PROMOTING AN EFFECTIVE TERRORISM RISK INSURANCE PROGRAM AND EXPLORING 

CONCEPTS TO ENHANCE PRIVATE MARKET CAPACITY

1. KEY OBJECTIVES OF ANY PROGRAM. Contemplation of the efficacy of the current program 

or any modified or replacement program necessarily starts with the identification of its key 

objectives. AIA submits that the purpose of TRIA and of any modified or replacement 

program are:

a. Economic stability across the lifecycle of the terrorism threat. Any terrorism 

recovery program must provide certainty and stability to the U.S. financial system 

and the real economy throughout the periods (i) before a terrorism event (so that 

lending can occur, buildings can be built, employers can employ and businesses can 

plan); (ii) during recovery from a terrorism event (so that victims and their families 

can be cared for and compensated, property can be restored, and businesses can 

endure interruption); and (iii) after a terrorism event (so that lending continues to 

occur, buildings continue to be built, employers continue to employ and businesses 

can continue to plan).

b. Preservation of the American way of life. Any program must defend the societal, 

economic and cultural ambitions of our nation. A program could not be considered 

successful if it capitulates to the threat of terrorism through economic incentives 

that deny Americans vibrant cities, forestall investment in infrastructure, slow job 

creation, or unproductively drain resources from the U.S. economy.

c. Efficiency and fairness for all stakeholders. Any program must meet its objectives 

through a fair and efficient allocation of the national burden brought upon us by the 

scourge of terrorism, considering (i) the root causes of the terrorism threat; (ii) the 

evolving and inherently unpredictable nature of that threat; (iii) public investments 

in, and acceptance of, measures for detecting and preventing planned acts of 

terrorism; and (iv) the capabilities each stakeholder possess that can be brought to 

bear to our collective fight against terrorists and their objectives.

2. THE “FULL FAITH AND CREDIT” OF THE U.S. GOVERNMENT WILL ALWAYS BE AN ESSENTIAL 

COMPONENT OF PROVIDING TERRORISM RISK INSURANCE. While some may want the U.S. 

government to play no role in the market for terrorism risk insurance, addressing threats to 

national security, providing for a common defense, and preserving a well-functioning U.S.

economy are fundamental functions of the federal government. While we can explore ways 

to stimulate the growth of the private market, the presence of the United States as a 

financial “backstop” to catastrophic terrorism is critical to achieving the objectives outlined 

above.
2

3. IMPROVING THE PROGRAM IS CURRENTLY THE BEST OPTION. AIA supports TRIA (and has 

supported the various iterations of the program) because it effectively provides stability to 

the economy in a time of terror and assures a continuing supply of insurance at affordable 

rates for exposures with the highest risk to terrorism, all at very little cost to taxpayers. The 

TRIA program has worked well to allow U.S. businesses to readily purchase terrorism 

coverage, and to establish a level of predictability necessary for insurers to manage their 

terrorism risk aggregations in the context of their overall enterprise risk management 

strategy. In short, TRIA has provided market stability for an atypical, uninsurable risk, and 

facilitates an orderly economic recovery following a terrorist attack on U.S. soil. The 

importance of this role cannot be understated. In the 15 1⁄2 years following the September 

11, 2001 attack, it has become abundantly clear that sources of private capital have no 

interest in assuming the catastrophic backstop role the federal government has in TRIA and 

no available substitute to the federal government has been identified.

4. ANY REVISIONS OR ALTERNATIVES MUST WORK FOR ALL INTERESTED PARTIES. AIA

believes that the program structure and elements should be reviewed now in order to 

consider improvements or other options that do not undercut the program, destabilize the 

private market, or create insurance capacity concerns. Any options must also reflect the 

fact that (1) the property-casualty reinsurance marketplace cannot provide sufficient 

reinsurance to address catastrophic terrorism losses, (2) the program itself is operating with 

insurer loss retentions that are at a “solvency management” level, (3) the underlying 

characteristics of terrorism risk have not evolved, and (4) while the U.S. has prevented 

another catastrophic terrorist attack since 2001, there can be no guarantee that another 

such attack won’t occur. 

Indeed, the program leaves a loss exposure nearly the size of Hurricane Katrina with the 

industry – thereby allowing any private capacity for terrorism ample room to take on the 

risk most insurers would be more than happy to transfer under the current program. While 

it is possible that additional capacity is available from capital providers willing to accept a 

remote risk of ever paying, the current program’s massive deductible and wide co-share 

structure imposes on insurer retentions far in excess of the retentions they typically accept 

for natural catastrophes. As a result, the working layer for terrorism reinsurance continues 

to be wide open to any available capital providers.

Of course, the current program only provides a recovery following a terrorism event to

policyholders that have purchased insurance that does not exclude the risk of terrorism. 

Under TRIA, all insurers are required to make such an offer. According to broker surveys, 

somewhere between one half and one third of businesses decline to be insured against 

terrorism through their property insurance policies – meaning that they have opted out of

an available tool for economic restoration should the worst occur. To the extent any 

program incents additional policyholders to opt out, economic recovery following a 

terrorism event will be impaired. Any adjustments to the current program should 

encourage higher “take up” rates, but such encouragement should not be confused with 

ratcheting up mandatory obligations on participating insurance companies. In addition, as 

discussed further below, state rate “regulation” should be exercised in a way that allows 

commercial insurers to charge risk-based premiums in a competitive market environment.
3

5. IN THE WAKE OF 9/11 AND AT EACH RENEWAL OF TRIA, AIA CONSIDERED A VARIETY OF 

OPTIONS, INCLUDING INITIALLY PROPOSING THE ESTABLISHMENT OF A U.S. EQUIVALENT 

TO U.K.’s POOL RE. AIA has consistently looked at ways to develop additional private 

market capacity and stability, recognizing the unique, uninsurable characteristics of 

terrorism risk that require some level of government support, financial and otherwise. In 

fact, either independently or with other industry participants, we have explored a variety of 

substantive proposals in the years since 9/11, including but not limited to, the following:

a. Terrorism Risk Pooling – AIA and its members offered draft legislation to the Bush 

Administration shortly following 9/11 that would have established a U.S. version of 

the United Kingdom’s Pool Re for terrorism insurance – a pre-funded approach 

ultimately rejected by the Administration because of its perceived permanency and 

active federal involvement as a primary reinsurer. In 2004, Tillinghast Towers 

Perrin studied the feasibility of a private voluntary workers’ compensation 

reinsurance pool for terrorism losses, but ultimately concluded that such a 

mechanism would be unable to create enough private market capacity to effectively 

handle a catastrophic terrorism event. The study reinforced the need for the TRIA 

program. That reality, and the existence of other complexities associated with the 

establishment of a terrorism risk pool (such as a reduction in individual underwriting 

discipline and hard-to-resolve intergenerational equity issues) would counsel

against the establishment of such a mechanism.

b. Reinsurance Facilities – AIA has worked with a variety of TRIA constituents to 

explore and design alternative reinsurance facilities that could be incorporated into 

the program to incent the development of a private layer of mezzanine financing at 

layers initially included in TRIA and now retained by the industry within the 

company retentions. These approaches faced challenges in actually encouraging 

the inflow of new private market capital (lack of demand) and faced structural 

obstacles in the legislative process (e.g., appearance of GSE structure, revenue 

collection).

c. Risk Securitization – In 2005/2006, AIA led a cross-industry group that conducted a 

survey of the capital markets to gauge their interest in serving as an alternative riskspreading mechanism. The survey revealed that the capital markets had very little 

interest in absorbing a risk that was not well understood, not insurable, unable to 

obtain a rating from a Nationally Recognized Service Rating Organization (NRSRO),

and highly correlated with their other investment positions. 

More recently in 2013, spurred by the quest for higher yields in a persistent low 

interest rate environment, many pension funds and asset managers created or 

expanded their mandates to invest in insurance-linked securities (ILS). At the time, 

estimates indicated that total alternative reinsurance capacity – including 

catastrophe bonds, sidecars and other non-traditional financing vehicles – had

grown to approximately $40b worldwide – comparable to the levels reached 

immediately after hurricanes Katrina, Rita and Wilma in 2005. 

The maturation of the ILS market over the past dozen years was a welcome 
4

development. The ability of primary insurance and reinsurance companies to access 

new sources of capital to fund peak natural catastrophe exposures – the main 

recipient of these capital investments – helped keep capital costs down and 

traditional insurance more affordable. However, the ILS market has not proven to 

be a substitute for traditional insurance and the ILS market has not been willing to 

underwrite risks that are not being underwritten by the traditional reinsurance 

market. Moreover, investors may be reluctant to buy terrorism bonds due to their 

correlation with the broader equity markets and the potential for adverse selection. 

The reluctance of the rating agencies to rate terror bonds further restricts potential 

investor interest. As a result, to date, we are not aware of any securitizations of 

property catastrophe terror bonds in the market despite this influx of capital. With 

terrorism risk largely uninsurable, we may never see a significant market for terror 

bond securitizations.

6. TRIA COVERAGE OF COMMERCIAL PROPERTY-CASUALTY LINES. AIA maintains that TRIA 

should continue to apply to those commercial lines currently in the program. There are 

different reasons – by broad line – for that support.

a. For workers compensation insurance, because of the regulatory 

restrictions, there are no options for insurers to exclude or sublimit 

terrorism risk. Therefore, elimination of the federal shared loss aspect of 

TRIA would force workers compensation insurers to ration the availability 

of workers’ compensation insurance based on terrorism risk 

aggregations. As a result, in the absence of the program, one would 

expect center city employment to suffer as employers seek a diminished 

supply of workers compensation insurance available for high-rise office 

workers.

b. For commercial property insurance, TRIA serves an important purpose by 

providing business continuity and support for construction and other 

commercial lending transactions. In addition, TRIA’s inclusion of 

commercial property insurance provides the underlying coverage 

necessary to enable commercial mortgage-backed securities (CMBS)

transactions to go forward. Failure to have the federal backstop, as Fitch 

noted in its 2013 report, could stall many of the CMBS transactions 

necessary for such commercial real estate development projects.

c. In the commercial liability lines, the size of the payment from the 9/11 

Victims Compensation Fund, coupled with the expansion of that fund to 

include first responders, demonstrates both the scope and potential 

nature of tort claims that might be leveled in the wake of another 

terrorist attack.

d. In addition, certain sectors such as transportation, communications, and 

energy face higher exposure to terrorism than other sectors.

e. Given the history of TRIA and the narrowing of lines included in the 

program, it may be worth examining whether terrorism risk for certain 
5

liability lines (or for certain sectors within the liability lines) can be 

managed more effectively within the program, perhaps utilizing one or 

more of the policy options under review. A number of questions would 

need to be answered before AIA members would be comfortable 

supporting any sort of liability-specific mechanism within the confines of 

TRIA.

7. PROGRAM ACCESS AND INSURER RETENTIONS: BALANCING INDUSTRY AGGREGATE LOSS 

WITH INDIVIDUAL INSURER RESPONSIBILITY UNDER TRIA. As TRIA has evolved, it has 

become clearer that it is not a government backstop for all acts of terrorism, but a shared 

responsibility program where the industry has been asked to manage, through a series of 

individual company retentions and industry aggregate loss targets, the consequences of

significant terrorist events that can produce losses of a magnitude of 9/11 or greater

without triggering a federal government payout.

On the other hand, the industry has never been comfortable with the uncertainty 

surrounding terrorism events at mega-catastrophic levels or attacks using unconventional 

means. TRIA attempts to balance the need for federal government financial intervention at 

mega-catastrophic levels, while maintaining certainty and stability in the private market to 

enable insurers to provide sufficient capacity to address non-catastrophic terrorism events 

that might occur. As the industry’s understanding of how to effectively deploy capital to 

provide protection against these non-catastrophic events improves, consideration of certain 

revisions to TRIA may make sense to put on the table for discussion:

a. Program Access (Certification Threshold/Aggregate Loss Program Trigger): 

Elimination of the $5 million industry aggregate loss certification threshold (to be 

deemed a covered “act of terrorism”) and changes to the escalating $200 million 

industry aggregate loss program event trigger could be considered. With respect to 

the certification threshold, it has been swallowed by the higher loss program trigger 

and now serves only to confuse the public about what constitutes terrorism or, 

worse, becomes a pawn in a political chess game to maximize available insurance 

coverage (and bypass policyholder decisions of whether or not to purchase 

terrorism coverage made available under TRIA). Congress should consider 

eliminating the threshold as a relic of the earlier post-9/11 debate separating acts of 

vandalism from foreign acts of terrorism perpetrated on U.S. soil.

Regarding the higher loss program trigger, the certainty that losses beneath the 

event trigger will be paid by the private market (coupled with increasing confidence 

that available capital can be effectively deployed) may encourage reinsurers to 

provide reinsurance and other capacity beneath the event trigger. Tailoring the 

program trigger to conventional events may further reinforce market

certainty. However, any consideration of the program trigger must recognize that

there is no current indication that such capital is readily available. In addition, as 

discussed immediately below, conversation about the utility of the program trigger 

may need to occur in the context of insurer retentions.

b. Conditions for Program Access: While insurers, including AIA’s members, have 

made peace with the “mandatory availability” provisions of the program, we are 
6

concerned that, over time, those provisions may migrate to mandatory purchase 

standards if the private market does not evolve or Congress becomes impatient with 

the pace of private market development. AIA believes that it would be worth 

having a discussion about finding the right balance for terrorism risk insurance. 

Particularly with the high potential damage severity that would accompany 

unconventional acts of terrorism, coupled with the human behavior and intent 

components associated with terrorism risk, we believe that there will always be a 

need for a federal government financial partnership to manage the broader social 

and economic consequences. In AIA’s view, it is better to have the conversation 

now, ahead of the political pressures of TRIA renewal, with all interested 

stakeholders.

c. Individual Insurer Retentions (Deductibles/Co-Shares): Under the current program, 

individual insurer deductibles (calculated as a sizeable percentage [20%] of prior 

year direct earned premiums [DEP] on all covered commercial lines) bear no relation 

to the terrorism risk exposure that is backed by premium dollars. As a result, rather 

than providing an industry incentive to maximize the amount of terrorism risk 

insurance capacity written in the private market and backed by reinsurance, the 

deductible ensures that companies will only manage terrorism risk exposure for 

financial solvency reasons. The existence of an additional co-share obligation of 20 

cents/dollar above the deductible to the program cap only increases the uncertainty 

attached to an insurer’s insured terrorism loss retention obligations. AIA would 

recommend that the Committee consider shifting the conversation to a loss 

retention that is based on an actual terrorism disaster scenario that is utilized by 

companies to manage their exposure (e.g., a 5-ton conventional truck bomb). If 

done appropriately, adopting a scenario-based parametric retention would: (1) be 

consistent with individual insurer terrorism risk management, (2) provide the basis 

for a more realistic program trigger, and (3) provide a more effective threshold to 

grow a private terrorism risk insurance market backed by reinsurance and separate 

that market from the catastrophic and unconventional acts of terrorism that require 

a federal government backstop.

8. THE DISCUSSION ON TRIA IMPROVEMENTS SHOULD PROVIDE TRANSPARENCY ON CYBERTERRORISM. Cyber risk is a critical, evolving and unique line of business that deserves 

additional discussion and potential clarity. While the application of TRIA’s mandatory 

availability provisions to cyber-risk may be unambiguous, to date, additional guidance has 

not answered open questions about the scope and nature of the program and its 

responsiveness to cyber-terrorism written on a standalone basis.

9. IMPROVEMENTS BEYOND TRIA: POTENTIAL SHIFTS IN STATE REGULATORY PERSPECTIVE. 

Given the national security and economic issues, there will always be a federal interest in 

terrorism risk insurance, even in the unfortunate event that the program expires. Assuming 

that the program is renewed, even with revisions, there are aspects of state regulation that 

should be examined to determine whether or not they are consistent with overall TRIA 

objectives. Two aspects that immediately come to mind are the existence of state statutory 

fire policies (SFP) and rate regulation. With respect to SFP jurisdictions, AIA’s concern stems 

from the required coverage for “fire following” an unconventional (NBCR) terrorism act that 

may otherwise be excluded. This is particularly concerning in the commercial property 
7

insurance context, where these are business-to-business transactions. As discussed above, 

government mandatory coverage obligations tend to distort competitive markets and to 

stunt private market development. With regard to rate regulation (again in the commercial 

insurance context), to the extent that government rate review and approval displace 

competitive market pricing and the evolution of insurer understanding of the dynamics of 

terrorism risk, this will in effect become a form of government subsidy that will accelerate 

federal government financial exposure to terrorism risk. Even worse, the inability to receive 

an appropriate rate for assuming terrorism risk may cause insurers to manage their 

terrorism exposure by restricting capacity. If that occurs, uninsured businesses will still look 

to the federal government to provide disaster assistance to jump-start economic recovery, 

and one of the primary goals of TRIA will be undercut.