy.49 This amount 

increased from $13.5 billion in 2010 and $8 billion in 2005. This 

represents the amount of coverage an insurer is willing to provide to any 

one insured. However, the actual capacity for terrorism risk is much lower 

than $14 billion per risk because the amounts above encompass capacity 

for risks in addition to acts of terrorism. According to Aon, non-terrorismrelated exposures, such as natural catastrophes (earthquake and 

windstorm), can vastly decrease the available capacity for terrorism risk.

 48Per risk capacity is a measure used for estimating market capacity that aggregates the 

maximum amount of coverage an insurer is willing to provide to any one insured.

49The stand-alone terrorism market has additional capacity. According to an Aon report, in 

2013, from $750 million to $2 billion per risk was available. Stand-alone policies can 

provide excess coverage above all-risk policies or fill gaps in coverage; for example, by 

covering losses from noncertified acts of terrorism. In general, coverage purchased in the 

stand-alone terrorism market is not subject to TRIA.

Capacity Has Remained 

the Same, Prices 

Declined, and Take-up 

Rates Flattened in Recent 

Years

Capacity
Page 26 GAO-14-445 Terrorism Insurance

Moreover, individual insurers’ capacity to underwrite terrorism will differ, 

and insurers told us they would limit capacity as needed based on their 

aggregate terrorism exposures, geographic concentration of terrorism 

exposures, and terrorism exposures relative to other natural catastrophe 

exposures. Most insurer representatives with whom we spoke reported 

that capacity to provide terrorism coverage over the past decade 

remained constant and 6 out of the 15 insurers stated that they limited 

capacity as needed to manage their overall exposures. About half of the 

insurers told us TRIA enabled them to provide capacity for terrorism risks, 

but TRIA also was the reason why capacity has remained relatively 

unchanged—because insurers managed their exposures based on the 

program parameters. In general, insurers assume some financial risk 

when covering terrorism risk, but they also employ various underwriting 

standards to manage the risk and limit potential financial exposures. As 

we previously reported, insurers’ willingness to provide coverage in 

certain areas may change frequently as new clients or properties are 

added to or removed from their book of business.50

In response to our questionnaire, most insurers told us they determined 

the amount of coverage they were willing to provide in defined geographic 

areas, depending on their risk tolerance. These amounts are sometimes 

called coverage limits (capacity limits) and are managed in relation to 

overall terrorism exposures. Almost all insurers told us factors such as 

loss estimates from terrorism models, aggregation of exposures in 

defined areas, proximity of exposures to high-profile targets or buildings, 

and individual property characteristics affect their terrorism underwriting 

decisions. Insurers may decide to limit capacity; that is, decide not to 

underwrite certain coverage, if taking on the additional risk would exceed 

their internal capacity limits. A few insurers that we interviewed also told 

us that over the past decade they have benefitted from significant 

improvements to their data systems and models that track terrorism 

exposures; in turn, the better systems and models have improved their 

ability to make sound underwriting decisions when renewing or writing 

new policies.

Prices have declined and insurers say TRIA has allowed them to offer 

coverage at prices policyholders are willing to pay. Insurers may charge 

an additional premium for terrorism coverage, as TRIA does not provide 

 50See GAO-08-1057.

Pricing
Page 27 GAO-14-445 Terrorism Insurance

specific guidance on pricing. According to data from Marsh, prices for 

terrorism coverage, as part of a commercial property policy, generally 

declined over the past decade (see fig. 4).51 These data are not 

necessarily reflective of the entire market, but represent the best available 

data on pricing.52 While prices slightly increased from 2003 to 2004, 

prices steadily declined since 2006. In 2013, the nationwide median 

amount that businesses paid per million dollars of coverage for terrorism 

insurance was $27. Using the 2013 nationwide median rate, a company 

purchasing $100 million in coverage for property damage would have 

paid approximately $2,700 in terrorism insurance premiums.

Figure 4: Terrorism Insurance Pricing, 2003–2013 (Median Rates per Million Dollars of Coverage)

In addition, prices that businesses pay will vary depending on company 

size, location, and industry. For example, prices will typically decrease as 

 51Rates are calculated by dividing the premium by the total insured value of a property.

52The pricing data are for Marsh clients that purchased terrorism coverage as part of a 

property policy. The data do not include pricing for terrorism coverage purchased as part 

of a liability or workers’ compensation policy. For this reason and because Marsh’s data 

solely represent its clients, the data are not representative of the entire market. However, 

we found Marsh’s data the most readily available data on pricing.
Page 28 GAO-14-445 Terrorism Insurance

the size of the company increases (size measured in terms of insured 

value and prices measured in millions of dollars of coverage), are typically 

higher in the Northeast, and higher in certain industry subsectors (such as 

construction, power and utilities, and media) due to perceived or actual 

risk exposure to terrorism.53 But because comprehensive pricing data are 

not readily available, it is difficult to clearly understand how prices differ 

by company size, location, or industry.

According to data from Marsh, from 2003 to 2013, companies paid 

approximately from 4 to 9 percent of their total property premium for 

terrorism coverage (see fig. 5). Analyzing the price of terrorism coverage 

as a part of overall property premiums allows companies to understand 

how terrorism coverage affected their overall property insurance budget. 

Businesses paid no more than approximately 5 percent of their total 

property premium for terrorism coverage since 2011.54 Using the 2013 

data, a company purchasing $100 million in property coverage would 

have paid approximately 4 percent of its $67,500 overall property 

premiums for terrorism coverage (or $2,700).

 53Marsh, Market Update 2013 Terrorism Risk Insurance Report, May 2013.

54According to the Marsh data, in 2012, businesses paid about 5 percent of their total 

property premium for terrorism coverage. As previously reported, according to our 

questionnaire of 15 insurers, terrorism insurance premiums made up approximately 2 

percent of overall premiums, in 2012. Marsh’s data solely consists of property policies, 

while our questionnaire data includes property policies, as well as other policies that may 

include terrorism coverage, such as liability or workers’ compensation policies. 
Page 29 GAO-14-445 Terrorism Insurance

Figure 5: Terrorism Insurance as a Percentage of Overall Property Premiums, 2003–

2013

Insurers told us TRIA allows them to offer coverage at prices their 

policyholders are willing to pay. Insurers said their primary concern for 

covering terrorism risks was limiting their exposures (that is, capacity)

because the losses could be huge under certain types of terrorist attacks 

and that pricing was secondary. TRIA addresses insurers’ primary 

concerns about the size of potential losses—it provides a structure in 

which insurers know, before an event, what their losses could be because 

the deductible and coshare are defined by law and losses are capped. 

For most insurance products, insurers typically use the potential 

frequency and severity of events to calculate premiums that are 

commensurate with the risks. Because the frequency and severity of 

terrorism are difficult to predict, the limits established in TRIA, which cap 

the potential severity of losses to insurers, make underwriting the risk and 

determining a price for terrorism coverage easier for insurers.

Furthermore, most insurers said their companies’ experiences with 

collecting terrorism insurance premiums and providing terrorism coverage 

over the past decade have had minimal or no impact on their pricing 

strategy. Insurer responses suggest this is mainly because terrorism is so 

different from other perils. For example, one insurer noted that with 

natural catastrophes, insurers have a long history of experience writing 

and pricing (based on claims), but this is not the case with terrorism. 
Page 30 GAO-14-445 Terrorism Insurance

Another insurer noted that terrorism risk provides too few data points to 

inform pricing and underwriting decisions. Additionally, one insurer told us 

it is a very competitive market and they do not charge terrorism insurance 

premiums that would cover their potential losses from a terrorist attack. 

For example, this insurer noted that if insurers did charge premiums that 

would cover potential losses, businesses would not buy it.

Take-up rates—which are the percentage of businesses buying terrorism 

coverage and help measure the demand for terrorism risk insurance—

increased from 2003 to 2006 and have remained relatively constant (and 

above 60 percent) since 2010, according to data from Marsh (see fig. 6). 

According to Treasury and NAIC, neither collects this type of information. 

Take-up rate data for businesses buying terrorism coverage as part of 

commercial property policies are only available from insurance brokers.55

The take-up rate for businesses buying terrorism coverage as part of 

workers’ compensation policies is 100 percent because state laws require 

businesses to purchase workers’ compensation insurance and do not 

permit insurers to exclude terrorism from workers’ compensation policies.

 55For example, Marsh does not collect data for the percentage of businesses buying 

terrorism coverage as part of commercial liability policies.

Take-up Rates
Page 31 GAO-14-445 Terrorism Insurance

Figure 6: Terrorism Insurance Take-Up Rates, 2003–2013

Note: Take-up rates measure the percentage of businesses buying terrorism insurance as part of a 

commercial property policy.

Take-up rates will vary depending on company size, location, and 

industry. For example, larger companies are more likely to purchase 

coverage than smaller companies, the Northeast has the highest take-up 

rates, and certain industry subsectors have higher take-up rates than 

others (for example, media, education, and financial institutions).56

According to our questionnaire results, overall take-up rates for insurers 

varied significantly (from 26 to 100 percent). One respondent noted that 

analyzing insurers’ overall take-up rates can be misleading and it is more 

appropriate to look at take-up rates for terrorism coverage in each line of 

insurance subject to TRIA. According to our questionnaire results, the 

lines of insurance with the highest take-up rates for terrorism coverage 

are commercial multiperil and inland marine, and the lines with the lowest 

take-up rates for terrorism coverage are aircraft and boiler and 

 56See Marsh, Market Update 2013 Terrorism Risk Insurance Report, May 2013.
Page 32 GAO-14-445 Terrorism Insurance

machinery.57 However, because Treasury and NAIC do not collect takeup rate data from insurers, it is difficult to thoroughly analyze take-up 

rates by line of insurance.

According to industry participants, take-up rates may have reached a 

plateau—that is, most businesses that want the coverage already have 

purchased it. From 2003 through 2013, take-up rates doubled, while 

prices declined by 50 percent.58 In more recent years, take-up rates 

remained relatively constant, although prices continued to decline (as 

shown in figures 4 and 6). Since 2010, both take-up rates and estimated 

terrorism insurance premiums have been relatively stable (see fig. 7).

 57This does not include workers’ compensation, which as previously stated has a 100 

percent take-up rate. We did not further analyze take-up rate data obtained as part of our 

questionnaire because of data reliability concerns (how each insurer obtained and 

reported the information to us). Because terrorism coverage is typically included in an allrisk property policy that covers several insurance lines, the information reported to us

varied significantly. A multiperil policy refers to a policy that may contain a few named 

perils and exclude others.

58Nationwide take-up rates increased from 27 percent in 2003 to 62 percent in 2013; while 

terrorism insurance median rates per million dollars of coverage declined from $56 in 2003 

to $27 in 2013. 
Page 33 GAO-14-445 Terrorism Insurance

Figure 7: Comparison of Terrorism Insurance Premiums and Take-up Rates, 2004–

2012

The changing proportions of new versus renewal policies covering 

terrorism risk offer further evidence that demand may be leveling off. On 

the basis of our questionnaire results, the majority of policies are 

renewals rather than new issuances, and this has stayed the same over 

the past several years (on average, about 83 percent renewals in 2008 

and in 2012).
Page 34 GAO-14-445 Terrorism Insurance

The transference of terrorism risk—namely, through reinsurance and 

alternatives to reinsurance such as insurance-linked securities—has been 

limited.59 Reinsurance capacity for terrorism risk has increased, but 

remains small relative to the federal reimbursements available through 

TRIA.60 For example, according to industry participants about $6 billion to

$10 billion in terrorism reinsurance capacity was available in the United 

States in 2013, which was an increase from the $4 billion to $6 billion 

available several years ago, but was still small compared with the federal 

assumption of 85 percent of losses (up to $100 billion of aggregate 

industry exposure minus items such as the insurer deductibles) in TRIA.61

Without TRIA, current reinsurance capacity would be insufficient to 

respond to a large-scale terrorist attack, in particular up to the limits the 

government program provides, according to a reinsurance trade 

association representative. Additionally, terrorism reinsurance capacity is 

small in relation to capacity for other perils. For example, the total amount 

of reinsurance capacity available for natural catastrophe risks in the 

United States in 2012 ranged from $90 billion to $120 billion.

Several factors limit the market for reinsurance of terrorism risk. For 

instance, unlike primary insurers, reinsurers are not subject to TRIA and 

therefore are not required to offer primary insurers coverage for terrorism 

risk. According to industry representatives, reinsurers face the same 

challenges as primary insurers––that is, terrorism risk is difficult to model 

and price, which also contributes to a limited market. Finally, insurers told 

us they typically purchase terrorism reinsurance as part of a multiperil 

 59Reinsurance is insurance for insurers. Insurance-linked securities are financial 

instruments, with values driven by insurance loss events. The most common type of 

insurance-linked security is a catastrophe bond, which we discuss later in this report.

60Congressional Budget Office, Federal Reinsurance for Terrorism Risk: Issues in 

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

61J. Eric Smith, The Terrorism Risk Insurance Act of 2002. Swiss Re Americas. Sep. 19, 

2013.

Use of Reinsurance and 

Insurance-Linked 

Securities for Significant 

Amounts of Terrorism Risk 

Remains Limited
Page 35 GAO-14-445 Terrorism Insurance

policy that covers terrorism risk in addition to other risks.62 To help 

manage their exposures to concentrated losses, reinsurers frequently 

write terrorism coverage with specific limits for individual properties rather 

than reinsure a share of an insurance company’s overall holdings.

According to brokers and reinsurers, terrorism reinsurance prices 

generally have declined by 50 percent over the past decade and more. 

Reasons these industry participants cite for the price declines include the 

passage of time since the September 11 attacks, the lack of subsequent 

terrorist attacks resulting in significant losses, decreased demand from 

primary insurers, and increased supply of reinsurance.63 However, the 

location of exposures also affects the price of terrorism reinsurance. For 

example, reinsurance coverage is more expensive for exposures in 

densely populated urban areas than less densely populated areas.

Although individual insurers’ reinsurance patterns vary, insurers have 

been reinsuring a limited amount of their terrorism risk and retaining 

roughly 80 percent of it according to the 2010 PWG report. Insurers make 

decisions on how much reinsurance to purchase based on their 

perception of risk, price of coverage, ability to manage risk, and other 

factors. One insurer contributing to this report commented that terrorism 

risk reinsurance remains insufficient to serve the market’s current risk 

exposure.64 According to our questionnaire results, 13 insurers purchased 

reinsurance for terrorism risk and 2 did not. Some responding insurers 

that purchased reinsurance for terrorism risk noted an increase in their 

 62Rather than insuring each type of exposure individually, a multiperil policy, or treaty, 

combines coverage for various types of exposures into a single contract. Other types of 

reinsurance contracts include automatic treaties, quota share treaties, and surplus 

treaties. With automatic treaties the reinsurer agrees in advance to accept a portion of the 

insurance line of the writing company or a portion of certain risks. Quota share treaties are 

an arrangement where the writing company and the reinsurance company agree to share 

the amount of each risk on some percentage basis. Surplus treaties are arrangements 

where the reinsurer agrees to accept some amount of insurance on each risk in excess of 

a specified net retention. See Emmett J. Vaughan and Therese M. Vaughan, 

Fundamentals of Risk and Insurance (New York: John Wiley & Sons; 2003).

63According to the 2010 PWG report, the reduction in the supply of reinsurance and 

significant price rises following the September 11 attacks were a typical industry response 

to a catastrophic loss shock. President’s Working Group on Financial Markets, Market 

Conditions for Terrorism Risk Insurance. 

64President’s Working Group on Financial Markets, Market Conditions for Terrorism Risk 

Insurance.
Page 36 GAO-14-445 Terrorism Insurance

purchasing levels, some noted a decrease, and still others noted 

fluctuations in their purchasing patterns. One insurer purchased terrorism 

reinsurance coverage continuously since 2002 and increased its limits as 

capacity became available and pricing became more affordable. Two 

insurers said that their purchases of terrorism reinsurance decreased 

over time. The two insurers that did not purchase reinsurance for 

terrorism noted that while some reinsurers were willing to provide a 

modest capacity for terrorism risk, the cost was prohibitive for them. 

Additionally, insurers noted that potential modifications to TRIA would 

affect their demand for reinsurance. For example, potential modifications 

that would increase insurers’ deductible and coshare amounts would 

result in increased demand from primary insurers for reinsurance, but 

supply might stay the same.

As an alternative to reinsurance, insurance-linked securities have 

remained a limited option for covering terrorism risk. Specifically, 

catastrophe bonds, insurance-linked securities that typically cover natural 

catastrophes, have been used over the past 20 years mainly because of 

the large amount of resources available in capital markets.65 Catastrophe 

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

provide insurance companies with a form of reinsurance to pay losses 

from natural catastrophes. 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. Catastrophe 

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

expand the pool of capital available to cover a particular risk. Some 

insurers and reinsurers issue catastrophe bonds because they allow for 

risk transfer and may lower the costs of insuring against the most severe 

catastrophes (compared with traditional reinsurance).66

Although catastrophe bonds have become more common, two have been 

issued to date that cover terrorism risk and neither is explicitly a terrorism 

 65House Committee on Financial Services, The Future of Terrorism Insurance: Fostering 

Private Market Innovation to Limit Taxpayer Exposure, 113th Cong., 1st sess.; testimony of 

John Seo, Fermat Capital Management (Nov. 13, 2013). 

66See GAO, Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors 

Affecting Their Use, GAO-02-941 (Washington, D.C.: Sept. 24, 2002) and Catastrophe 

Insurance Risks: Status of Efforts to Securitize Natural Catastrophe and Terrorism Risk,

GAO-03-1033 (Washington D.C.: Sept. 24, 2003). 
Page 37 GAO-14-445 Terrorism Insurance

risk bond that covers risks included under TRIA. Each is a multi-event 

bond associated with the risks of natural disaster, pandemic, or terrorist 

attack.67 However, these bonds are mortality bonds and therefore would 

be an alternative for a life insurance policy (which is not a line of 

insurance eligible for TRIA) and not an alternative to commercial property 

and casualty insurance. As of April 2014, no property and casualty 

terrorism bonds have been issued.

Industry representatives mentioned various challenges to issuing 

catastrophe bonds covering terrorism risk.

• Investors generally avoid risks not widely underwritten in reinsurance 

markets and therefore lack interest in such catastrophe bonds.68

• Investors are reluctant to make investments in which losses may be 

correlated with widespread financial market losses (as was the case 

with terrorism losses after September 11, 2001) as well as low returns 

or payouts.69

• Rating agencies have not been willing to use terrorism loss models 

that estimate the probability of terrorism events (probabilistic models) 

for rating purposes and at least for terrorism risk investors tend to 

avoid risks that cannot be credibly modeled and rated.70

The difficulty of modeling terrorism represents an additional overall 

challenge to the development of the private market for terrorism 

insurance. Models used to estimate terrorism risk have become more 

sophisticated in estimating the severity of specific events in recent years. 

 67One bond was developed by the Fédération Internationale de Football Association, the 

world football [soccer] governing body, to protect its investment in organizing the 2006 

World Cup in Germany. The security, rated investment-grade (A3) by Moody’s, covered 

natural and terrorist catastrophic events that would result in the cancellation of World Cup 

games. Catastrophic mortality transactions were the basis for the second bond related to 

terrorism risk. It covered significant increases in population mortality for any reason. 

Rating agencies and investors have become comfortable with these transactions, because 

the main source of risk is a pandemic or natural catastrophe with higher expected loss 

value than a terrorist attack, so that terrorism risk contributes only a small portion of the 

expected loss.

68Ginger Turner, Terrorism Risk Insurance Act: The Economic Case for Public-Private 

Partnership (Swiss Re: September 2013). 

69Aon, response to the President’s Working Group on Financial Markets, Sept. 16, 2013.

70American Academy of Actuaries, response to President’s Working Group on Financial 

Markets, Sept. 16, 2013.
Page 38 GAO-14-445 Terrorism Insurance

However, they remain fundamentally different from those used to assess 

natural hazard risks, which estimate both the severity and probability. For 

example, according to the Reinsurance Association of America, terrorism 

modeling is primarily a means for underwriters to measure how much 

they have at risk in a given geographic area and losses from a specific 

type of event (that is, the severity of an event), not to estimate the 

probability of such events.71 Terrorism risk is unlike other catastrophic 

risks—such as earthquake or hurricane—in that terrorists can alter their 

behavior, which makes it hard to model the probability of potential events 

with the level of accuracy required to accurately price the coverage. 

There are relatively few instances on which to base probability estimates 

for acts of terror in the United States, which means that such estimates 

lack actuarial credibility. Additionally, insurers and modeling firms have no 

access to data used internally by U.S. intelligence and counterterrorism 

agencies. Moreover it may be impossible to build a model that provides a 

valid representation of all individuals and groups that might decide to try 

to use terrorism as a tactic against the United States. In addition, as 

opposed to other types of risks that are random to some extent, terrorist 

acts are intentional and terrorists continually attempt to defeat loss 

prevention and mitigation strategies.

 71Reinsurance Association of America, response to President’s Working Group on 

Financial Markets on the long-term availability and affordability of insurance for terrorism 

risk, September 16, 2013.
Page 39 GAO-14-445 Terrorism Insurance

Insurers and other industry participants cited concerns about the 

availability and price of terrorism coverage if TRIA expired or was 

changed substantially, but some changes could reduce the government’s 

fiscal exposure. For example, some insurers we interviewed said they 

would stop covering terrorism risks if TRIA expired. In addition, most of 

the insurers we interviewed, including larger and smaller insurers, cited 

potential consequences associated with increasing the deductible or 

coshare, such as impacts on pricing, the need to reevaluate risk and 

capacity, and threats to their solvency in the event of a large industry 

loss. These concerns are consistent with points industry participants 

raised before previous reauthorizations of the program. However, several

insurers told us they were less concerned about an increase to the 

aggregate retention amount or program trigger. Further, we found that 

increasing the deductible, coshare, or industry aggregate retention 

amount could reduce the government’s fiscal exposure under certain 

terrorist event scenarios. Responses to our questionnaire revealed that 

insurers were uncertain about whether TRIA covers risks from a cyber 

terrorism attack. Without clarification of the coverage of cyber risks, some 

insurers may not offer cyber coverage and the coverage may not be as 

available.

The long-term impact of expiration of the terrorism risk insurance 

program’s authority is difficult to determine, but according to insurers, in 

the short run, the availability of terrorism coverage may become more 

limited. Some insurers told us that they will stop providing terrorism 

coverage if TRIA expires on December 31, 2014. As indicated by 

responses to our questionnaire and other surveys of insurers, some 

insurers already made regulatory filings or issued notices to policyholders 

indicating that terrorism coverage would be excluded from policies in 

force beginning on January 1, 2015, if TRIA expired. For example, one 

insurer said that if TRIA were not renewed, the company would either 

exclude terrorism coverage or not underwrite businesses in states that 

prohibit terrorism exclusions.72 Insurers could further limit terrorism 

exposures, particularly in geographic areas considered at high risk for 

attacks.

 72The insurer said that the exclusions would not apply to workers’ compensation policies.

TRIA Expiration or 

Modification Could 

Affect Availability of 

Terrorism Coverage 

and Federal Fiscal 

Exposure, but 

Additional 

Clarification of 

Covered Risks Is 

Needed

Insurers May Limit 

Terrorism Insurance if 

TRIA Expires, but LongTerm Impacts of Expiration 

Are Difficult to Determine
Page 40 GAO-14-445 Terrorism Insurance

Because some states prohibit excluding certain risks, if a large-scale 

event occurred in the absence of TRIA, some insurers could face higher 

risk of insolvency or have more incentives to leave the market. For 

example, New York state insurance law prohibits terrorism exclusions for 

property and casualty policies that include standard fire coverage. In 

some other states, property insurers must cover losses from fire 

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

policyholder declined terrorism coverage. Thus, if TRIA expired, insurers 

operating in these states still would have to cover damage from fire 

following a terrorist attack. Such situations might leave some insurers 

bearing risks they could not adequately reinsure and leave them at 

increased risk for insolvency. Some insurers might decide their exposures 

were too great without TRIA and exit the market or decline to insure 

commercial property altogether.73

Some industry observers have noted that, in the long term if no large 

losses occur, the private insurance market might be able to address the 

need for terrorism coverage without support from the program. The 

amount of insurance and reinsurance written is related, in part, to the 

amount of surplus held by insurers and reinsurers.74 Over time, the 

private insurers and reinsurers might develop additional terrorism 

capacity if there are no losses due to terrorism. If capacity did not 

increase in the terrorism insurance and reinsurance markets, the 

insurance-linked securities market might develop and insurers might 

increasingly attempt to access capital markets to help spread terrorism 

risk. One capital markets participant said that in the past catastrophic 

shocks have led to more interest in insurance-linked securities and 

accelerated issuance of natural catastrophe bonds and that the expiration 

of the program could similarly foster interest in bonds for terrorism risk. 

However, insurers and reinsurers continue to question whether the 

market can accurately price terrorism risk. As a result, insurers and 

reinsurers might continue to believe they were unable to accurately price 

for such risks and leave the market for terrorism risk insurance (as 

 73Congressional Budget Office, Federal Reinsurance for Terrorism Risks: Issues in 

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

74By surplus, we mean policyholder surplus, which is an important measure of an insurer’s 

ability to pay claims and represents the extent to which an insurer’s assets exceed its 

liabilities. See GAO-14-136. Treasury officials noted that, among others, the reliability of 

modeling and potential for unlimited losses in concentrated geographic locations are 

additional factors that can influence the amount of insurance and reinsurance written.
Page 41 GAO-14-445 Terrorism Insurance

happened after September 11, 2001). Furthermore, because losses 

would no longer be capped, rating agencies might downgrade ratings for 

insurers and reinsurers, affecting the companies’ ability to raise capital. In 

the long term, policyholders (businesses) also might increase terrorism 

mitigation and deterrence efforts. For example, businesses might locate 

some operations away from high-risk areas, invest in mitigation measures 

(retrofitting properties to better withstand an attack or improve evacuation 

measures), or both.75

In the case of workers’ compensation, businesses unable to find 

coverage from insurers would have to obtain coverage from state funds, 

which might be more expensive than coverage from primary insurers.76

For example, representatives of one industry association told us that after 

the September 11, 2001, attacks, participation in state funds in New York, 

Washington, D.C., and Virginia increased, as some businesses were 

unable to find workers’ compensation coverage from primary insurers. 

Over time, businesses were able to leave the state funds and find 

coverage in the primary market, but workers’ compensation insurers 

became more selective about the number of employers they insured in a 

particular location.

Finally, past experience following disasters suggests that the federal 

government may provide assistance to businesses after a terrorist event 

in the absence of a federal terrorism insurance program. For example, 

following the September 11, 2001, terrorist attacks, we reported in 2003 

that Congress committed at least $18.5 billion to individuals, businesses, 

and government entities in the New York City area for initial response 

efforts, compensation for disaster-related costs and losses, infrastructure 

restoration and improvement, and economic revitalization.77 As we 

reported in 2009, many federal agencies and program components 

administer supplemental programs and funding, reprogram funds, or 

 75Department of the Treasury, Assessment: The Terrorism Risk Insurance Act of 2002

(Washington, D.C.: June 30, 2005).

76State funds are insurers of last resort for employers that otherwise cannot find workers’

compensation insurance in their respective states. See GAO, Terrorism Insurance: 

Measuring and Predicting Losses from Unconventional Weapons Is Difficult, but Some 

Industry Exposure Exists, GAO-06-1081 (Washington, D.C.: Sept. 25, 2006). 

77See GAO, September 11: Overview of Federal Disaster Assistance to the New York City 

Area, GAO-04-72 (Washington, D.C.: Oct. 31, 2003). 
Page 42 GAO-14-445 Terrorism Insurance

expedite normal procedures after a disaster.78 For example, forms of 

disaster assistance available from federal agencies include grants, loans, 

loan guarantees, temporary housing, counseling, technical assistance to 

state and local governments, and rebuilding or recovery projects. 

Following the April 2013 bombings in Boston, the federal government 

issued an emergency declaration for the state of Massachusetts that 

made federal assistance for equipment, resources, or protection available 

as needed. In 2012, we reported that the growing number of major 

disaster declarations contributed to an increase in federal expenditures 

for disaster assistance.79 For fiscal years 2004 through 2011, the federal 

government obligated more than $80 billion in disaster relief, about half of 

which followed Hurricane Katrina. And about $50 billion in federal 

assistance supported rebuilding efforts after Superstorm Sandy.80

As previously discussed, each of the program parameters—program 

trigger, deductible, coshare, and industry aggregate retention amount—

have changed since the program was enacted. It is not clear what impact 

these past changes have had on insurers in the market, but insurers told 

us that they generally preferred no additional changes. According to 

responses from our questionnaire, 11 of 15 insurers said that the TRIA 

program trigger (currently $100 million) could be increased without 

significantly changing their ability to provide coverage.81 In particular, 6 of 

those 11 insurers noted their companies would be able to offer terrorism 

coverage if the program trigger were raised up to $500 million, while of 

the remaining 5 insurers, 4 said they could offer coverage if the trigger 

were raised up to $1 billion and one insurer said that the trigger could be 

increased to more than $1 billion. Insurers said that they could continue 

offering coverage under an increased trigger amount because their 

current deductibles under the program were higher than the program 

trigger and increasing the trigger would not impact their share of losses. 

 78See GAO, Disaster Recovery: Experiences from Past Disasters Offer Insights for 

Effective Collaboration After Catastrophic Events, GAO-09-811 (Washington, D.C.: July 

31, 2009).

79GAO, Homeowners Insurance: Multiple Challenges Make Expanding Private Coverage 

Difficult, GAO-14-179 (Washington, D.C.: Jan. 30, 2014). 

80In January 2013, Congress passed and the President signed the Disaster Relief 

Appropriations Act of 2013 and the Sandy Recovery Improvement Act of 2013 providing 

this assistance.

81Four insurers wanted the trigger to stay the same. 

Certain Modifications to 

TRIA Could Affect 

Availability of Terrorism 

Coverage, but Insurers 

Said Other Changes May 

Not Significantly Affect the 

Market
Page 43 GAO-14-445 Terrorism Insurance

For example, using 2012 data, the 10 largest insurers in TRIA-eligible 

lines all had deductibles much greater than $100 million. As stated 

previously, while government coverage is triggered once aggregate 

industry losses exceed $100 million, individual insurers that experienced 

losses would first pay their deductibles and only then be eligible to 

receive federal reimbursement for 85 percent of their losses. One insurer 

explained it was less concerned with changes to the program trigger than 

to the deductible and coshare percentages, because changes to the latter 

were more likely to have direct impacts on insurers’ liquidity and result in 

significant market disruptions. Further, we found that increases to the 

program’s parameters could reduce federal fiscal exposure in certain 

situations, as long as the private sector’s share of losses is below the 

industry aggregate retention amount of $27.5 billion. As previously 

discussed, TRIA includes a provision for mandatory recoupment of the 

federal share of losses when private industry’s uncompensated insured 

losses are less than the industry aggregate amount of $27.5 billion. 

Insurers that responded that they preferred that no change be made to 

the program trigger cited concerns about capacity limitations, increased 

terrorism insurance premiums, and an increase in the cost for terrorism 

reinsurance if the trigger were increased.

Most of the insurers said that increases to the current deductible (20 

percent of previous year’s direct earned premium) or private-sector 

coshare (currently at 15 percent) could affect insurer capacity and pricing. 

For example, insurers commented that an increase in either of these 

parameters would result in their companies reevaluating their risk, and 

likely reducing their capacity or increasing policyholders’ premiums. One 

insurer said that it had adjusted its terrorism risk-management program 

according to the current program, and that any increases almost certainly 

would result in the company taking risk-mitigation actions, including 

reducing terrorism exposures, to offset the increased risk to the 

company’s surplus. In addition, insurers stated that increasing the 

deductible or private-sector coshare would bring many companies under 

rating agency scrutiny for risk concentrations, which likely would result in 

industry-wide reductions in terrorism exposure. However, some insurers 

(3 of 15) told us that their companies could absorb a higher deductible 

amount, including one insurer that told us its company could absorb an 

increase in the deductible up to 29 percent. However, this same insurer 

cautioned that such an increase likely would result in increased premiums 

for terrorism coverage and decreased take-up rates.

Insurers also expressed concerns about impacts on their solvency if the 

deductible or coshare percentages were increased. For example, insurers 
Page 44 GAO-14-445 Terrorism Insurance

commented that such increases could affect rating agency assessments 

of companies’ financial strength. Representatives of A.M. Best told us that 

they use a stress test of different scenarios to measure insurers’ financial 

strength and notified 34 insurers their ratings could be negatively affected 

without a sufficient action plan as a result of failing the stress test.82

Insurers told us that increasing the deductible or private-sector coshare—

and thus the amount of losses insurers would be responsible for paying—

could adversely affect insurers’ liquidity and solvency in the event of large 

terrorism losses given the levels of surplus available from which to pay 

these losses. Industry participants consider deductible in relation to 

surplus as a metric to help understand how much of the company’s 

surplus would be at stake to pay the TRIA deductible amount in the event 

of a certified act of terrorism.83 (Insures also must have surplus available 

to cover unexpectedly large losses in all other lines of insurance they 

underwrite.) We found the TRIA deductible has generally represented an 

increasing portion of insurers’ surplus. Under the current program 

parameters, in 2012 the industry-wide TRIA deductible made up 

approximately 17 percent of estimated surplus of insurers potentially 

exposed to terrorism risk.84 Deductibles remained at 15 percent or higher 

of estimated surplus since 2005 (see fig. 8).

 82A.M. Best, Future of TRIPRA Remains Uncertain, Rating Pressure Intensifies (Oldwick, 

NJ: Oct. 9, 2013). According to A.M. Best, the 34 insurers provided action plans or 

corrected information and therefore would not be subject to rating action. See A.M. Best, 

No Rating Actions Taken on Insurers with Terrorism Exposure Despite Uncertain Future of 

TRIPRA (Oldwick, NJ: Dec. 19, 2013).

83By surplus, we mean policyholder surplus, which is an important measure of an insurer’s 

ability to pay claims and represents the extent to which an insurer’s assets exceed its 

liabilities. See GAO-14-136.

84We calculated the industry-wide deductible as a percentage of policy holder surplus by 

taking the industry-wide deductible in 2012 ($37 billion) and dividing it by the A.M. Best 

estimate for policyholder surplus of insurers potentially exposed to terrorism risk ($221 

billion). A.M. Best’s estimate takes total surplus for the U.S. property and casualty industry 

($612 billion) and deducts surplus related to insurers not subject to TRIA, such as those 

that are predominantly writing personal lines, medical professional liability, reinsurance, 

fidelity, surety, and commercial automobile.
Page 45 GAO-14-445 Terrorism Insurance

Figure 8: Terrorism Risk Insurance Act Deductible as a Percentage of Estimated 

Surplus, 2003–2012

Smaller insurers’ surplus would be affected more than larger insurers’ 

surplus in the event of a large terrorism loss. For example, according to 

our analysis of 2012 SNL Financial insurance data, on average, smaller 

insurers’ TRIA deductible amounts made up 23 percent of surplus 

compared with 12 percent for larger insurers (that is, the 10 largest 

commercial property and casualty insurers in TRIA-eligible lines).85

However, some larger insurers’ surplus also would be at heightened risk. 

For example, the TRIA deductible amounts represented from 7 to 19 

percent of surplus of larger insurers. If the deductible was increased to 35 

percent, surplus at stake (using 2012 data and holding the estimate for 

 85Using SNL Financial insurance data from 2012, for the 10 largest insurers, we 

calculated their deductible amounts based on 20 percent and divided them by estimates 

for each insurer’s surplus. For the small insurers (all other insurers other than the 10 

largest) we calculated the deductible amount based on 20 percent and then divided it by

40 percent of A.M. Best’s estimate for the surplus of insurers potentially exposed to 

terrorism. (In 2012, A.M. Best’s estimate was $221 billion.) According to A.M. Best, the 10 

largest insurers held roughly 60 percent of the estimated surplus and therefore all other 

insurers accounted for roughly 40 percent.
Page 46 GAO-14-445 Terrorism Insurance

surplus constant) would nearly double to 30 percent, greatly increasing 

the possibility of insurer insolvencies due to certified terrorism losses.

In contrast to insurer responses on the program deductible and coshare 

percentages, some insurers told us that the industry could absorb an 

increase to the industry aggregate retention amount.86 According to 

responses from our questionnaire, 7 out of 15 insurers said the industry 

aggregate retention amount should stay the same and 5 said it could be 

increased.87 Two insurers that said increasing the retention amount was 

reasonable because the industry has grown. For example, one insurer 

commented that the $27.5 billion amount was roughly based on 20 

percent of industry premiums for TRIA-eligible lines in 2006. This insurer 

stated that because of growth in premiums, the insurance industry was 

capable of assuming a higher aggregate retention.88 Another insurer 

commented that surplus for the property and casualty industry has grown 

by approximately 20 percent since the 2007 reauthorization; therefore, 

the insurance industry might be able to absorb an increase in the amount 

based on the growth in surplus, which would be approximately $33 

billion.89 However, 7 insurers reported that they preferred to maintain the 

current industry aggregate retention amount and most of those insurers 

cited concerns about the impact a higher retention amount would have on 

policyholders, due to the surcharges that would be added to policyholder 

premiums in the event of recoupment.90 One industry participant noted 

that according to experience in other lines of insurance, any surcharge 

that resulted in a premium increase of more than 2 percent might result in 

policyholders deciding not to purchase this coverage.

 86The act refers to this program parameter as the insurance marketplace aggregate 

retention amount.

87The remaining three insurers did not to respond to this question.

88On the basis of 2012 SNL Financial data, 20 percent of direct earned premiums in TRIAeligible lines equaled $37 billion.

89According to a report by the Federal Office of Insurance, the property and casualty 

sector reported $529 billion and $597 billion in surplus, for 2007 and 2012, respectively; 

which represented an increase of 13 percent over this period. A 13 percent increase in the 

retention amount would bring the total to approximately $31 billion.

90TRIA also sets limits on discretionary surcharges. For example, the surcharge is based 

on the policy’s overall property and casualty premium charged and instances of 

discretionary recoupment cannot exceed 3 percent of the overall property and casualty 

premium. Because of these limitations, theoretically speaking, a loss could be so large 

that the federal government could not recoup (discretionally) and be fully repaid.
Page 47 GAO-14-445 Terrorism Insurance

Changes to program parameters not only would affect insurers but also 

estimates for fiscal exposure under TRIA. The legal commitment to pay a 

share of the losses when a certified terrorist attack occurs makes the 

program an explicit fiscal exposure for the U.S. government.91 The 

amount of federal spending resulting from this exposure depends on the 

extent of covered losses incurred as a result of a certified attack. Because 

the potential amounts of fiscal exposure and loss sharing would depend 

on the specifics of a certified act of terrorism, we developed illustrative 

examples to help demonstrate estimated changes in the magnitude of 

fiscal exposure when the deductible, coshare, or industry aggregate 

retention amounts were individually changed.92 We found that increasing 

the insurer deductible, coshare, or aggregate retention amount could 

reduce the government’s fiscal exposure in certain situations (see fig. 9). 

More specifically, as the deductible or coshare percentages increase, the 

government’s overall share of losses decreases, but only when the 

private sector’s share of losses exceeds $27.5 billion (because of 

mandatory recoupment).93

 91As discussed earlier, the government’s legal commitment to pay losses when a certified 

terrorist event occurs makes the terrorism risk insurance program an explicit exposure. 

See GAO-14-28.

92See appendix I for information on how we developed these examples. We examined the 

potential effects if different numbers of insurers were affected (10 largest insurers, 20 

largest insurers, and all insurers) because losses from an attack are highly unlikely to 

impact all insurers or be distributed evenly among all insurers. Our illustrative examples 

also took into account variously sized terrorist attacks––attacks that would result in $25 

billion, $50 billion, $75 billion, or $100 billion of insured losses. The illustrative examples 

are not specific determinations of federal fiscal exposure under TRIA and do not take into 

account the requirement for Treasury to recoup 133 percent of the payments to insurers 

under the program. All mandatory recoupment from insurers for all acts of terrorism after 

January 1, 2012, must be collected by September 30, 2017.

93Because of the program’s recoupment mechanism, changes to program parameters 

effectively only could reduce the government’s estimated fiscal exposure when attacks 

resulted in insured losses exceeding the industry aggregate retention amount of $27.5 

billion. That is, the federal government must recoup any payments initially made to 

insurers in instances when the private sector’s share of losses is less than $27.5 billion 

under the current law.

Changes to Program 

Parameters Could Reduce 

Federal Fiscal Exposure 

under Certain 

Circumstances
Page 48 GAO-14-445 Terrorism Insurance

Figure 9: Potential Impacts of Increases to the Industry Aggregate Retention Amount and Insurers’ Deductible and Coshare 

Related to the Terrorism Risk Insurance Act

Increasing the industry aggregate retention amount would have a greater 

impact on reducing fiscal exposure than increasing either the deductible 

or coshare percentages by certain specified amounts (see fig. 10). The 

potential reduction to federal exposures was most pronounced in our 

scenario with a $50 billion loss and an increased retention amount. Such 

a scenario would approximate current-dollar losses similar to those that 

resulted from the September 11, 2001, terrorist attacks. Potentially, every 

$1 increase in the retention amount can result in an equal $1 decrease in 

federal exposure, when the insured losses are more than the industry 

aggregate retention amount of $27.5 billion. The insurers’ share of losses 

increases with any decrease in federal fiscal exposures. 

According to this $50 billion loss scenario, under the current program 

parameters the government’s share of losses after mandatory 

recoupment would be $23 billion. If the industry aggregate retention 

amount were increased to $35 billion, as suggested by increased surplus 

levels in the industry, federal exposure could decrease to $15 billion (see 

fig. 10). To achieve similar levels of reduction in the government’s share 

of losses, the deductible would have to be raised from 20 to more than 35 

percent. There was no observable change to federal exposure when the 
Page 49 GAO-14-445 Terrorism Insurance

coshare was increased in this $50 billion loss example because of the 

mandatory recoupment amount.94

Figure 10: Examples of Reductions in Estimated Fiscal Exposure by Increasing Program Parameters, $50 Billion TerrorismRelated Insured Loss Event

Note: This example assumes a terrorist attack that occurred in 2012, resulted in $50 billion of insured 

losses, and affected the 10 largest commercial property and casualty insurers in TRIA-eligible 

 94When we examined the potential effects of the 20 largest insurers affected instead of the 

10 largest insurers, we did notice a change to federal exposure when the coshare was 

increased. This is because the federal share of losses is less, as more insurers are 

affected by an event (that is, suffer losses).
Page 50 GAO-14-445 Terrorism Insurance

insurance lines. The example assumes all 10 insurers have an equal market share and that the event 

will have an equal impact on the TRIA-eligible insurance lines.

The impact of changing the industry aggregate retention amount 

compared to changes to the deductible or coshare is even more evident 

under our $75 billion loss scenario (see fig. 11).

Figure 11: Examples of Reductions in Estimated Fiscal Exposure by Increasing Program Parameters, $75 Billion TerrorismRelated Insured Loss Event

Note: This example assumes a terrorist attack that occurred in 2012, resulted in $75 billion of insured 

losses, and affected the 10 largest commercial property and casualty insurers in TRIA-eligible 

insurance lines. The example assumes all 10 insurers have an equal market share and that the event 

will have an equal impact on the TRIA-eligible insurance lines.
Page 51 GAO-14-445 Terrorism Insurance

As we have previously reported, insurers generally have attempted to 

limit their exposure to nuclear, biological, chemical, or radiological 

(NBCR) risks by excluding nearly all NBCR events from property and 

casualty coverage. According to industry representatives, property and 

casualty insurers believe they have excluded NBCR coverage by 

interpreting existing exclusions in their policies to apply to NBCR risks, 

but some of the exclusions could be challenged in courts.95 In 2004 

Treasury issued an interpretive letter that clarified that the act’s definition 

of insured loss does not exclude losses resulting from NBCR attacks or 

preclude Treasury from certifying a terrorist attack involving NBCR 

weapons.96 According to Treasury’s interpretive letter, the program covers 

insured losses from NBCR events resulting from a certified act of 

terrorism, if the coverage for those perils is provided in the policy issued 

by the insurer.

While Treasury has confirmed that NBCR losses would qualify for loss 

sharing under TRIA, we found insurers generally excluded coverage for 

NBCR risks.97,98 Several insurers told us that they do not underwrite 

NBCR risks because of the lack of data to assess frequency and severity, 

which makes it difficult to determine an accurate price for the coverage. 

One insurer told us that NBCR events are uninsurable because of the 

scale of losses, difficulties in modeling, and the deliberate nature of the 

acts. Several insurers also told us they generally exclude NBCR risk 

where state law permits.

However, insurers are generally required to cover NBCR losses for 

workers’ compensation policies, and may provide NBCR coverage in 

other limited circumstances. For instance, two insurers we interviewed 

provide NBCR coverage in limited circumstances. One insurer told us that 

the company covers NBCR risks in its general liability policies, and 

another said some of its environmental policies include NBCR coverage. 

As stated previously, workers’ compensation insurers generally include

 95See GAO-06-1081.

96“Make Available”; “Property & Casualty Insurance” (Nuclear, Biological & Chemical) / 

TRIA Sections 102(12) and 103(c) / 31 C.F.R. §§ 50.5.5(l), 50.23., found at 

http://www.treasury.gov/resource-center/fin-mkts/Pages/letters.aspx. 

97State workers’ compensation laws generally do not permit insurers to exclude NBCR 

risks. 

98GAO-09-39. 

Most Insurers Not Willing 

to Cover NBCR Outside of 

Workers’ Compensation 

Policies
Page 52 GAO-14-445 Terrorism Insurance

NBCR coverage because states generally prohibit the exclusion of any 

peril for workers’ compensation.99 Also, certain states require insurers to 

cover fire following an event, regardless of the cause of the fire. Thus, an 

NBCR event that leads to a fire may activate a fire policy providing 

coverage to a policyholder.

Other options for NBCR coverage exist. For instance, NBCR coverage 

can be obtained through the use of captive insurers accessing the TRIA 

program and we previously reported that some large businesses elected 

this coverage route.100 There also is a limited stand-alone terrorism 

insurance market for NBCR, but high prices have prevented most 

businesses from purchasing coverage.101 And, although reinsurance 

companies traditionally excluded NBCR, about two-thirds of reinsurance 

companies offered some coverage for NBCR events, according to a 2010 

survey.102

Some insurers told us that expanding TRIA to require insurers to make 

NBCR coverage available would result in significant disruptions to the 

market. Some insurers said that an NBCR event could render the 

insurance industry insolvent. Another insurer told us that underwriting 

NBCR risks would decrease its capacity to underwrite other types of 

insurance. Several insurers did not support changing TRIA to require 

coverage for NBCR events because, in their opinion, NBCR was not an 

insurable risk. One insurer said effective underwriting and pricing of 

NBCR exposure was not possible and attempting to do so would be 

contrary to basic principles of insurance underwriting and pricing.103 One 

 99GAO-06-1081.

100Captives are special-purpose insurance companies set up by commercial businesses 

to self-insure risks arising from the owners’ business activities. Captives may be insurers 

under TRIA and therefore may be eligible for payments for losses related to certified 

NBCR events. See GAO-06-1081.

101Aon, Response to U.S. Treasury and President’s Working Group: Terrorism 

(Re)insurance, September 2013.

102Guy Carpenter, Terrorism: Reinsurers Standing By, June 2010.

103As previously discussed: (1) there must be a sufficiently large number of homogeneous 

units exposed to random losses, both historically and prospectively, to make the future 

losses reasonably predictable, (2) the loss must be definite and measurable, (3) the loss 

must be fortuitous or accidental and (4) the loss must not be catastrophic. See 

GAO-06-1081.
Page 53 GAO-14-445 Terrorism Insurance

company told us that significant market disruptions would occur if NBCR 

coverage were mandatory. Additionally, one insurer told us that 

reinsurance capacity for NBCR risks was minimal and, as a result, the 

ability of any insurer to offer NBCR coverage was limited.

According to responses to our questionnaire, 10 of 15 insurers said that 

they did not favor establishing a prefunding mechanism (such as a pool) 

in place of the current postfunding mechanism under TRIA (recoupment). 

For example, a prefunding mechanism could potentially allow insurers to 

set aside tax-deductible reserves for terrorist events or the creation of 

risk-sharing pools. One insurer supported a prefunding mechanism and 

four other insurers did not provide comments on the advantages and 

disadvantages associated with a prefunding mechanism. Insurers not in 

favor of a mechanism to charge for federal reinsurance cited a number of 

obstacles that would need to be considered, such as the following:

• Increased administrative costs. Several insurers commented that a 

prefunding mechanism would require additional resources and staff to 

administer. For example, one insurer said that Treasury would have to 

expand its staff and augment their expertise to administer a 

prefunding mechanism. This insurer also noted that Treasury would 

have to collect and analyze exposure and other pricing data, utilize 

terrorism risk models, obtain staff with actuarial and underwriting 

expertise, conduct audits of insurers, and manage a billing process.

• Difficulties funding a reinsurance pool. Insurers noted challenges in 

accumulating sufficient reserves for a pool, and effectively managing 

the pool. For example, one insurer commented that the federal 

government likely would not be able to accumulate enough funds for 

such a pool. Insurers also cited other challenges involved in 

prefunding federal reinsurance, such as decreases in the purchase of 

terrorism insurance due to its increased cost or lack of coverage after 

an event depletes the fund.

• Challenges in estimating the frequency of terrorist attacks. The 

unpredictability of terrorist attacks and the inability to effectively 

underwrite against terrorism risk would need to be considered. One 

insurer commented that any prefunding mechanism would be purely 

speculative and contribution amounts would bear little relationship to 

the likely losses from an event. Additionally, because it is difficult to 

assess the potential frequency and severity of a terrorism event (key 

components in pricing or funding for risk), insurers commented that 

postfunding (recoupment) was the preferable approach for terrorism 

risk.

Insurers Reported 

Numerous Obstacles 

Involved in Charging for 

Federal Reinsurance
Page 54 GAO-14-445 Terrorism Insurance

• Increased cost to policyholders. Insurers commented that if a 

prefunding mechanism were established, it likely would result in 

increased costs, such as administrative costs and increased costs to 

policyholders. For example, one insurer told us that as users of such a 

mechanism, its costs for such a mechanism would be passed to 

policyholders. This insurer also noted that additional costs may cause 

policyholders to forgo terrorism coverage; therefore, in their view a 

prefunding mechanism could contravene the purpose of TRIA—to 

encourage the availability and affordability of terrorism coverage for 

policyholders that want to insure against terrorism exposure.

Some uncertainty exists in the market about whether TRIA covers cyber 

terrorism risks. According to industry participants, cyber attacks could 

involve a wide spectrum of potential threats that could impact property, 

critical communications, and utility and transportation infrastructure, 

among other unconventional threats. Industry participants also pointed 

out that cyber events have the ability to impact numerous lines of 

insurance coverage. While TRIA does not explicitly exclude coverage of 

cyber risks (or other specific perils) it also does not explicitly cover it. 

Program guidance and other official communications have been silent on 

this point—thus, allowing for confusion or uncertainties about coverage. 

According to our questionnaire, 8 of 15 insurers considered losses 

resulting from cyber terrorism as covered by TRIA as long as the insurer 

underwrote cyber terrorism coverage as part of the underlying policy. 

However, our questionnaire also revealed uncertainty about such TRIA 

coverage. For example, 7 other insurers said that, based on their 

understanding of TRIA, they did not know if losses resulting from cyber 

terrorism would be covered by TRIA. Insurers commented that more 

clarity about the treatment of cyber terrorism under the program would be 

helpful to eliminate any uncertainty in the insurance industry about 

coverage of this type of risk.

Insurers also commented that because cyber terrorism is an emerging 

risk there was some uncertainty about what the term encompassed. For 

example, one insurer noted that there is no statutory definition for cyber 

terrorism and that depending on the definition of cyber terrorism the 

program may or may not be triggered; therefore, the insurer said that a 

consistent definition would be needed. Another insurer said it was unsure 

if the industry has had a consistent approach to defining and covering 

cyber terrorism in policies and suggested that a technical working group 

or clarification from Treasury could help make this clearer. Some insurers, 

industry associations, and brokers also noted that because cyber 

While Some Insurers 

Cover Cyber Terrorism 

Risks, Others Not Certain 

If TRIA Covers This Risk
Page 55 GAO-14-445 Terrorism Insurance

terrorism risk is a new and evolving risk that recently has come into focus, 

some clarification about how this risk would be covered under TRIA would 

be helpful and could help increase capacity in the market. For example, in 

its comments to PWG, Aon noted a lack of cyber insurance capacity in 

certain industries, such as large energy, utility, gas, and water entities. In 

addition, in their 2013 statement to PWG, the American Academy of 

Actuaries stated that cyber terrorism is a significant risk, and that 

clarification is important because of the nation’s ever-increasing 

dependence on technology, including for commerce and business 

administration.

As discussed earlier in this report, Treasury issued an interpretive letter in 

2004 that clarified whether losses from an NBCR event would be covered 

under TRIA.104 In addition, our work on fiscal exposures demonstrates the 

importance of complete information about fiscal exposures.105

Specifically, a more complete understanding of the sources of fiscal 

exposure and the way they change can provide enhanced control and 

oversight over federal resources. Treasury acknowledged that there has 

been growth in the cyber insurance market. Treasury officials said that 

they have not issued any clarifications because clarification was 

unnecessary and explicitly listing TRIA-covered events may create 

unnecessary coverage disputes. While TRIA does not explicitly prohibit 

coverage of cyber terrorism risk, neither does it explicitly allow it. 

However, without clarification of the coverage of cyber risks, some 

insurers may not offer cyber coverage or may not explicitly exclude 

coverage. As a result, coverage may not be as available. Additionally, 

inclusion of cyber risks affects the government’s fiscal exposure under 

TRIA, and without gathering information from the industry to help provide 

clarity surrounding the definition and coverage of this risk, the federal 

government would not have an understanding of the potential impact of 

losses from a cyber attack.

 104In 31 C.F.R. § 50.9, Treasury provided a procedure for requesting TRIA interpretations 

and noted that responses by the TRIP office would be made publicly available. See 

Department of the Treasury, “Make Available”; “Property and Casualty Insurance”

(Nuclear, Biological, and Chemical) / TRIA Sections 102(12) and 103(c) / 31 C.F.R. §§ 

50.5.5(l), 50.23.

105GAO-14-28.
Page 56 GAO-14-445 Terrorism Insurance

Congress enacted TRIA and its reauthorizations to help ensure the 

availability and affordability of insurance for terrorism risk and provide a 

transitional period in which the private insurance market could determine 

how to model and price terrorism risk. However, Treasury has not 

collected comprehensive data directly from insurers. Federal internal 

control standards state that agencies should identify and obtain relevant 

and needed data to be able to meet program goals. Obtaining 

comprehensive data is necessary to thoroughly analyze the market. While 

Treasury stated that the information available from other sources has 

been sufficient for purposes of responding to TRIA’s reporting 

requirements, more data and periodic assessments of the market would 

help Treasury assess whether the program goals of ensuring the 

continued widespread availability and affordability of terrorism risk 

insurance and addressing market disruptions are being met, and advance 

decision making about any potential program changes and the impact of 

those program changes on the market.

Moreover, Treasury has performed limited analyses of the potential 

amount of fiscal exposure the program represents. While no terrorist 

attacks have triggered TRIA, the program still creates an explicit fiscal 

exposure for the government because the government is legally required 

to make payments for certified terrorist events. According to industry best 

practices, analysis of exposures is important for understanding the 

financial risks of a potential terrorist attack. In addition, federal internal 

control standards state the importance of analyzing risks to programs, 

and our prior work on fiscal exposures highlights how estimates could be 

developed to better understand fiscal exposures. By enhancing its data 

analyses, Treasury would be in a better position to estimate the amount 

of fiscal exposure under various scenarios of potential terrorist attacks 

and to inform Congress of the potential fiscal implications of any program 

changes. By better understanding fiscal exposure, Treasury can aid 

Congress in monitoring the financial condition of the program and its 

potential impact on the federal budget over the longer term.

In the last few years, demand for terrorism insurance may have leveled 

off, as indicated by available data. However, insurers are concerned 

about how a new type of terrorist threat, cyber attacks, would be treated 

under the program and some industry sectors have experienced difficulty 

obtaining coverage. Some terrorism risk insurers told us they do not know 

whether losses resulting from cyber terrorism would qualify for coverage 

under TRIA, which may impact their decision to cover it. In the past, 

Treasury issued an interpretive letter to clarify the treatment of NBCR 

risks under the program. TRIA is silent on cyber threats. Clarification of 

Conclusions
Page 57 GAO-14-445 Terrorism Insurance

the coverage of cyber risks could spur additional capacity in the market 

for this type of risk. Additionally, clarification of cyber risks could help 

estimates of the government’s fiscal exposure more accurately reflect the 

potential risks.

We recommend that the Secretary of the Treasury take the following 

three actions:

• Collect the data needed to analyze the terrorism insurance market. 

Types of data may include terrorism coverage by line of insurance 

and terrorism insurance premiums earned. In taking this action, 

Treasury should determine whether any additional authority is needed 

and, if so, work with Congress to ensure it has the authority needed to 

carry out this action.

• Periodically assess data collected related to terrorism insurance,

including analyzing differences in terrorism insurance by company 

size, geography, or industry sector; conducting hypothetical illustrative 

examples to help estimate the potential magnitude of fiscal exposure; 

and analyzing how changing program parameters may impact the 

market and fiscal exposure. 

• Gather additional information needed from the insurance industry 

related to how cyber terrorism is defined and used in policies, and 

clarify whether losses that may result from cyber terrorism are 

covered under TRIA––clarification could be made through an 

interpretative letter or revisions to program regulations, some 

combination or any other vehicle that Treasury deems appropriate.

We provided a draft of this report for review and comment to the 

Department of the Treasury (Treasury), including the Federal Insurance 

Office, and National Association of Insurance Commissioners (NAIC). We 

received written comments from Treasury, which are presented in 

appendix II. NAIC did not provide written comments. Treasury and NAIC 

also provided technical comments, which we incorporated as appropriate. 

In its written comments, Treasury agreed with our recommendations on 

collecting and assessing data to analyze the terrorism insurance market, 

but with respect to our recommendation about clarifying guidance on 

coverage of cyber terrorism, said that it did not believe advance 

determination of such an event would be helpful or appropriate. 

Treasury agreed to collect the data needed to analyze the terrorism 

insurance market and to periodically assess these data for certain 

purposes, such as for differences in terrorism insurance by company size, 

geography, or industry sector and effects on the market for terrorism risk 

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
Page 58 GAO-14-445 Terrorism Insurance

insurance of changing program parameters. Treasury also noted that 

collecting and analyzing market data would not provide a basis to 

meaningfully estimate the fiscal exposure of the government under the 

program and that the amount of federal payments to insurers resulting 

from acts of terrorism hinges on multiple variables that cannot be 

predicted with precision. As discussed in the report, limitations of 

modeling the probability of this type of risk exist, but we maintain that

estimating the potential magnitude of fiscal exposure under various 

hypothetical scenarios of terrorist attacks could help inform Congress of 

the potential fiscal implications of any program changes, including 

changes that could limit federal fiscal exposure. Further, accounting for 

insurers’ deductibles and recoupment in these estimates could aid 

Treasury in monitoring the potential impact of the program on the federal 

budget over the longer term. In light of Treasury’s response, we have 

revised our draft recommendation to clarify what types of analyses to 

conduct and to specify that illustrative examples of different terrorist 

attack scenarios could be used for the analysis of the potential magnitude 

of fiscal exposure.

Regarding our third recommendation that Treasury should clarify whether 

losses that may result from cyber terrorism are covered under TRIA, 

Treasury stated that TRIA does not preclude federal payments for a cyber 

terrorism event if it meets the statutory criteria for an act of terrorism. 

Treasury also stated that while the agency will continue to monitor this 

issue as it develops and collect applicable market data as necessary, it 

does not believe that providing an advance determination of when a cyber 

event is an act of terrorism would be helpful or appropriate. As discussed 

in the report, clarification of whether losses from a cyber terrorism event 

could be eligible for coverage under TRIA is needed because of existing 

uncertainties regarding this coverage. Such clarification would not 

necessarily require an advance determination of what types of cyber 

events would qualify as acts of terrorism under the statute. As we 

discussed in the report, 7 of the 15 insurers responding to our 

questionnaire did not know if losses resulting from cyber terrorism would 

be covered by TRIA. In addition, a large broker noted a lack of cyber 

insurance capacity in certain industries. Due to the uncertainties that exist 

about what this emerging risk encompasses and whether losses resulting 

from a cyber terrorism event would qualify for coverage under TRIA, 

clarification would be helpful to spur additional market capacity for this 

risk, consistent with the program’s goals of ensuring availability and 

affordability of terrorism risk insurance. In light of Treasury’s response, we 

revised our draft recommendation to specify the type of information to be 
Page 59 GAO-14-445 Terrorism Insurance

gathered from the industry to help inform Treasury’s decision regarding

guidance on cyber terrorism.

As agreed with your offices, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies to Treasury, NAIC, and other 

interested parties. In addition, the report will be available at no charge on 

the GAO website at http://www.gao.gov.

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

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

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. Key contributors to this report are listed in 

appendix III.

Daniel Garcia-Diaz

Director, Financial Markets and Community Investment
Appendix I: Objectives, Scope, and 

Methodology

Page 60 GAO-14-445 Terrorism Insurance

The objectives of our report were to (1) evaluate the extent of available 

data and the U.S. Department of the Treasury’s (Treasury) efforts in 

determining the government’s exposure for the terrorism risk insurance 

program, (2) describe changes in the terrorism insurance market since 

2002, and (3) evaluate potential impacts of selected changes to the 

Terrorism Risk Insurance Act (TRIA).

For each of our objectives, we reviewed relevant laws, particularly the 

Terrorism Risk Insurance Act of 2002, its amendments, and implementing 

regulations.1 We also reviewed relevant literature and past reports on 

terrorism risk, including the Congressional Research Service’s reports on 

the current program and recent legislation.2 Additionally, we reviewed 

reports our previous reports on TRIA and updated our work accordingly.3

We reviewed reports to Congress from the President’s Working Group on 

Financial Markets (PWG).4 We also reviewed comments submitted from 

the public to PWG for their most recent TRIA report. We interviewed 

federal officials and staff from Treasury, the National Association of 

Insurance Commissioners, and the Congressional Budget Office. We also 

interviewed several industry participants (such as representatives from 

insurance trade associations, terrorism risk modeling firms, rating 

agencies, and insurance brokers) to obtain information for all our 

objectives.

Because detailed information on terrorism insurance was not publicly 

available, we developed a questionnaire to solicit information applicable 

 1

Terrorism Risk Insurance Act of 2002 (Pub. L. No. 107-297), the Terrorism Risk 

Insurance Extension Act of 2005 (Pub. L. No. 109-144), the Terrorism Risk Insurance 

Program Reauthorization Act of 2007 (Pub. L. No. 110-160), and the Code of Federal 

Regulations (31 CFR Part 50).

2

Congressional Research Service, Terrorism Risk Insurance: Issue Analysis and 

Overview of Current Program (Washington, D.C.: May 24, 2013 and March 28, 2014). 

3

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

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

Dec. 12, 2008); Terrorism Insurance: Status of Efforts by Policyholders to Obtain 

Coverage, GAO-08-1057 (Washington, D.C.: Sept. 15, 2008); and Terrorism Insurance: 

Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-307 (Washington, 

D.C.: Apr. 23, 2004).

4

See President’s Working Group on Financial Markets, Terrorism Risk Insurance

(Washington, D.C.: September 2006); Market Conditions for Terrorism Risk Insurance

(Washington, D.C.: 2010); and The Long-Term Availability and Affordability of Insurance 

for Terrorism Risk (Washington, D.C.: April 2014).

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 61 GAO-14-445 Terrorism Insurance

to all our objectives from 15 insurers from which businesses had 

purchased terrorism coverage in 2012. The 15 companies—10 of the 

largest U.S. commercial property and casualty insurers in lines subject to 

TRIA (by premium volume) and 5 additional insurers recommended to us 

by an insurance broker, trade association, or both—represented roughly 

40 percent of the commercial property and casualty market (by direct 

earned premium volume for 2012), according to SNL Financial data.5 We 

included questions about coverage, premium volume, and underwriting 

decisions. We also obtained views on potential modifications to TRIA and 

how they might affect the market, which we took into account when 

developing questions. We worked with a GAO specialist to draft 

questions. To minimize errors arising from differences in how questions 

might be interpreted and reduce variability in responses, we conducted 

pretests with two different organizations in January 2014. On the basis of 

feedback, we revised the questionnaire to improve organization and 

clarity. We then sent the questionnaire to the 15 insurers in January 2014. 

Some questions required close-ended responses, such as providing a 

specific percentage or checking boxes. Other questions were openended, allowing the insurers to provide more in-depth responses on how 

changes to TRIA might affect them. Since the 15 insurers we contacted 

were selected on a nonprobability basis, the findings are only applicable 

to the 15 companies that we interviewed and do not generalize to even 

the commercial property and casualty insurers that sold terrorism 

coverage in 2012. They do offer insight into how some private market 

insurers currently view parameters and topics under consideration related 

to government-backed terrorism insurance.

We took steps to verify the information gathered in the questionnaire and 

analyzed the results. We initially reviewed returned questionnaires to 

ensure company representatives had provided complete and consistent 

responses. After we received the completed, written responses, we held 

teleconferences with representatives from each insurer to discuss, clarify, 

or amend responses, as appropriate. We aggregated the responses and 

presented summary information in this report. We used standard 

descriptive statistics to analyze quantitative responses and performed 

content analysis on the open-ended responses to identify common 

themes. Where possible, we corroborated insurers’ responses with 

 5

SNL Financial, through a partnership with NAIC, provides comprehensive statutory 

financial data for the insurance industry.
Appendix I: Objectives, Scope, and 

Methodology

Page 62 GAO-14-445 Terrorism Insurance

information or analysis from other sources. On the basis of our 

questionnaire design and these follow-up procedures, we determined that 

the data used in this report were sufficiently reliable for our purposes. 

Finally, GAO data analysts independently verified all data analysis 

programs and calculations for accuracy.

To evaluate the extent of comprehensive data, we obtained and reviewed 

information on the availability of data on the terrorism insurance market 

and Treasury’s efforts to help estimate federal exposure under TRIA. We 

reviewed previous reports to Congress from PWG and Treasury on TRIA. 

In addition, we interviewed and obtained information from officials and 

staff at Treasury’s Federal Insurance Office and Terrorism Risk Insurance 

Program Office. To obtain information on Treasury’s efforts in determining 

federal exposure, we reviewed a study from the Insurance Services 

Office, Inc. that provided an estimate of average annual losses under 

TRIA in any given year. We also reviewed documents from Treasury, and 

information on exposure analyses from risk modeling companies, such as 

RMS and AIR Worldwide. We spoke to insurers, brokers, and terrorism 

risk modeling firms to better understand how they analyze information 

about terrorism exposures and obtain information about the industry’s

best practices. Finally, we reviewed our work on fiscal exposures to help 

determine any explicit exposures created by TRIA.6 For example, a 

certified terrorism attack would represent an explicit exposure because 

some payment by the federal government would be legally required.

To describe changes in the terrorism risk insurance market, we obtained 

and analyzed available information on premiums, capacity, pricing, and 

take-up rates (the percentage of businesses buying terrorism coverage). 

We obtained information on terrorism insurance premiums from 2004 

through 2012 from A.M. Best, an insurance rating agency, which had 

collected this information as part of its annual Supplemental Rating 

 6

See GAO-14-28, Fiscal Exposures: Improving Cost Recognition in the Federal Budget, 

GAO-14-28 (Washington, D.C.: Oct. 29, 2013); and Fiscal Exposures: Improving the 

Budgetary Focus on Long-Term Costs and Uncertainties, GAO-03-213 (Washington, D.C.: 

Jan. 24, 2003).
Appendix I: Objectives, Scope, and 

Methodology

Page 63 GAO-14-445 Terrorism Insurance

Questionnaire. A.M. Best provided aggregated data to us.7 To compare 

terrorism premiums with premiums collected for other insurance lines, we 

obtained data from SNL Financial on premiums earned for commercial 

property and casualty insurers for all commercial lines and for lines 

subject to TRIA. Additionally, we obtained capacity, pricing, and take-up 

rate information from 2003 through 2013 from two insurance brokers—

Marsh and McLennan (Marsh) and Aon—as available. Marsh provided 

nationwide pricing and take-up rate data, while Aon had information on 

capacity. Marsh and Aon are the largest business insurance brokers in 

the United States. We interviewed representatives from Marsh and Aon to 

ensure we had a clear understanding of which insurers the data 

represented and how the brokers obtain information from their data 

systems. All data presented in this report from Marsh and Aon solely 

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

are attributed accordingly. Based on this, we determined that the data 

used in this report from the insurance brokers were sufficiently reliable for 

our purposes. To obtain information on the reinsurance market and

insurance-linked securities, we interviewed representatives from the 

Reinsurance Association of America and Fermat Capital Management. 

We also reviewed reports from industry participants, such as Swiss Re, 

Munich Re, and Aon Benfield on the status of the reinsurance and 

insurance-linked securities markets. Finally, as part of our questionnaire, 

we asked insurers whether they purchased reinsurance for terrorism risk 

and how reinsurance purchasing patterns have changed over the last 

decade.

To evaluate the potential impact of selected changes to TRIA, we 

identified certain changes to the program’s parameters based on our 

 7

In 2004, A.M. Best began collecting data on premiums charged for terrorism coverage as 

a part of its annual survey of insurers (the Supplemental Rating Questionnaire for U.S 

property and casualty). A.M. Best collects these data for insurance rating units that 

provide commercial lines on a primary basis, in which the commercial lines make up more 

than 10 percent of the rating units’ direct written premiums. A.M. Best defines rating units 

as a single operating company or several affiliated member companies that have common 

rating assignments due to common operations, internal pooling, or reinsurance 

agreements. A.M. Best provided us with aggregated data from the questionnaire and told 

us that in 2012 they collected information on premiums charged for terrorism coverage for 

226 rating units (of a total of 889 rating units). As part of the survey, A.M. Best asks 

insurers for their total amount of terrorism premium received, including premium received 

as a separate endorsement or included as a risk load in the policy premium. A.M. Best 

also asks for the terrorism premium broken down by workers’ compensation, commercial 

property, and all other commercial lines of business.
Appendix I: Objectives, Scope, and 

Methodology

Page 64 GAO-14-445 Terrorism Insurance

analysis of the program’s structure, review of relevant literature, 

testimonies from congressional hearings, and prior changes made in the 

TRIA reauthorizations. On the basis of these, we asked the 15 insurers 

who received our questionnaire for their input on how selected changes 

would affect the insurance market for terrorism risk. For example, we 

asked insurers to categorize the greatest changes to program parameters 

and how such changes could affect each company’s capacity, pricing, 

and take-up rates. We asked insurers to categorize the greatest change 

to the aggregate industry retention amount (currently, $27.5 billion) that, 

in their opinion, the industry could handle. We also asked insurers if their 

companies underwrote nuclear, biological, chemical, or radiological risks 

or cyber risks and what metrics or factors Congress would need to 

consider if changes were made to TRIA related to losses as a result of 

these types of risks. Finally, we asked insurers to indicate what metrics 

and factors Congress would need to consider if the federal government 

were to establish a prefunding mechanism (in place of the current 

postfunding mechanism—recoupment). We obtained information from 

A.M. Best on estimated policyholder surplus of insurers potentially 

exposed to terrorism from 2003 through 2012, to compare, industry-wide, 

the TRIA deductible amounts with estimates of policyholder surplus. We 

also compared the average TRIA deductible as a percentage of estimated 

policyholder surplus, for the 10 largest commercial property and casualty 

insurers (in insurance lines subject to TRIA), with all other insurers, as 

well as the range for the 10 largest insurers. We performed this analysis 

to help determine whether any differences existed for large versus small 

insurers in terms of their TRIA deductible amounts as a percentage of 

surplus.

We also developed examples to illustrate the impact of certain changes to 

the current program on the federal government’s fiscal exposure. To 

develop the examples, we consulted with experts from terrorism risk 

modeling firms and reviewed relevant literature. Additionally, to develop 

the examples, we made assumptions for the number of insurers affected, 

and their direct earned premiums, market share, insurance lines, and total 

loss amount. We used SNL Financial insurance data and information from 

A.M. Best to help develop these assumptions. We compared what federal 

losses would be under the current program parameters (status quo) with 

those after making changes to the current program. For example, we 

compared changing the deductible from 20 to 35 percent and changing 

the insurers’ coshare from 15 to 30 percent, in intervals of 2 to 3 percent. 

We analyzed the federal share of losses for variously sized terrorist 

attacks ($25 billion, $50 billion, $75 billion, and $100 billion) before and 

after recoupment, using the current law’s aggregate industry retention 
Appendix I: Objectives, Scope, and 

Methodology

Page 65 GAO-14-445 Terrorism Insurance

amount ($27.5 billion).

8 To help assess the reliability of our analysis, we 

verified that our results were consistent with a model developed by the 

Reinsurance Association of America.

We conducted this performance audit from July 2013 through May 2014, 

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.

 8

We chose to present only the $50 billion and $75 billion loss event scenarios in the report 

because they best illustrated the magnitude of changes to federal fiscal exposure under 

changes to the program parameters.
Appendix II: Comments from the Department 

of the Treasury

Page 66 GAO-14-445 Terrorism Insurance

Appendix II: Comments from the Department 

of the Treasury
Appendix II: Comments from the Department 

of the Treasury

Page 67 GAO-14-445 Terrorism Insurance
Appendix II: Comments from the Department 

of the Treasury

Page 68 GAO-14-445 Terrorism Insurance
Daniel Garcia-Diaz, (202) 512 – 8678 or garciadiazd@gao.gov

In addition to the contact named above, Jill Naamane (Assistant Director); 

William Chatlos; Robert Dacey; Rachel DeMarcus; Patrick Dynes; Beth 

Ann Faraguna; Isidro Gomez; DuEwa Kamara; Shamiah Kerney; May 

Lee; Marc Molino; Erika Navarro; Susan Offutt; Barbara Roesmann; 

Jessica Sandler; Melvin Thomas; and Frank Todisco made key 

contributions to this report.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(250746)
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