R e p o r t t o C o n g r e s s

Assessment:

The Terrorism Risk Insurance 

Act of 2002

The United States Department of the Treasury

June 30, 2005

REPORT TO CONGRESS

ASSESSMENT: 

THE TERRORISM RISK INSURANCE ACT OF 2002

JUNE 30, 2005 

THE UNITED STATES DEPARTMENT OF THE TREASURY

OFFICE OF ECONOMIC POLICY

WASHINGTON D.C. 
Acknowledgments 

This study was conducted and prepared by the staff of the Treasury Department’s Office of 

Microeconomic Analysis under the direction of Assistant Secretary for Economic Policy Mark J. 

Warshawsky. Contributors included Lucy Huffman, Linda Moeller, Stacy Furukawa, Nada O. 

Eissa, and John D. Worth, with the research assistance of David Handy. 

The staff of the Treasury Department’s Office of Financial Institutions Policy, especially Mario 

Ugoletti, Roy Woodall and C. Christopher Ledoux, and the staff of the Terrorism Risk Insurance 

Program, including Jeffery Bragg, Howard Leikin, David Brummond, Howard Davis, and Neil 

Furst, provided expertise and insight. William McGinnies, Roberta McInerney and Martha Ellett 

gave legal counsel. Elizabeth Knack, John Palmieri, and Ernest Dillworth gave assistance with 

procurement of the survey contract and oversight of the survey process. 

We gratefully acknowledge the expert advice we have received from many sources outside the 

government, including members of the insurance industry and policyholders, and other experts in 

the insurance field, related to the survey instruments and to industry experience and practices. 

We also wish to thank the National Association of Insurance Commissioners, especially Eric 

Nordman and Thomas Kindred, for their assistance and for their provision of data, and the A.M. 

Best Company, especially Matthew Mosher and Henry Kane, for their advice and for providing 

us with specialized data. 
Chapter 1 Introduction and Executive Summary 

Introduction 

The Terrorism Risk Insurance Act of 2002 (P.L. 107-297) (TRIA) requires the Department of the 

Treasury to administer a temporary program providing a Federal backstop for specified losses 

that are covered by insurers in the event of an act of terrorism committed by or on behalf of 

foreign person or interests. The Act further mandates that, as administrator of the Terrorism 

Risk Insurance Program (Program), the Treasury Department assess features of the Program and 

its environment. Specifically, Treasury is required to assess: 

• The effectiveness of the Program; 

• The likely capacity of the property and casualty insurance industry to offer insurance for 

terrorism risk after termination of the Program; and, 

• The availability and affordability of such insurance for various policyholders, including 

railroads, trucking, and public transit. 

We evaluate the effectiveness of TRIA within the context of the purpose of the legislation. The 

Act states: 

PURPOSE- The purpose of this title is to establish a temporary Federal program 

that provides for a transparent system of shared public and private compensation 

for insured losses resulting from acts of terrorism, in order to-- 

(1) protect consumers by addressing market disruptions and ensure 

the continued widespread availability and affordability of property 

and casualty insurance for terrorism risk; and 

(2) allow for a transitional period for the private markets to 

stabilize, resume pricing of such insurance, and build capacity to 

absorb any future losses, while preserving State insurance 

regulation and consumer protections. 

Therefore we evaluate effectiveness in terms of these purposes. 

We evaluate the likely capacity of the property and casualty insurance industry to offer insurance 

for terrorism risk after expiration of the Program in terms of the general “insurability” of 

terrorism risk and the likely provision of coverage after the expiration of TRIA. 

We address the “availability and affordability of such insurance for various policyholders, 

including railroads, trucking, and public transit,” by reporting on terrorism insurance take-up and 

costs for these groups. 

To assist in making these assessments, Treasury conducted a set of surveys. Treasury contracted 

with an outside survey research firm to assist in the development of and to conduct the surveys 

of both policyholders and insurers. In the process of developing the survey instruments, 

Treasury worked closely with policyholder and insurance industry representatives. 
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In addition to the formal surveys, Treasury also consulted with the National Association of 

Insurance Commissioners (NAIC), and a broad range of experts representing the insurance 

industry, policyholders, and others, in order to draw upon as many sources of information and 

input as possible. The completed survey results and information derived from these other 

sources forms the basis of this Report to Congress. 

The Report is organized as follows. Chapter 2 discusses background, including the mechanics of 

the Program. Chapter 3 gives a methodological overview of the surveys conducted by the 

Department. Chapter 4 summarizes and discusses key results from the surveys of insurers. 

Chapter 5 summarizes and discusses key results from the surveys of policyholders. This chapter 

also discusses the “availability and affordability” of terrorism risk insurance coverage for three 

specific policyholder groups as mandated by the Act – railroads, trucking, and public transit. 

Chapter 6 summarizes information collected from the survey of insurers on the use of 

reinsurance for terrorism risk. In Chapter 7, we make an assessment of the likely capacity of the 

insurance industry to offer insurance for terrorism risk after expiration of the Program. In 

making this assessment we use information from the surveys along with industry financial 

statistics, information on terrorism modeling methodologies, and other types of information, 

including that derived from our consultations with experts from the insurance and reinsurance 

industries and insurance industry regulators. 
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Executive Summary 

Based on our research, we offer our assessment of TRIA. Treasury is required to assess: 

A. The effectiveness of the Program; 

B. The likely capacity of the property and casualty insurance industry to offer insurance for 

terrorism risk after termination of the Program; and, 

C. The availability and affordability of such insurance for various policyholders, including 

railroads, trucking, and public transit. 

A. Effectiveness 

As discussed above, we evaluate the effectiveness of TRIA in terms of the purposes given in the 

legislation. 

Item 1: Protect consumers by addressing market disruptions and ensure the continued 

widespread availability and affordability of property and casualty insurance for terrorism risk. 

The year 2003 marked the first of three full years of subsidized Federal terrorism risk 

reinsurance. Surveys of insurers and policyholders through early 2005 suggest that policyholder 

take-up and the number of insurers writing terrorism risk insurance improved somewhat between 

2002 and the period subsequent to enactment of TRIA (2003 through 2005). TRIA’s insurer 

deductibles have increased each year since 2003, shifting ever more of the burden of coverage 

from the Federal government back to the industry. In spite of this shift, the data show 

policyholder take-up rose or stayed stable between 2003 and 2004 and between 2004 and early 

2005, a pattern suggestive of a market increasingly able to provide coverage. 

Availability of Terrorism Coverage 

Insurer Survey Results – Insurers wrote terrorism risk coverage on 67 percent of commercial 

property and casualty insurance policies, a 7 percentage point increase from 2002. This increase 

is in part due to more insurers writing coverage for terrorism risk. Whereas 73 percent wrote 

coverage in 2002, fully 91 percent of insurers surveyed wrote terrorism insurance in 2003. The 

measures of terrorism risk insurance were generally stable between 2003 and 2004. 

Policyholder Survey Results – Between 2002 and 2003, after the enactment of TRIA, take-up of 

terrorism risk insurance increased from 27 percent of policyholders to 39.5 percent. In 2004, 54 

percent of policyholders reported having terrorism risk insurance coverage.

We note that these changes were correlated with the enactment of TRIA, but not necessarily a 

result of TRIA. Other factors, such as the general insurance underwriting cycle, likely had some 

effect on market outcomes during this time. While we cannot quantify the share of observed 

coverage changes caused by TRIA, we do show evidence that suggests some effect of the 

Federal subsidy. 
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Pricing of Terrorism Coverage 

Results from both the survey of insurers and the survey of policyholders suggest insurers 

resumed, or more accurately began, pricing terrorism risk insurance during the time TRIA was in 

effect. 

Insurer Survey Results – In 2002, over 75 percent of insurers providing coverage for terrorism 

risk did not charge for it. That share declined to 46 percent in 2003 and just over 40 percent in 

2004. As a consequence of more insurers charging for coverage during this period, the average 

cost of terrorism insurance (measured as the share of total premiums paid for terrorism coverage) 

increased from 0.9 percent to 1.8 percent of premiums by 2004. 

Among insurers who charged for terrorism insurance in 2002, however, average cost did not 

follow a straight pattern. The share of premiums charged for terrorism coverage first declined 

from 3.7 to 2.4 percent of premiums between 2002 and 2003, but then increased to 3.1 percent of 

premiums by 2004. 

Policyholder Survey Results – In 2002, 70 percent of policyholders with terrorism risk insurance 

coverage reported that they received the coverage at no cost. That share declined to 42 percent 

in 2003 and further to 37 percent in 2004. As a consequence of more policyholders paying for 

terrorism risk insurance, the average cost of such coverage increased from 1.2 percent of 

premium in 2002 to 1.6 percent in 2003, and further to 1.7 percent of premium by 2004. 

Among policyholders who reported paying for terrorism coverage, cost declined steadily over 

the period: from 4.0 percent of premium in 2002 to 2.8 percent in 2003 and further to 2.7 

percent of premium in 2004. 

Policyholders located in high-risk cities faced declining costs for terrorism risk coverage that 

varied from 2.8 percent of premiums in 2002, 3 percent in 2003 and 1.9 percent in 2004. This 

overall decline in the cost of terrorism coverage is the outcome of two opposing trends: an 

increasing share that are paying for coverage and declining prices among those who report 

paying for the coverage. More than half of policyholders in cities that are considered to be at 

high risk for a terrorist attack reported receiving coverage at no cost in 2002, but less than 30 

percent reported free coverage in 2004. On the other hand, the cost of terrorism coverage for 

paying policyholders in these high-risk cities declined substantially from 6.1 percent of premium 

in 2002, to 5.1 percent in 2003, and further to 2.6 percent in 2004. 

Item 2: Allow for a transitional period for the private markets to stabilize, resume pricing of 

such insurance (described above), and build capacity to absorb any future losses, while 

preserving state insurance regulation and consumer protections. 
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Building Capacity to Absorb Future Losses 

Industry surplus, a major source of insurer capacity, has returned to pre-September 11th levels. 

Insurers are financially stronger and more able to bear unexpected losses than they were prior to 

the enactment of TRIA. 

Insurers might have begun charging for terrorism risk insurance, and insurer financial strength 

would have improved whether or not TRIA was enacted. We therefore cannot determine that 

TRIA effectively caused these changes to take place. 

Reinsurance is another important component of an insurer’s capacity to absorb losses. Our data 

show a modest net increase in use of reinsurance over the period. Seventy percent of insurers 

reported purchasing reinsurance for terrorism risk in 2003, this fell to 65 percent in 2004 before 

increasing to 75 percent in the first months of 2005. Smaller and medium-sized insurers 

generally reported greater use of reinsurance for terrorism risk exposure (TRIA deductibles and 

co-payments) between 2003 and 2005. During this same period, however, larger insurers 

reported less use of reinsurance for terrorism risk exposure. 

Assessment (Items 1 and 2) 

Overall we find that TRIA was effective in terms of the purposes it was designed to achieve. 

TRIA provided a transitional period during which insurers had enhanced financial capacity to 

write terrorism risk insurance coverage. While we don’t ascribe a causal effect, during this 

period insurers began pricing for terrorism coverage and insurer financial strength improved. 

More generally, TRIA provided an adjustment period allowing both insurers and policyholders 

to adjust to the post-September 11th view of terrorism risk. 

TRIA’s effectiveness for these purposes does not imply continuation of the program. The sunset 

of TRIA should encourage the development of the private reinsurance market and other risktransfer mechanisms. 

B. Insurance for Terrorism Risk after Termination of the Program 

The likely capacity of the property and casualty insurance industry to offer insurance for 

terrorism risk after expiration of the program is the primary focus of Chapter 7 of the report. 

TRIA provided a Federal backstop for terrorism losses that effectively subsidized terrorism risk 

insurance. It is reasonable to expect that the removal of the subsidy will result in a short-lived 

adjustment in coverage and pricing. We also sketch briefly the likely dynamics of the long run 

adjustment. 
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Modeling 

To provide and price insurance efficiently, insurers should be able to quantify their exposure to 

losses from terrorism risk. Insurers’ primary tool for quantifying loss exposure is modeling 

terrorism risk. Modeling terrorism risk has two critical components: (1) the ability to identify 

and quantify the severity of an event in terms of insurers’ losses, and (2) the probability of the 

loss occurring. Our assessment of developments in risk modeling over the past few years is 

positive, but we note that challenges do remain. 

Insurers’ ability to identify and quantify the severity of an event in terms of insurers’ losses has 

improved greatly. In particular, insurers are much better able to assess their exposures or 

accumulations of risk for a given terrorist event on an overall and individual customer basis. 

This is important because it allows insurers to more effectively underwrite coverage. 

Nevertheless, challenges remain, particularly in assessing the probability of the loss from 

terrorism. Because of the difficulty inherent in assessing these probabilities, use of models to 

predict terrorism risk is tempered by the uncertainty of their predictions. 

Financial Capacity 

We also assess capacity in terms of insurer financial strength, which incorporates both balance 

sheet strength and operating performance. The financial health of insurers, especially surplus, 

improved in the past three years. Among insurer groups providing coverage in TRIA-eligible 

property and casualty lines, surplus was higher in the third quarter of 2004 than it was in the 

third quarters of 2001, 2002 and 2003. 

Our surveys of insurers and policyholders also provide some indications of the development of 

private market capacity. Take-up of terrorism risk insurance, for example, continued to increase, 

while the ratio of policies written by insurers including terrorism coverage has been flat to rising, 

even as the TRIA deductible rose over time. 

It would not be surprising if the expiration of TRIA changes industry behavior since the business 

environment will change. Insurers, for example, will likely consider factors such as the 

possibility of insolvency from terrorism losses given the levels of surplus available and the effect 

on credit ratings. Experience with natural catastrophe risk underwriting and assignment of 

agency ratings suggests that in order to avoid ratings downgrades, insurers may significantly 

alter their approach to terrorism risk insurance after TRIA’s expiration. Among the changes 

insurers may institute are increasing the use of private reinsurance, building surplus by tapping 

into capital markets, and raising premiums or placing exclusions on some policies. 

The policyholder and insurer surveys include direct responses on the availability of coverage 

after the expiration of TRIA. Responding to questions about policies written in early 2005 that 

continue into 2006, nearly 50 percent of insurers reported that they are not writing coverage for 

terrorism risks in 2006 (after the scheduled expiration of TRIA) that is similar to the coverage 

they write under TRIA. One quarter of policyholders with terrorism risk coverage indicated that 

their coverage excludes terrorism coverage after the expiration of TRIA. 
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Assessment 

TRIA’s expiration will conclude the transitional assistance first provided to the insurance 

markets in the uncertain economic environment of 2002. Overall, our assessment is that the 

immediate effect of the removal of the TRIA subsidy is likely to be less terrorism insurance 

written by insurers, higher prices and lower policyholder take-up. While TRIA is in effect, 

however, it crowds out development of some reinsurance markets, and delays the development 

of private capacity to provide terrorism risk insurance. Over time, we expect that the private 

market will develop additional terrorism insurance capacity. We anticipate that the initial 

response of premiums in the market will spur the buildup of surplus as insurers tap into capital 

markets and the development of additional private reinsurance and other risk shifting 

mechanisms. 

C. Availability and Affordability of Such Insurance for Various Policyholders, 

Including Railroads, Trucking, and Public Transit 

Chapter 4 discusses terrorism risk insurance take-up and cost for various classes of 

policyholders, including railroads, trucking and public transit. Among railroads, estimated takeup rates were approximately 25 percent in 2002, 31 percent in 2003, and 32 percent in 2004. In 

trucking, we estimate that take-up rates increased from 23 percent in 2002 to 31 percent in 2003 

and 43 percent in 2004. The corresponding estimates for public transportation are 2 percent in 

2002, 20 percent in 2003, and 36 percent in 2004. 

Cost estimates for these populations are less precise because they are based on smaller sample 

sizes (only respondents with terrorism coverage provide cost information), and are more likely to 

suffer from selection bias. The cost estimates for railroads are 5 percent of premiums in 2002 

and 2003, increasing to 8 percent of premiums in 2004. These estimates, however, are based on 

only 13-15 observations (out of a population of 421 railroads). Cost estimates for trucking, 

where sample sizes are reasonably good, fall from 0.68 percent in 2002 to 0.55 percent in 2003 

and rise to 1.06 percent in 2004. Cost estimates for public transit are based on samples too small 

to report.

Chapter 2 Background on the Property and Casualty Insurance Industry, 

 Terrorism Losses of September 11th, and TRIA 

This chapter presents background information on the property and casualty insurance industry. It 

describes the structure and workings of commercial property and casualty insurance; the 

insurance industry environment after September 11th and prior to the passage of TRIA; and the 

structure and implementation of TRIA. In particular, Section 2.1 provides an overview of the 

insurance industry in the United States, with specific reference to the insurance lines eligible for 

Federal loss compensation under TRIA (TRIA-eligible), and to measures of financial strength of 

the insurance industry. Section 2.2 reviews the size of insured losses resulting from the terrorist 

attacks of September 11th and their impact on the insurance market. Section 2.3 describes the 

TRIA Program, including its structure and regulatory implementation, and certain administrative 

decisions made by the Treasury Department. 
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2.1 Overview of the Insurance Industry 

U.S.-based commercial property and casualty insurers represent a $209 billion industry (2003 

premiums). The industry is characterized by a high degree of market regulation. Its 

performance generally follows an insurance industry cycle, characterized by periods of soft 

market conditions, in which premium rates are stable or falling and insurance is readily available, 

followed by periods of hard market conditions, in which rates rise, coverage may be more 

difficult to find and insurers’ profits increase. 

This section provides a brief overview of the U.S. insurance industry, with specific reference to 

TRIA-eligible lines. It presents a general description of the business, regulatory and market 

structure of the insurance industry. Key divisions, types of insurance coverage, measures of 

industry performance and concentration are described in Section A. Section B then focuses on 

TRIA-eligible lines. An overview of state insurance regulation relevant for terrorism risk 

insurance is provided in Section C. 

A. Nature of Insurance, Industry Structure, and Concentration 

Risk Transfer 

Insurance is the promise of payment in the event of a loss, under the terms and conditions of a 

contract between the policyholder and the insurer. The premium is the price of an insurance 

promise, usually payable in advance of the period of coverage and earned as the policy coverage 

period elapses. The policyholder therefore transfers the risk of the loss covered by the contract 

to the insurer, allowing the policyholder to manage its risk by controlling its exposure to loss. 

The insurer, for a premium, promises to compensate the policyholder for the insured loss, if 

realized. The basic purpose of insurance is to distribute, as efficiently and effectively as 

possible, the risk of loss of one person among a larger number of those who are exposed to 

similar perils. Premiums represent the cost of distributive risk-bearing. 

The insurer will typically transfer some of this risk by purchasing its own insurance - referred to 

as reinsurance - to cover a portion of the insured losses. Reinsured losses are often characterized 

by low probabilities of high losses. (See further discussion of the role of reinsurance below). 

Investments, Expenses, Reserves and Surplus 

Premiums represent a major, but not the only, source of revenue for insurers. Insurers also hold 

investment portfolios – mainly bonds and stocks – that generate returns. Insurers’ expenses 

include annual reserves set aside for anticipated annual losses, expenses associated with auditing 

and estimating loss claims, business expenses associated with administering and selling policies, 

and reinsurance costs. Insurers hold policyholders’ surplus to protect their policyholders against 

unanticipated losses. Policyholders’ surplus is the difference between the value of assets and 

known liabilities; it can be thought of as the financial cushion that protects the firm from being 

unable to pay all claims (insolvency).1

 Insurers’ net profit builds retained earnings, a component 

 

1

 Standards of insolvency and regulatory actions vary from state to state. If an insurance company fails to meet a 

state standard, the regulator may put the company under its control and guidance, or may liquidate the company, 
- 11 -

of policyholders’ surplus; insurers also build policyholders surplus by raising outside capital as 

needed. 

Types of Insurance Coverage 

The insurance industry is divided into two distinct parts: (1) property and casualty (including 

automobile, home and business insurance) and (2) life and health insurance. Insurance provided 

by property and casualty insurers – 3330 insurers, with premiums of $462 billion in 20032

 - is 

further divided into personal lines and commercial lines. Personal lines include coverage for 

individuals’ personal risks, mainly private passenger automobile, homeowners and renters, 

personal property and liability insurance. 

Commercial Property and Casualty Insurance. Commercial property and casualty insurance 

covers a wide range of businesses. The specific types of insurance that fall under this category 

are defined by states and, as such, no uniform definition exists. In broad terms, however, the 

major lines of coverage (lines as defined for state financial reporting purposes) are commercial 

multiple-peril, fire and allied lines, liability, commercial auto, and workers’ compensation. 

 

● Commercial multiple-peril package policies provide coverage for several risks, which 

frequently include fire, allied lines, and liability as well as business interruption insurance 

(BI). BI covers financial losses that occur when a firm is forced to suspend business 

operations either due to direct damage or inability to access its premises (loss of use). 

Farmowners’ multiple-peril package policies similarly include property and liability 

coverage for personal and business losses of farmowners. 

● Fire insurance provides coverage for damage from fire and lightning, including BI due to 

fire, loss of rents, etc. With few exceptions in some states, fire insurance also covers 

losses caused by a fire following an event, even when other losses from that event are 

excluded from the insurance policy. 

● Allied lines insure against losses caused by several different perils, including wind, hail, 

water damage, explosion and riot, BI, etc. 

● Boiler and machinery insurance covers the malfunction or breakdown of boilers, 

machinery and electrical equipment, and associated BI. 

● Marine lines (ocean and inland) provide coverage of all types of vessels and watercraft, 

for property damage to the vessel and cargo, BI, and for marine-related liabilities. In 

addition, inland marine insures articles in transit by all forms of land and air 

transportation, as well as bridges, tunnels and other means of transportation and 

communication. 

 selling assets to pay claims and third-party liabilities. State guaranty funds may also be used to help make 

payments, should assets prove insufficient. 

2

Source: NAIC, “Property/Casualty Insurance Industry Aggregates: 1994-2003 Historical Direct Premiums”, 

2003Property Casualty Statistical Compilation at 

www.naic.org/research/Research_Division/Stats/2003_PC_stat_comp.htm, accessed May 2005. 
- 12 -

● Commercial auto (liability) protects the policyholder from legal liability for motorvehicle-related accidents causing injuries or property damage to others. Commercial auto 

(physical damage) covers damage to the policyholder’s vehicle. 

● Burglary and theft insurance provides coverage for property taken or destroyed due to 

burglary, robbery, fraud, forgery, etc. 

● Liability provides coverage for exposure to lawsuits. Product liability covers exposure 

from a defective condition causing bodily injury or property damage through the use of 

the product. Other liability provides coverage to a business for liability (such as 

negligence or carelessness) that leads to property damage or injury. 

● Workers’ compensation provides for the cost of medical care and rehabilitation for 

injured workers, for lost wages, long term disability, and for death benefits for 

dependents of persons killed in work-related accidents. 

Role of Reinsurance 

Reinsurance is insurance purchased by primary insurance companies. It provides reimbursement 

for insured claims eligible under the reinsurance contract, and hence spreads the primary 

insurer’s risk. Primary insurers use reinsurance to manage their overall risk exposure, for 

example, by limiting liability from specific risks, or protecting against low-probability 

catastrophic loss - either a catastrophic loss resulting from a single event or from the aggregation 

of a large number of smaller events. Because reinsurance allows primary insurers to underwrite 

more policy coverage, it enhances the capacity of the primary insurer. 

Reinsurers’ portfolios consist of promises to reimburse insurers for portions of the insurers’ 

losses. As with primary insurers, the aggregation of independent risks provides diversification 

benefits which reduce reinsurers’ costs and enhances their claims-paying ability. Also, in 

parallel to primary insurers, reinsurers themselves purchase reinsurance for portions of their risks 

(retrocession) and hold surplus to protect their ability to pay claims of insurers. 

Reinsurance contracts are usually one of two types: treaty and facultative. A treaty contract 

generally covers eligible losses incurred under all or a broad set of the insurer’s policies for all 

risks written by the primary insurer (unless the risks are explicitly excluded). Facultative 

reinsurance contracts are much narrower in nature and cover losses incurred under specific 

underlying policies above a certain threshold. There are, broadly speaking, two types of loss 

reimbursement arrangements. Proportional (quota-share) reinsurance is a contract under which 

the primary insurer and the reinsurer share all premiums and losses on a pro-rated basis. 

Proportional reinsurance is often used in situations in which overall losses are limited but the 

probability is less well known. Excess-of-loss reinsurance, by contrast, provides reimbursement 

to the primary insurer for losses incurred above a specific threshold. Excess of loss reinsurance 

is often used in situations in which very large, low probability losses could threaten the insurer’s 

solvency. Contracts are often written to the particular needs of the client and a single contract 

may offer a variety of compensation arrangements. 
- 13 -

In the United States, reinsurance may be purchased from state-authorized reinsurance companies, 

and, subject to certain conditions, from reinsurers that are not authorized (usually non-U.S. 

reinsurers). In the latter case, state insurance regulators generally require these reinsurers to 

collateralize their reinsurance liabilities. 

The property and casualty industry reinsures a substantial share of its direct premiums; over the 

past 5 years, for all lines, the share of premiums reinsured rose from 18 percent in 1999 to 21.5 

percent in 2003. The degree of reinsurance varies sharply from line to line. While the 2003 

share of commercial multi-peril and workers’ compensation premiums reinsured was 

respectively, 20 and 24.5 percent, the shares of premiums reinsured in the (commercial) fire, 

allied lines, and other liability lines in 2003 were 38, 50, and 40 percent, respectively.3

Role of Private Credit Rating Agencies 

Insurance company ratings provided by private credit rating agencies offer opinions of an 

insurer’s financial strength and ability to meet ongoing obligations to policyholders. The ratings 

are derived from evaluations of the company’s balance sheet, operating performance and 

business profile. 

A number of agencies rate insurers, including the A.M. Best Company (A.M. Best or Best’s), 

Moody’s and Standard & Poor’s (S&P). A.M. Best, an SEC-recognized ratings agency for the 

insurance industry, is the dominant issuer of insurer ratings. Almost 90 percent of eligible 

property-liability insurers in 1995 applied for a rating from A.M. Best, while only about 18 

percent applied for a rating from S&P and only 10 percent applied for a rating from Moody’s.4 

The most important factor behind this preference is probably the long historical relationship 

between Best and the insurance industry. 

The ratings are vitally important to investors and insurance purchasers as well as the insurers 

themselves. Insurance purchasers use ratings to choose insurance companies and/or decide how 

much they are willing to pay for insurance from particular companies. Many corporate insurance 

buyers require that all their insurers be highly rated. A strong financial rating gives an insurer 

better and cheaper access to capital markets, thus has a direct impact on its costs of raising 

capital. 

Financial Statistics of the Insurance Industry 

Premiums and surplus are key indicators of the size and financial performance of the insurance 

industry. This section presents data on premium revenues and surplus of the entire (commercial 

 

3

 RAA DataCenter, Line of Business Review, P & C Industry Trends by Line of Business, www.reinsurance.org, 

accessed May 2005. 

4

 Steven Pottier and David Sommer, “Property-Liability Insurer Financial Strength Ratings: Differences Across 

Rating Agencies,” Journal of Risk and Insurance, 1999, Vol. 66, No. 4, 621-642. 
- 14 -

and personal) property and casualty industry. The data show that the financial situation of the 

property and casualty insurance improved substantially since the September 11th attack. 5

Our first measure of industry financial performance, direct written premiums (DWP) in property 

and casualty insurance, is total premiums collected by insurers directly from policyholders for 

the upcoming period of coverage, before any adjustments for premiums ceded to reinsurers. 

Figure 2.1 shows that direct written premiums increased by about 25 percent from 2001 to 2003, 

with the largest single year gain – nearly 15 percent - occurring from 2001 to 2002. Over the 7 

year period from 1994 to 2001, direct written premiums increased by a total of about 35 percent. 

Figure 2.1 

Direct Written Premiums by Year: 

All Property and Casualty Lines: 1994 to 2003

0

50

100

150

200

250

300

350

400

450

500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Billions of Dollars

 Source: NAIC, 2003 Property Casualty Statistical Compilation. See footnote 2, this Chapter.

While premiums are collected, invested, and proceeds used to pay a portion of anticipated losses, 

the ultimate source of insurers’ ability to pay claims is policyholders’ surplus. Figure 2.2 shows 

the growth in surplus of the entire property and casualty industry over the past decade. The 

growth in surplus is due to both revenue from underwriting and realized returns on investments, 

and to unrealized gains or losses on investments.6

 

5

 The September 11th attacks primarily affected the commercial property and casualty industry. We discuss the 

recent financial performance of the property and casualty insurers that write in the TRIA-eligible lines in detail in 

Chapter 7. 

6

 Insurers’ accounts are reported under statutory accounting principles (SAP) imposed by state laws, rather than 

GAAP. 
- 15 -

Figure 2.2 

Policyholder Surplus by Year 

All Property and Casualty Lines: 1994 to 2003

0

50

100

150

200

250

300

350

400

450

500

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Billions of Dollars

 Source: NAIC, 2003 Property Casualty Statistical Compilation. See footnote 2, this Chapter.

Figure 2.2 shows that property and casualty industry surplus increased substantially from 1994 to 

1998, but was about constant through 2000. Surplus dropped by $33 billion over 2001 and by 

$10 billion over 2002, but rose sharply between 2002 and 2003; by 2003 it had surpassed the 

2000 level.7

 The growth in surplus before 2000 likely reflects investment gains (interest, stock 

dividends and realized capital gains and losses), which averaged about $50 billion annually from 

1994 to 2000, but only about $35 billion annually from 2000 to 2003.8 The decline in surplus 

over 2001 and 2002 was, in part, the result of low to negative net income, driven by the 

September 11th underwriting losses. The industry recorded a net income loss of about $4 billion 

in 2001 and underwriting losses of more than $50 billion in 2001. While the industry recorded a 

net income gain of $4 billion in 2002, it incurred underwriting losses of $30 billion in that year. 

The trend in surplus between 2001 and 2003 is consistent with the industry underwriting cycle. 

The cycle reflects the general response of premium and surplus following a catastrophic event, in 

which the sudden loss in surplus is followed by reductions in amounts of coverage offered by 

insurers and higher premiums. The higher premiums help rebuild surplus and attract new capital. 

Once surplus is rebuilt and new capital enters, the competition that follows leads to weaker 

premium growth. The underwriting cycle is relevant to the recovery of the property and casualty 

industry following the September 11th attacks as well as the Northridge earthquake. 

Distribution of Market Shares 

Figures 2.3 and 2.4 show the distribution of industry market shares of premiums. The two 

figures illustrate the diversity of market shares of industry participants. Figure 2.3 depicts 

market share against the rank of the insurer by direct premiums written (through rank 125). As 

 

7

 Statutory surplus includes both net profits (losses) from underwriting performance and realized investment gains 

(losses) and also unrealized investment gains (losses). In addition to direct losses, the September 11th attacks

triggered investment portfolio losses. 

8

 Robert Hartwig, “Overview and Outlook for the Property/Casualty Insurance Industry,” Insurance Information 

Institute, July 2003, www.iii.org/media/industry/, accessed June 22,2005. 
- 16 -

Figure 2.3 illustrates, the industry is composed of a number of large groups9 and many small 

groups, most with market shares under 2 percent. In 2003, there was only one group with market 

share above 10 percent and all groups beyond the 12th ranked group held less than 2 percent. 

Figure 2.3 

Property and Casualty Insurance Industry: 

Market Share by Company Rank: 2003

0

2

4

6

8

10

12

159

13172125293337414549535761656973778185899397

101105109113117121125

Market Share (Percent)

 Source: NAIC, Property and Casualty Insurance Industry 2003 Market Share Report by State and 

 Countrywide, By Group, All Lines, http://www.naic.org/research/Research_Division/Stats 

 /2003_PC_MrktShare_Totals.pdf, accessed May 2005. 

Figure 2.4 depicts the cumulative market shares held by insurers ranked by direct premiums 

written. As Figure 2.4 shows, the market share of total premiums held by the top five groups in 

2003 was about 30 percent. 

Figure 2.4 

Property and Casualty Insurance Industry: 

Cummulative Market Share by Company Rank: 2003

0

20

40

60

80

100

159

13172125293337414549535761656973778185899397

101105109113117121125

Market Share (Percent)

 Source: NAIC, Property and Casualty Insurance Industry 2003 Market Share Report by State and 

 Countrywide, By Group, All Lines, http://www.naic.org/research/Research_Division/Stats 

 /2003_PC_MrktShare_Totals.pdf, accessed May 2005. 

 

9

 An insurer group consists of affiliated companies that are commonly owned. 
- 17 -

Broadly, the data depicted in Figures 2.3 and 2.4 show that the insurance industry is not highly 

concentrated. 

B. TRIA-Eligible Insurance Lines 

The remainder of the chapter focuses on industry performance and structure in the TRIA-eligible 

lines. This subsection first describes the TRIA-eligible lines and then examine characteristics of 

the insurers that provide coverage in these lines. As indicated earlier, we discuss the recent 

financial performance of these insurers in more detail in Chapter 7. 

TRIA-Eligible Lines 

TRIA established a temporary Federal program of shared public and private compensation for 

most lines of commercial property and casualty insurance; it specifically excluded personal 

property and casualty insurance, as well as health and life insurance (including group life). 

Because the states define commercial property and casualty insurance differently, Treasury 

looked to the NAIC’s Exhibit of Premiums and Losses (commonly known as Statutory Page 

14)10 as a general reference point for its regulatory definition of commercial property and 

casualty insurance in implementing TRIA. Table 2.1 provides a complete list and brief 

description of each of the lines included under TRIA. 

 

10 Department of the Treasury, 31 CFR Part 50, Departmental Offices; Terrorism Risk Insurance Program. 
- 18 -

Table 2.1 

TRIA-Eligible Lines and Descriptions

NAIC Line of Business Description 

1. Fire Coverage protecting property against damage from losses caused 

by a fire or lightning and loss of use (business interruption, or 

BI). 

2.1 Allied Lines Property insurance that is usually bought in conjunction with fire 

insurance; it includes wind, water damage, explosion, riot, 

vandalism and other coverage, and BI. 

3.0 Farmowners’ Multiple Peril Package policy that includes property and liability coverage for 

personal and business losses. 

5.1 Commercial Multiple Peril 

 (non-liability) 

Package policy for the entire commercial enterprise that includes 

various risk exposures, frequently including fire, allied lines, BI, 

etc. 

5.2 Commercial Multiple-Peril 

 (liability) 

As above, but includes liability. 

8 Ocean Marine Coverage of all types of vessels and watercraft, for property 

damage to the vessel and cargo, BI, and for marine-related 

liabilities. 

9 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. 

16 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. 

17 Other Liability Covers the policyholder against liability resulting from 

negligence, carelessness, failure to act, that causes property 

damage and personal injury to others. 

18 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. 

19.3 Commercial Auto No-Fault Protects the policyholder against exposure to motor-vehiclerelated accidents causing injuries or property damage to others. 

No-fault is defined by states. 

19.4 Other Commercial Auto 

 Liability 

Protects the policyholder from legal liability for motor-vehiclerelated accidents causing injuries or property damage to others. 

21.2 Commercial Auto Physical 

 Damage 

Covers damage to the policyholder’s vehicle. 

22 Aircraft (all perils) Covers aircraft hulls, contents, and owners’ and manufacturers’ 

liability to passengers, airports and third parties. 

24 Surety Covers a policyholder against damage from failure by a third 

party to perform specific obligations. 

26 Burglary and Theft Insurance for property taken or destroyed due to burglary, 

robbery, fraud, forgery, etc. 

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

and electrical equipment, and associated BI. 

Source: TRIA-eligible lines: Department of the Treasury, 31 CFR Part 50, Departmental Offices; Terrorism Risk 

Insurance Program; and NAIC, “Official NAIC Quarterly Statement Instructions, Annual Statement Instructions, 

Property/Casualty For the 2005 Reporting Year,” November 2004. 
- 19 -

Figure 2.5 shows the distribution of direct written premiums by TRIA-eligible lines in 2003. As 

the figure indicates other liability and workers’ compensation account for nearly $100 billion in 

direct written premiums. Together these two lines account for nearly 48 percent of TRIAeligible direct written premiums. Another $52 billion, or 25 percent of TRIA-eligible direct 

written premiums, is derived from commercial property insurance, including approximately $19 

billion in direct written premiums from commercial multiple-peril insurance and $10 billion in 

direct written premiums from fire insurance. 

Figure 2.5 

Direct Written Premiums by TRIA Eligible Line: 2003

0 5 10 15 20 25 30 35 40 45 50

17 Other Liability

16 Workers Compensation

19.4 Other Commercial Auto Liability

5.1 Commercial Multiple Peril (non-liability)

5.2 Commercial Multiple Peril (liability)

9 Inland Marine

1. Fire

21.2 Commercial Auto Physical Damage

2.1 Allied Lines

24 Surety

18 Products Liability

22 Aircraft (all perils)

8 Ocean Marine

3.0 Farmowner Multiple Peril

27 Boiler and Machinery

19.3 Commercial Auto No-Fault

26 Burglary and Theft

Billions of Dollars

 Source: NAIC, Property/Casualty Insurance Industry Aggregates, 1994-2003 Historical Direct Premiums 

 Written, http://www.naic.org/research/Research_Division/Stats/PC_StatCompHistory2003.pdf, accessed 

 May 2005. 

Insurers Underwriting Coverage in the TRIA-Eligible Lines 

Most insurers underwriting coverage in TRIA-eligible lines also provide coverage in other, noneligible, lines of insurance. To get a sense of how important their TRIA-eligible business is to 

these insurers, we first compared the direct premiums written for TRIA-eligible lines to 

premiums written by these same insurers for all lines of property and casualty insurance. This 

includes insurance for personal lines coverage and other commercial lines that are not eligible for 

TRIA compensation. Figure 2.6 provides a time series for premiums written in TRIA-eligible 

lines and in all lines by these insurers. As Figure 2.6 indicates, TRIA-eligible lines have 

generally accounted for somewhat less than half the premiums written in all lines by these 

insurers over these years. In 2003 premiums in TRIA-eligible lines were $208.6 billion, while 
- 20 -

premiums for all the property and casualty lines written by these insurers, including personal 

lines and other commercial lines not eligible for TRIA compensation, were $459.2 billion.11

Figure 2.6 

Direct Written Premiums by Year: 

TRIA-Eligible and All Lines

0

100

200

300

400

500

1999 2000 2001 2002 2003

Billions of Dollar

Direct Written Premiums -

TRIA-Eligible Lines

Direct Written Premiums -

 Source: Data provided by A.M. Best. 

The insurers writing insurance in the TRIA-eligible lines industry exhibit the same diversity as 

characterizes the property and casualty industry as a whole: a number of large groups and many 

small groups, most with market shares under 2 percent. The larger groups write insurance in 

national and large regional markets while the smaller groups serve smaller regional and single 

state markets. To examine whether there were differences in performance by size and markets, 

all insurers writing more than $10 million in premiums in the TRIA-eligible lines were assigned 

to categories, defined by ranking by direct written premiums, that broadly reflect the range of 

markets they serve. Insurers were ranked after consolidating any insurers that were part of an 

insurer group - a corporate organization that includes all affiliated insurer and reinsurer entities.12 

These categories are as follows: 

● Top 25 Insurers – comprised of large national insurer groups generally writing in most or all 

states. 

● Insurers 26 to 50 – Approximately half national insurer groups, half large regional insurer 

groups, including some specialty writer groups. 

● Insurers 51 to 75 – Predominantly mid-size regional insurer groups. 

● Insurers 76 to 100 – Predominately smaller regional groups and some large groups providing 

insurance in only one or two states. 

● Insurers 101 + – Remaining insurer groups, mainly providing coverage in one or two states. 

 

11 The total property and casualty premiums in 2003 were $462.1 billion (see Figure 2.1); the difference between 

that number and this data may be due in part to the presence of property casualty insurers specializing in one or 

more lines not eligible for compensation under TRIA. In addition, there is likely some small discrepancy in totals 

between NAIC data and that of Best’s. 

12 This categorization was recommended to us as most nearly capturing insurers alike in scope of business. 

Telephone conversation with Michael Murray, ISO, and Matthew Mosher, A.M. Best, March 24, 2005. 
- 21 -

A sense of the average size of these categories may be gained by examining the share of direct 

premiums and of total surplus held by each category. In Figure 2.7 we compare the share of 

2003 direct written premiums written by each size class of insurer group in TRIA-eligible lines 

and in all property and casualty lines written by these insurers. The top 25 insurers account for 

over 65 percent of direct written premiums within TRIA-eligible lines and over 57 percent of 

direct written premiums in all lines. 

Figure 2.7 

Share of Direct Written Premiums by Company Size Class

TRIA-Eligible and All Lines: 2003

0

20

40

60

80

100

Companies

Ranked 1-to-25 

Companies

Ranked 26-to-50 

Companies

Ranked 51-to-75 

Companies

Ranked 76-to100 

Companies

Ranked 101-toEnd 

Percent Premiu

m

Direct Written Premiums -

TRIA-Eligible Lines

Direct Written Premiums - All

Lines

 Note: Share represent share of direct written premiums written by insurers with over $10 million in direct 

 written premiums. 

 Source: Data provided by A.M. Best.

As Figure 2.7 shows, the top 25 insurer groups dominate the market in TRIA-eligible lines, with 

over 60 percent of the total premiums. The top 50 insurers provide over 70 percent of the 

coverage in these lines. 

 

C. State Regulatory Authority 

States have primary responsibility for regulating the insurance industry in the United States - 

both the financial solvency of insurance companies doing business in their state and various 

aspects of insurer’s interactions with customers, referred to as market regulation.13 Congress 

acknowledged the role of state regulation in TRIA’s stated purposes and in its direction that 

Treasury consult with the NAIC in conducting this study.14 Market regulation by each state is 

intended to make sure that insurers are fair and nondiscriminatory in their dealings with 

customers, do not renege on the terms of their contracts, and write policies that offer what state 

laws require. Financial solvency regulation by the states is intended to ensure that insurers that 

do business in the state are in good financial condition and able to pay policyholders’ claims. 

State insurance regulations also govern the definition of various lines of coverage and a wide 

 

13 The McCarran-Ferguson Act, enacted in 1945, is the basis for the general structure of state regulation of the 

business of insurance in the United States. See 15 USC § 1012. 14 See Section 101(b) (purposes) set forth in Chapter 1 and Section 108(d). 
- 22 -

range of insurer practices within the state, including sales, premium rates, policy forms, 

underwriting, and claims processing and payment. 

There are two broad types of state market regulations: price (rate) and coverage (form) 

restrictions. State insurance regulators have the ability to both regulate price and require 

mandatory coverage of various risks or perils by means of their authority to reject insurance 

policy forms and the rates used to compute insurance premiums. It is important to note that 

states often do not have a uniform approach to regulation and may use different regulatory 

mechanisms for different types of insurance coverage. 

Commercial policies for large commercial buyers deemed to have the economic clout and 

insurance buying expertise to negotiate with insurers in a largely unregulated environment are 

often exempted from rate and form regulation. Many states with rating approval laws provide 

for the exemption of rate approvals on large commercial property and casualty policies, based on 

policy conditions. The conditions for exemption vary from state to state but usually require the 

buyer to have insurance premiums, net worth, and/or revenue above specified dollar limits. For 

example, Massachusetts defines a large commercial policyholder as having aggregate annual 

property and casualty insurance premiums (excluding workers’ compensation premiums) of at 

least $30,000; net worth of at least $10,000,000; net revenue or sales of $5,000,000; and more 

than 25 employees. The exemptions, however, do not apply to workers’ compensation policies. 

In addition to coverage provided in a state by insurers that are licensed or admitted by the state, 

coverage for special risks (surplus lines) is also available from insurers that are not licensed or 

admitted by the state, but are allowed to write insurance in the state if certain requirements are 

met. Examples of coverage provided by surplus lines insurers include insurance for risks of a 

special nature that require greater flexibility in policy terms and conditions than those of standard 

forms, or risks for which the highest rate allowed is considered inadequate by admitted 

companies. Surplus lines companies participate almost exclusively in the commercial markets. 

The requirements for surplus lines insurers vary from state to state; many states require that 

surplus lines carriers meet financial standards or require evidence that licensed insurers must 

have declined to provide coverage. 

Mandatory Insurance Coverage 

In addition to regulation of rates, states also have the right to require insurers within various lines 

to provide coverage for specific risks or perils. States can bar insurers from excluding various 

risks from their coverage. The two most common examples of states’ requiring the provision of 

coverage are workers’ compensation and statutory fire following requirements. 

Workers’ Compensation. Employers in all states except Texas are required to carry workers’ 

compensation (WC) insurance, although a few exempt certain industries and most exempt small 

employers.15 No exclusions are permitted for employers required to carry WC. Regulation of 

rates in most states historically required all insurers to use the same rates, employment rating 

classes and experience-rating plans (the employer’s own loss experience relative to the class 

 

15 The following description is taken from Patricia Danzon and Scott Harrington, “Workers’ Compensation Rate 

Regulation: How Price Controls Increase Costs,” Journal of Law and Economics, Vol. XLIV (April 2001). 
- 23 -

average). Rate advisory organizations (the National Council of Compensation Insurers – NCCI – 

in most states) collect loss and expense data from insurers to develop prospective loss costs. 

Insurers can file deviations and add their own expense and profit by class. Residual market 

mechanisms provide insurance at regulated rates to firms that cannot obtain coverage voluntarily 

from insurers. Residual market deficits are usually prorated across all insurers in the state. If 

insurers cannot fully recoup these deficit assessments by pass-through to the voluntary market, 

insurers may exit the market. Although likely a last resort for the insurers, this reduction in 

voluntary availability would further exacerbate voluntary market problems and the growth of 

residual markets. Studies of the workers’ compensation line indicate that pricing controls have 

the effect of exacerbating losses, particularly in the residual markets, which in turn increase 

premiums in private voluntary markets. The studies conclude that there is a cross-subsidy to 

high risks and small firms at the expense of low risks and insurer equity.16

Fire Following States. Fire following states are states that have adopted the Standard Fire Policy 

(SFP) for losses from fires. Currently 30 states have statutory standard fire insurance policy 

requirements.17 In these states, the statutory requirement establishes the minimum coverage for 

the peril of fire and the permissible exclusions from coverage.18 To date 12 of these states have 

allowed insurers to exclude terrorism from their SFPs if the insured policyholder turned down 

terrorism coverage under TRIA; the effect is that damage from a fire caused by a terrorist event 

is not covered even if the policyholder purchased coverage for fire, if the terrorism coverage 

offered by the insurer under TRIA has been turned down.19 In the rest of the fire following 

states, no exclusions for fire resulting from terrorism are allowed. As a result, the SFP provides 

mandatory coverage for fire following a terrorist act in these remaining states. 

Consequences of Restrictions on Terrorism Exclusions. If a peril such as terrorism cannot be 

excluded from general (non-terrorism) policy coverage, yet the insurer believes that writing the 

coverage would jeopardize solvency, it may respond by reducing the amount of coverage offered 

under the general policy. The responses of markets and regulators after September 11th suggest 

that this issue of contagion from terrorism insurance markets to non-terrorism insurance markets 

is one with potentially serious consequences that are generally recognized by regulators. 

Prior to September 11th, terrorism insurance was an unnamed peril in most standard commercial 

insurance policies covering damage to property and contents. This was because most insurers 

simply did not view terrorism as a risk that was significant enough to merit being explicitly 

considered or priced for most commercial insurance policies.20 As a consequence, after 

September 11th when insurers re-assessed the significance of this implied coverage for terrorism 

coverage that they were providing, they realized that they had much more exposure to risk than 

they had earlier thought. 

 

16 Patricia Danzon and Scott Harrington, “Workers’ Compensation Rate Regulation: How Price Controls Increase 

Costs,” Journal of Law and Economics, Vol. XLIV (April 2001). 17 National Association of Mutual Insurance Companies (NAMIC), at www.namic.org, accessed June 2005. 18 NAMIC, State Advocate, www.namic.org, accessed May 2005. 

19 NAMIC Compliance Grid, Standard Fire Insurance Policy, www.namic.org, accessed April 2005. 20 Howard Kunreuther and Erwan Michel-Kerjan, “Policy Watch: Challenges for Terrorism Risk Insurance in the 

United States,” NBER Working Paper No. 10870, October 2004. 
- 24 -

The NAIC became concerned that if insurers were not allowed to exclude losses due to terrorist 

acts, then the only way to limit exposure would have been to severely restrict or cease operations 

in particular lines of coverage, categories of business or geographic zones likely to suffer such 

losses. 21 In order to avoid this problem, the NAIC urged its members in all 50 states to approve 

blanket terrorism exclusions for regulated property and casualty policies until such time as a 

Federal backstop was provided. By August 2002, 45 states, the District of Columbia and Puerto 

Rico had approved the exclusions while only five - New York, California, Texas, Florida and 

Georgia - had rejected them or withheld approval. These blanket exclusions were rescinded 

upon the passage of TRIA. 

Recently, the impending expiration of TRIA prompted some 47 states and the District of 

Columbia - the exceptions being Florida, Georgia and New York - to approve exclusions for 

property terrorism risk, conditional upon either expiration of TRIA at the end of 2005, or a 

renewal of TRIA with deductible, co-payment, or terrorism definition different from those in the 

current Program (called pop-up exclusions). 

 

21 Robert Hartwig, “September 11: One Hundred Minutes of Terror that Changed the Global Insurance Industry 

Forever,” Insurance Information Institute (III), August 2002, p. 10. 
- 25 -

2.2 September 11th and Aftermath 

September 11th changed the way Americans think about terrorism and the risks of terrorist 

attacks. In the context of terrorism risk insurance, the attacks on American soil that took place 

that day resulted in a broad reassessment of the likelihood and potential loss associated with 

terrorism. This prompted changes in the insurance industry, state regulation, and the 

management of risk by the insurance industry and ultimately led to the passage of TRIA. This 

section briefly describes the aftermath of September 11th as it relates to terrorism risk insurance 

and describes the atmosphere and debate leading up to and surrounding the passage of TRIA. 

A. Losses 

The size of the insured losses from the tragic events of September 11th were initially estimated 

to be anywhere from $25 billion to $70 billion. The size of these early loss estimates altered 

insurers’ and policyholders’ assessments of both the probability of terrorist attacks and their 

potential severity. The September 11th terrorist attacks affected more kinds of insurance and 

more commercial policyholders than any other disaster.22 As of July 2002, 119 insurers (nonlife, 

life and reinsurers) worldwide had publicly announced exposure to the attacks.23 Generally 

speaking, larger companies with the greatest financial resources (i.e., capital and surplus) 

suffered the heaviest losses, while smaller companies with more limited resources experienced 

fewer losses. 

 

22 Insurance Information Institute, Hot Topics and Issues Update, “Catastrophes: Insurance Issues,” May 2005. 23 Robert Hartwig, “September 11: One Hundred Minutes of Terror that Changed the Global Insurance Industry 

Forever,” Insurance Information Institute (III), August 2002, p. 7. 
- 26 -

The most recent estimate of insured losses from the September 11th attacks is $32.4 billion.24 

Figure 2.9 shows the distribution of insured losses across the broad lines of insurance coverage. 

Figure 2.9 

Insurance Industry Loss Estimates from September 11th Attacks 

(Billions of Dollars)

Event Cancellation 

$1.0 Property - Other $6.0

Workers' 

Compensation $1.8

Aviation Liability $3.5

Aviation Hull $0.5

Property - WTC 1 and 

2 $3.6

Other Liability $4.0

Business Interruption 

$11.0

Life $1.0

 Notes: Amounts are losses as of October 2004, before adjustment for reinsurance. Dollar amounts and 

 percentages do not add to total due to rounding. WTC losses do not include $1.1 billion due to a December 

 2004 Federal jury decision that the World Trade Center losses resulted from two separate attacks; this 

 decision is subject to appeal. Including this amount would bring total losses to $33.5 billion. 

 Source: Hartwig, “The Cost of Terrorism,” Insurance Information Institute. See footnote this Chapter, 

 page 17. 

The life insurance industry losses of $1 billion include both group life insurance and individual 

life insurance. Data are not available for the separate components.25 It is estimated that group 

life insurance losses were less than half the total.26 

The losses in the figure do not represent all the insured losses. Almost all the victims’ liability 

claims were waived because victims were compensated through the September 11th Victim 

Compensation Fund (VCF), the Federal fund created to compensate victims in lieu of their tort 

remedies. The total payment to victims for death and personal injury claims from the VCF is 

likely to be $6.9 billion.27 

The insured losses were not the only losses arising from September 11th. Investment losses 

experienced by primary property casualty insurance and reinsurance companies, which had been 

 

24 Robert Hartwig, “The Cost of Terrorism: How Much Can We Afford?,” Presentation before the National 

Association of Business Economists, October 4, 2004, at www.iii.org/media/presentations/tria/, accessed June 2005. 25 Lloyd Dixon and Rachel Stern, Compensation for Losses from the 9/11 Attacks, RAND Institute for Civil Justice, 

2004. 

26 Kevin Trapp, Swiss Re, “Pricing for Terrorism Risk in Group Life, Group Health and Group Disability Products,” 

Presentation at Society of Actuaries Spring Meeting, Session 23PD, June 23 to 25, 2003. 

27 Ibid., p. 25. 
- 27 -

growing prior to that date, racheted upward sharply in the third quarter 2001, but recovered 

somewhat by the fourth quarter. Unlike other insured events, the insurance losses from these 

terrorist attacks were highly correlated with investment losses - a difficult and risky situation for 

insurance and reinsurance companies which rely in large part on invested surplus to assure 

solvency. 

B. Insurance Market Response and the Passage of TRIA 

The September 11th losses produced an underwriting and pricing reaction by both insurers and 

reinsurers. The insurance industry announced it would cover insured losses, notwithstanding the 

arguably warlike nature of the attacks. Insurers and reinsurers, however, also took steps to 

reduce their exposure to future terrorism attacks. Reinsurers began excluding terrorism coverage 

from their commercial coverages, particularly for locales thought to be at risk - large urban 

locations and iconic properties - with the result that insurance coverage became less available for 

these properties. Insurers willing to provide the coverage were reportedly asking high prices. 

Primary insurers filed with their state regulators for permission to exclude the coverage from 

regulated policies and, as discussed above, all but five states granted blanket exclusions.28 The 

exclusions applied only to losses classified by the Property Claims Service as catastrophes - 

events with aggregate losses of at least $25 million in direct aggregate insured losses to property 

and affecting a significant number of insurers and policyholders; insurers were not allowed to 

exclude coverage for losses from smaller events. 

The behavior was generally consistent with the beginning stages of an underwriting or loss cycle 

that is a typical industry response to a catastrophic loss shock - insurers and reinsurers withdraw 

from the markets to limit their exposures while revising their understanding of the potential 

losses from such catastrophic events. During this initial period investors are reluctant to supply 

external capital because of doubts about levels of loss exposure and future loss expectations, 

forcing insurers to operate with their now-reduced internal capital or raise new, more expensive, 

external capital. As a consequence, supply is sharply reduced and prices rise significantly. 

The pullback in terrorism coverage in large cities and other high-risk areas raised concerns that 

this period of adjustment to the reality of global terrorism risk in the insurance market could have 

a negative spillover effect on the macroeconomy. Many of the concerns related to the disruptive 

effects of the transition between a world in which terrorism coverage was provided for a 

negligible price and one where terrorism risk was considered a non-negligible risk. 

For example, it was reported that large commercial properties and construction projects were 

having trouble getting financing because of concerns about terrorism coverage and there were 

questions about downgrading of existing mortgage-backed securities with inadequate insurance 

coverage on the collateral. 

In response to these and other concerns, efforts to create a Federal backstop began shortly after 

the September 11th attacks. 

 

28 Prior to September 11th, most standard commercial insurance policies included terrorism coverage effectively free 

of charge because it was not excluded as a cause of loss, nor priced separately. 
- 28 -

The House of Representatives passed the “Terrorism Risk Protection Act” (H.R. 3210) on 

November 29, 2001. The House bill called for a temporary program that expired at the end of 

three years. Federal compensation was triggered if industry-wide losses exceed 

$1 billion; or if industry-wide losses exceeded $100 million and some part of those losses 

exceeded 10 percent of the surplus (capital) and 10 percent of an individual commercial insurer’s 

net premium written. The bill would have required insurers to pay back to the U.S. Treasury any 

funds received. 

The Senate passed the “Terrorism Risk Insurance Act of 2002” (S. 2600) on June 18, 2002. Like 

the House, the Senate bill called for a temporary program. The two-year plan called for by this 

bill proposed a sharing of losses between insurers and the Federal Government above an 

aggregate industry retention of $10 billion for the first year of the plan and $15 billion during the 

plan’s second year. An individual insurer’s deductible was to be calculated as its market share 

multiplied by $10 billion in the first year and $15 billion in the second.

The Terrorism Risk Insurance Act (TRIA), which included provisions from both the Senate and 

House bills, was signed into law on November 26, 2002 and became effective immediately. 

Details of the final law are described in Section 2.3. 
- 29 -

2.3 The Terrorism Risk Insurance Act of 2002 – Structure and Implementation 

This section provides an overview of the structure of TRIA and its implementation by Treasury 

as the administrator of the Terrorism Risk Insurance Program. 

A. Structure of TRIA 

TRIA established a temporary (three-year) Federal Terrorism Risk Insurance Program that 

provides for a system of shared public and private compensation for insured property casualty 

insurance losses resulting from acts of terrorism. TRIA’s stated purposes are to ensure continued 

widespread availability of property and casualty insurance for terrorism risk and provide a 

transition period for private markets to stabilize, resume pricing, and build capacity, while 

preserving state insurance regulation and consumer protection. TRIA can be most easily thought 

of as terrorism risk reinsurance provided by the Federal Government at no cost, above a 

company-specific deductible. 

Certified Acts of Terrorism 

TRIA provides that the Federal Government will cover 90 percent of insured losses (as defined 

by TRIA) of participating insurers for an act or acts of terrorism as defined by TRIA, once an 

insurer’s deductible is reached. TRIA defines an act of terrorism as (1) a violent act or act that is 

dangerous to human life, property or infrastructure, that (2) has resulted in damage within the 

United States or outside of the United States in the case of an air carrier or vessel (as defined by 

TRIA) or on the premises of a United States mission, and (3) has been committed by an 

individual or individuals acting on behalf of any foreign person or interest, (4) as part of an effort 

to coerce the U.S. civilian population or influence the policy or affect the conduct of the U.S. 

Government by coercion. In addition, this statutory definition of an act of terrorism requires that 

the act be certified by the Secretary of the Treasury, with the concurrence of the Secretary of 

State and the Attorney General. Moreover, an act of terrorism must have resulted in property 

and casualty losses, in the aggregate, of $5 million or more. TRIA limits the liability of the 

Federal Government and insurers to $100 billion per year.29

Terrorism losses that are not covered under the Program are referred to by the industry as noncertified losses. Such losses might include, for example, acts of domestic terrorism committed 

without the relevant intent, attacks that fall below the minimum insured loss limit, or attacks 

outside U.S. borders. 

Mandatory Availability 

TRIA nullified exclusions for acts of terrorism contained within policies for TRIA-eligible lines 

of property and casualty insurance (discussed in Section 2.1) that were in effect on November 

26, 2002. TRIA did not make the purchase of terrorism risk insurance mandatory, but it did 

require that all entities meeting the definition of a participating insurer under the Act offer (make 

available) terrorism risk insurance to their policyholders in any of TRIA-eligible lines that the 

 

29 Section 102(1) of TRIA defines act of terrorism including the certification requirement. Section 103(e)(1)(B) 

contains the insurer liability caps under TRIA. 
- 30 -

insurer offered. TRIA also required insurers to make the offer of terrorism risk insurance on the 

same terms and conditions as offered in their non-TRIA coverage and to disclose the cost of the 

terrorism risk insurance coverage.30 TRIA also required insurers to make certain disclosures to 

their policyholders about the TRIA Program. 

Policyholders have the option to accept or decline the terrorism risk insurance coverage, or to 

negotiate other terms with the insurer. TRIA did not set the price for terrorism risk insurance. 

Pricing is generally subject to state regulation as discussed previously. 

Insured Losses 

Insured loss is defined by TRIA as any loss resulting from an act of terrorism that is covered by 

primary or excess property and casualty insurance (as defined by TRIA) and issued by an insurer 

if such loss occurs within the United States or on a U.S. air carrier, vessel as defined in TRIA, or 

on the premises of a U.S. mission.31 TRIA covers insured losses from a nuclear reaction, or 

radiological, biological, or chemical release and/or contamination resulting from a certified act of 

terrorism if the coverage for those perils is provided in the primary or excess property and 

casualty policy issued by a TRIA-eligible insurer. 

Eligible insurers are defined in TRIA to include private insurers licensed or admitted to provide 

insurance by any state, which includes state-licensed captive insurance companies and risk 

retention groups set up to insure the risks of a parent company or association; state joint 

underwriting associations that pool the losses of members and state residual market entities that 

pool the risks of those that cannot otherwise get insurance; approved alien insurers incorporated 

outside the U.S. and not licensed by a state; and insurers approved by a federal agency for 

maritime, energy, or aviation activity. 

Insurer Deductible 

The term insurer deductible is defined by TRIA.32 The amount changes in each Program Year. 

In the first full Program Year (2003) the deductible was 7 percent of 2002 premiums, in 2004 the 

deductible was 10 percent of 2003 premiums, and in 2005 the deductible is 15 percent of 2004 

premiums. The purpose of the graduated deductible amounts was to encourage development of 

private market capacity over time. As noted above, insurers are also liable for 10 percent of 

losses above the deductible threshold. 

A simple numerical example is helpful in illustrating the operation of the TRIA deductible and 

co-pay provisions. Consider an insurer with $1 billion in direct earned premiums in TRIAeligible lines in 2004; its deductible for 2005 would be equal to $150 million and the Federal 

Government would share 90 percent of losses above the $150 million threshold. If this insurer

 

30 The term insurer is defined in section 102(6) of TRIA and includes any affiliate as defined in section 102(2). See 

also Treasury regulations at 31 CFR 50.5. The mandatory availability (also known as the make available) 

requirement is contained in section 103(c) and its continuation in Program Year 3 was made subject to a 

determination by the Treasury Secretary by September 1, 2004. See also 70 FR 7403 (February 14, 2005). For a 

discussion of the mandatory availability decision see section 2.3C. 

31 Insured loss is defined in section 102(5) of TRIA. 

32 Insurer deductible is defined in section 102(7) of TRIA. 
- 31 -

faced an insured loss of $100 million due to certified terrorism losses there would be no Federal 

compensation and the insurer would be liable for the entire loss. 

In the event that the Federal Government provides compensation for insured losses for an act of 

terrorism under the Program, TRIA requires recoupment of at least a portion of the Federal 

compensation through policyholder premium surcharges.33 Recoupment is mandatory in cases 

where the aggregate industry retentions (deductibles and co-pays) are below a specified 

aggregate retention amount. The annual aggregate retention amount was $10 billion for 2003, 

$12.5 billion for 2004 and is $15 billion for 2005. The Government is required to collect the 

difference between these recoupment amounts and the aggregate industry retention through an 

industry-wide surcharge, not to exceed 3 percent of the premium paid on a policy. If the 

aggregate industry retention amount exceeds the aggregate retention amount, the Federal 

Government may require recoupment at the discretion of the Secretary of the Treasury, but the 

statute does not require recoupment. 

Impact of Company-Specific Deductibles 

Setting an insurer’s deductible as a percentage of its premiums may confer an advantage on 

smaller insurers because large insurers, with more premiums, retain more exposure to terrorism 

risk for the same policy limit. For example, consider a comparison between the insurer in the 

example above, with 2004 direct earned premiums of $1 billion and a 2005 deductible of $150 

million, and an insurer with $100 million in 2004 earned premiums and a 2005 deductible of $15 

million. If both insurers were writing coverage for an insured loss of $100 million due to 

certified terrorism losses, the larger insurer could expect to retain the entire loss without TRIA 

compensation, while the smaller insurer would have a retention of $23.5 million; the $15 million 

deductible and 10 percent, or $8.5 million, of the losses above the threshold. Thus, on the 

margin, TRIA may confer a pricing advantage upon the smaller insurer. 

The advantage conferred upon smaller insurers would be maximized for small companies 

offering terrorism-only coverage, such as by the use of a captive insurance company for 

terrorism risks. A 2005 survey by Marsh reported “...significant utilization of captive insurers 

for terrorism exposures...”.34 The Treasury has cautioned that post-enactment formation or 

utilization of a captive insurer that will only provide stand-alone, TRIA-only coverage for losses 

from acts of terrorism raises questions regarding the integrity of the Program.35 Treasury will 

not pay the Federal share of compensation, in whole or part, should it determine that the insurer’s 

claim for Federal payment has been designed to circumvent the purposes of the Act or 

regulations.36

TRIA also may confer an advantage upon insurers writing in single TRIA-eligible lines 

(monoline insurers) relative to insurers writing across a broad range of TRIA-eligible lines 

 

33 TRIA’s recoupment provision are contained in section 103(e)(7). 

34 “Marketwatch: Terrorism Insurance 2005,” Research Report, Marsh, Inc., 2005. 35 U.S. Treasury, Terrorism Risk Insurance Program Office, Interpretative Letters, “Insurer (TRIA-Only Captives),” 

March 2, 2004, and “Property and Casualty Insurance (Standalone Terrorism Coverage and Captive Insurer),” 

September 24, 2004. 

36 U.S. Treasury, Terrorism Risk Insurance Program Office, Interpretative Letters, “Property and Casualty Insurance 

(Workers Compensation Deductible and Captive Insurer),” September 21, 2004. 
- 32 -

(multiline insurers), some of which offer less accumulation risk, yet with the same deductible. 

Compare, for example, a monoline property insurer with a $150 million deductible derived from 

15 percent of direct earned premiums in the line, with a multiline insurer, with the same overall 

direct earned premium and deductible but writing premiums in property and commercial auto, 

which offers low level terrorism risk. That second insurer could be expected to retain a greater 

portion of property losses per dollar of policy coverage, compared to the monoline insurer, 

because a given property event would not be as likely to exceed the deductible of the second 

insurer. The monoline insurer could gain a pricing advantage. 

B. Implementation of TRIA 

TRIA gave Treasury the responsibility for implementing the Terrorism Risk Insurance Program. 

In implementing TRIA, Treasury has followed five goals: (1) to ensure the Program was 

promptly operational; (2) to implement TRIA in a transparent and effective manner; (3) to rely as 

much as possible on the state insurance law and regulatory structure; (4) to allow insurers to 

participate in the Program in a manner most consistent with their normal course of business; and, 

(5) to ensure that in the event of insured losses, insurance benefits could be provided in the most 

expeditious manner.37 

In consultation with the NAIC, Treasury promptly issued several interim guidance notices to 

assist the insurance industry in complying with the immediately-effective requirements of 

TRIA.38 The interim guidance notices were directly followed by notice and comment 

rulemakings resulting in the issuance of interim and final regulations to implement key 

provisions of TRIA. Treasury proposed and finalized all regulations necessary to make the 

Program operational, including regulations necessary to identify participating insurers,39 to 

identify TRIA-eligible commercial property and casualty insurance lines,40 to calculate insurer 

deductibles, to address the treatment of state residual market insurance entities;41 for submission, 

review and payment of potential claims under TRIA42 and for litigation management.43 

In April 2003, Treasury established a Terrorism Risk Insurance Program (TRIP) office,44 named 

its executive director, and recruited its small staff (seven staff members currently). The TRIP 

Office has provided insurers with numerous interpretations and responses to various issues, 

contracted with a claims management contractor and an auditor to assist with the processing and 

verification of potential claims and has established a web-based claims facility for the 

 

37 See Testimony of Wayne A. Abernathy, Assistant Secretary for Financial Institutions, Treasury Department 

before the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises of the House 

Committee on Financial Services (April 28, 2004). 

38 Treasury issued interim guidance notices on December 3, 2002; December 18, 2002 and January 22, 2003. These 

notices provided a basis for the insurers to proceed to offer coverage and allowed the Program to be immediately 

operational. 

39 31 C.F.R. 50.5 et seq. 

40 Ibid. 41 31 C.F.R. 50.19 and 50.30. 

42 31 C.F.R. 50.50. 

43 31 C.F.R. 50.80. 

44 31 C.F.R. 50.2 (2003). 
- 33 -

submission and payment of claims. Currently the TRIP Office is finalizing recoupment 

procedures. 

C. Administrative Decisions by Treasury under TRIA 

Make Available 

The make available provisions of TRIA required that, from the date of enactment (November 26, 

2002) through the last day of the second year of the Program (December 31, 2004), each insurer 

must make available, in all of its commercial property and casualty insurance policies, coverage 

for losses due to covered acts of terrorism that does not differ materially from the terms, amounts 

and other coverage limitations applicable to losses arising from events other than acts of 

terrorism. TRIA required that the Secretary of the Treasury determine by September 1, 2004, 

whether the make available provision should be extended through the third and final year of the 

Program. 

On June 18, 2004, the Secretary of the Treasury announced the extension of the make available 

provision into the third year. 45 

Group Life 

TRIA did not provide coverage for group life insurance policies. Instead, the Treasury 

Department was tasked with evaluating market conditions and making a determination on 

whether group life should be included in TRIA. The law directed that the Secretary of the 

Treasury could include coverage for group life insurance if both insurance and reinsurance were 

not available, or not likely to be available in the future. 

During its evaluation of market conditions, the Treasury concluded that, while there was a 

general lack of catastrophic reinsurance for insurance companies that offer group life coverage, 

there had been no appreciable reduction in the availability of group life insurance coverage for 

consumers. Group life insurance companies have stayed with their customers and continued to 

make group life insurance available on much the same terms as before September 11th. Given 

that evaluation, the Secretary of the Treasury determined that he could not extend coverage for 

group life insurance under the Program. The decision was the result of a careful consideration of 

market conditions, with significant input from users and providers of group life insurance.46

 

45 Office of Public Affairs, “Treasury Announces Decision to Extend the ‘Make Available’ Provisions of the 

Terrorism Risk Insurance Act into 2005,” Treasury Department, June 18, 2004. Also see Technical Amendments to 

“Make Available'' Provision and “Insurer Deductible” Definition, 70 FR 7403 (February 14, 2005).

46 Office of Public Information, “Treasury Announces Decision on Group Life Coverage 

Under Terrorism Risk Insurance Program,” Treasury Department, August 15, 2003. 

Chapter 3 Methodological Overview of TRIA Surveys 

This chapter provides an overview of the surveys used by the Treasury to evaluate insurancemarket conditions following the implementation of TRIA. Before September 11th terrorism 

risks were treated as “other perils” and were not priced either explicitly or separately in the 

majority of commercial property and casualty insurance policies. While anecdotal information 

about perceived shortages of terrorism risk insurance and reinsurance was widely reported, little 

was known about the more general availability and affordability of terrorism risk insurance in the 

United States. Treasury contracted for the collection of the survey data because the required 

market-wide data were generally not available. 

The TRIA survey data provide Treasury with a consistent basis for the quantitative analysis of 

the insurance market. These data give a unique, comprehensive overview of the availability and 

affordability of terrorism risk insurance coverage on an approximately annual basis, from 2002 

through the first two months of 2005. 

The broad objectives of the TRIA surveys were: 

• To collect information from both buyers and sellers of terrorism risk insurance on the broad 

scope of terrorism coverage immediately prior to passage of TRIA, and while TRIA is in 

effect. 

• To collect this information from nationally representative samples of insurers and 

policyholders. 

• To collect data “at arm’s length” from Treasury to preserve the confidentiality of survey 

responses. 

• To survey the same organizations on an approximately annual basis in order to monitor the 

effects of increases in the legally mandated insurer deductibles. 

• To minimize respondent burden while collecting information in sufficient detail to control 

for important differences between survey respondents. 

• To collect the survey data on a timely basis, including data on policies written or renewed at 

the beginning of 2005 and therefore extend into 2006, for analysis and incorporation into 

the study results for delivery to Congress by June 30, 2005 as required by law. 

Section 3.1 of this chapter reviews the development of the survey instruments, including the 

substantial contributions made by insurance industry experts and representatives. We discuss 

sample and survey design in Section 3.2. Section 3.3 describes the data-collection process. 

Section 3.4 discusses the strengths and weaknesses of the survey data. 
- 36 -

3.1 Survey Development 

The information provided in this study is based on two independent multi-wave surveys of 

participants in the commercial property and casualty insurance market: the first surveyed 

insurers and the second surveyed policyholders.1 The insurer survey collected information on 

the provision of certified and non-certified terrorism coverage, the average cost of certified 

coverage, terms and conditions on terrorism coverage, the purchase of reinsurance, and technical 

factors affecting insurers’ ability to price terrorism coverage. The policyholder survey 

questionnaire collected information on the characteristics of businesses and other organizations 

that purchase terrorism coverage, special terms and conditions associated with that coverage, 

reasons why policyholders declined the mandatory offer, and reported loss-mitigation efforts. 

Treasury’s strategy for the collection of this information and the survey questionnaires are 

described in this section. 

Treasury developed a preliminary plan for the collection of information on terrorism risk 

insurance coverage immediately after passage of TRIA. These plans were shared with insurance 

industry representatives and experts for comment. Treasury convened a meeting of insurance 

industry representatives and other experts to review the proposed survey plans on January 30, 

2003. During this advisory meeting, industry representatives and experts emphasized several 

features of the market, including the heterogeneity of the commercial property and casualty 

insurance market; the importance of accounting for different market segments; the distinction 

between commodity coverage and negotiated coverage; the importance of analyzing industry 

capacity as well as the availability and affordability of terrorism coverage; and the existence of 

policy renewal “seasons” within a calendar year. 

Location, size, and “nature of industry” were identified as variables that are important for the 

definition of market segments. It was noted that large insurers and large companies negotiate 

contracts on a case-by-case basis. These contracts are complex and heterogeneous, and it is 

difficult to draw meaningful conclusions about them on the basis of information from 

standardized survey questions. Virtually all high profile, large, geographically concentrated 

properties fall within this category. 

Meeting participants agreed that the survey should take account of coverage for non-certified 

terrorist attacks as well as coverage for acts of terrorism likely to be certified because both affect 

market conditions within the industry. Workers’ compensation was identified as an important 

issue because the liabilities associated with personnel loss are difficult to value, terrorism 

coverage is mandatory even in the case of war, and the perceived magnitude of liabilities 

associated with personnel loss has increased since the September 11 attacks. Other issues that 

were noted include workers’ compensation insurance and nuclear, biological, chemical, or 

radiological (NBCR) terrorism risks. 

Meeting participants recommended that the Treasury surveys ask whether respondents have 

terrorism risk insurance and whether they consider premiums for such insurance to be too high. 

Treasury was advised that information on terrorism risk insurance prior to the events of 

 

1

 A questionnaire directed to reinsurers was also developed, but the resulting data are not statistically reliable 

because response rates to the reinsurer survey were low. 
- 37 -

September 11th is generally unavailable because terrorism risk insurance was often incorporated 

into standard coverage at little or no additional cost. Regarding questions about post-September 

11th prices, Treasury was advised to inquire about limits and deductibles as well as premiums. 

There was also agreement among those experienced with business surveys that contracting with 

a third party to collect survey data under a pledge of confidentiality would increase survey 

participation. 

Preliminary survey questionnaires were drafted in the spring of 2003. In all cases these 

questionnaires were reviewed by insurance industry representatives, NAIC representatives and 

others before they were submitted to the survey contractor for field testing. A self-organized 

working group consisting of representatives of major insurers and the American Insurance 

Association (AIA) provided a substantially revised alternative approach to the insurer 

questionnaire. Detailed comments on the insurer questionnaire were also provided by the 

Alliance of American Insurers (AAI) after consultation with its members. Members of the 

Coalition to Insure Against Terrorism (CIAT) met with Treasury staff to review the policyholder 

questionnaire and recommend changes in wording and question formulation. In addition staff 

members from Marsh, Guy Carpenter and the Council of Insurance Agents and Brokers (CIAB) 

provided substantial advice to Westat and to Treasury under consulting arrangements with 

Westat. NAIC staff members responded to numerous questions from Treasury staff and from 

Westat, the contractor chosen by Treasury to conduct the TRIA surveys. Many revisions 

suggested by these reviewers were incorporated in the final questionnaire design. The resulting 

insurer and policyholder survey questionnaires are described below. 

Insurer Questionnaire 

The insurer questionnaire had four major sections. The first section requested information on the 

characteristics of the insurer, such as ownership (public or privately held) and number of 

locations. The second section collected information on insurance purchased or sold in TRIAeligible lines, charges for terrorism coverage, and special terms and conditions associated with 

terrorism coverage. This section also asked about non-certified coverage, NBCR and special 

conditions associated with coverage in states that require coverage for fire damages following 

terrorist attacks whether terrorism risk insurance coverage was purchased or not. The third 

section of the insurer questionnaire asked about reinsurance for the deductible and co-payment 

associated with terrorism coverage, or the reasons why terrorism reinsurance was not purchased. 

The last section asked a number of qualitative questions designed to assess recent and expected 

developments in market capacity and insurers’ ability to underwrite terrorism risks. These 

surveys were conducted on an annual basis: the first wave covered 2002 and 2003, the second 

wave covered 2004, and the third survey covered the first two months of 2005. 

More specifically, the second section of the questionnaire asked about insurers’ policies written 

or renewed within the specified calendar year: the month when policies representing the largest 

share of direct written premiums was renewed, the total number of policies written or renewed in 

a given year, the total direct written premiums from those policies, the number of policies written 

in that year that included terrorism coverage, total direct written premiums on policies with 

terrorism coverage, and total direct written premiums for terrorism coverage in policies that 

included terrorism coverage. In wave one these questions were asked for each of the following 
- 38 -

broad lines: commercial property including business interruption, workers’ compensation, other 

liability and casualty. 

Survey respondents were asked to aggregate across the lines and coverage types in two ways. 

First, the lines were aggregated over three broad lines of coverage: commercial property, 

workers’ compensation, and other liability and casualty. The commercial property aggregate 

includes policies covering losses to property and business interruption. Workers’ compensation 

includes only coverage for workers’ compensation. Other liability and casualty includes liability 

and casualty coverage, including commercial auto no-fault, other commercial auto insurance, 

aircraft, and other types of coverage. 

Second, respondents were asked to provide information aggregated by the method of coverage 

provision. Information on umbrella or excess policies and on package policies was collected 

separately. Umbrella or excess policies provide coverage for losses above the limits of the 

property-casualty policies. Such policies may have terms of coverage that are broader than 

policies providing the primary layer of coverage. Package policies cover more than one type of 

insurance risk under the same policy. Thus, umbrella and package policies effectively aggregate 

across the broad lines of coverage identified above. 

The questions described above refer explicitly to policies written or renewed in a given calendar 

year. Because TRIA was passed in late November 2002, comparisons between the pre-TRIA 

environment in calendar year 2002 and the post-TRIA environment in calendar years 2003 

through 2005 are reasonably straightforward. Data reported for calendar year 2002 represent 

primarily pre-TRIA market conditions, while data reported for 2003 through 2005 represent 

post-TRIA market conditions. 

In the first survey wave, for each of the broad lines listed above, insurers were asked to identify 

the month when the policies representing the largest share of their direct written premiums is 

written or renewed. Because all policies are not written or renewed at the beginning of the 

calendar year, the true average cost of coverage for acts of terrorism covered under TRIA, in an 

expected value sense, should incorporate a weighted average of the TRIA Program year 

deductibles.2

 Furthermore previously existing exclusions of terrorism coverage were nullified 

immediately when TRIA went into effect, but insurers may have waited for their regular policy 

renewal dates to price the mandatory offer under terms that took account of the TRIA backstop. 

Therefore the true behavioral response of insurers should become apparent with a lag, and the 

length of that lag is a function of the primary policy renewal month within each line. 

Survey information collected from insurers was generally available in insurers’ books and 

records, and much of it is routinely reported to NAIC. The balance of the second section of the 

insurer questionnaire was designed to be answered more easily. For example, respondents were 

asked a series of questions that can be answered yes or no, to determine whether special terms or 

conditions were typically associated with the terrorism coverage they actually sold. While the 

law specifies that the insurer must offer all policyholders terrorism coverage under terms and 

conditions comparable to those in the basic insurance policy, the policyholder is free to decline 

 

2

 The program year deductibles are 7 percent of the prior calendar year’s direct earned premiums in 2003, 10 percent 

in 2004, and 15 percent in 2005. 
- 39 -

the initial offer and then negotiate for coverage under terms and conditions that are different 

from the initial offer. If negotiation for terrorism coverage under terms and conditions that are 

different from the mandatory initial offer were a general pattern, and if insurers were to prefer 

one type of restriction or condition over others available to them, insurers’ responses to these 

questions should identify their preferred mechanisms for limiting exposure. 

To characterize the different markets served by different survey respondents, insurers were asked 

to report the median value of assets covered by commercial insurance policies, the median 

number of employees at a single location covered in workers’ compensation policies, and their 

willingness to provide workers’ compensation insurance to establishments in different employee 

size classes. To evaluate cyclical changes in the structure of coverage, brief questions about 

system-wide changes in average limits and deductibles among policies that did not include 

terrorism coverage were also included. 

Respondents were asked whether they provide any coverage to locations in high-risk cities, an 

iconic location, or a city with more than 350,000 in population, and whether the terms and 

conditions associated with terrorism coverage for these high-risk locations differ significantly 

from those associated with coverage for other locations.3

 Insurers providing any NBCR 

coverage and those that provide coverage in fire following states were also asked about special 

terms and conditions associated with terrorism coverage in those contexts. 

The third section of the insurer survey collects information on reinsurance for terrorism risks. 

Participants were asked to identify the approximate percentage of their TRIA deductibles and copayments reinsured, and to indicate whether their reinsurance coverage included special terms 

and conditions. The survey also collected information about reinsurance for non-certified and 

NBCR terrorism coverage. Finally, insurers that do not purchase reinsurance for their TRIA 

deductibles and co-payments were asked why they do not. 

The last section of the insurer questionnaire asked a series of simple questions about the 

organization’s use of techniques to estimate the probability and cost of a future terrorist event, 

their use of specific financial risk management techniques and techniques to limit exposure 

within geographical areas.4

Policyholder Questionnaire 

The policyholder questionnaire parallels the insurer questionnaire, but is shorter and simpler. In 

the first section of the questionnaire, policyholders were asked about corporate structure, whether 

their organization has a single or multiple locations, whether they have locations in a high-risk 

city, in an iconic location, and/or in a large city (defined by population greater than 350,000). 

The second section of the policyholder questionnaire asked basic information about the 

 

3

 These cities were identified by the Department of Homeland Security (DHS) in the spring of 2003: Chicago, 

Houston, Los Angeles, New York City, San Francisco, Seattle or Washington, D.C. See the DHS May 14, 2003 

press release titled “Securing Our Homeland: Protecting Our Urban Areas,” accessed June 9, 2005 from 

http://www.ncsl.org/terrorism. 

4 The reinsurer questionnaire was broadly similar to the insurer questionnaire, and as such is not reviewed in detail. 
- 40 -

respondent organization: total assets, number of employees, total revenue, share of revenue from 

each major geographic region, and share of revenues from large cities. 

The third section of the policyholder survey asked about the organization’s insurance coverage. 

Information was collected on the number of policies begun or renewed in the specified year, 

whether any of those policies included terrorism coverage, the total premiums paid for all 

policies within the broad line, the total premiums for TRIA-eligible coverage, the sum of total 

premiums for non-certified coverage if known, the highest limit across all policies, and the 

lowest deductible across all policies. 

Recognizing the possibility that the policy renewal month would affect the date when 

policyholders received the initial mandatory offer of terrorism risk insurance for acts of terrorism 

covered under TRIA, policyholders were asked to identify the policy renewal month for policies 

representing the largest share of their total premiums within broad lines of interest. In 2003 and 

2004, policies written or renewed later in the calendar year were expected to reflect higher 

charges for certified coverage because the coverage period extends into the following year, when 

the legislatively mandated insurer deductible is higher.5

 

Policyholders were asked whether any of their terrorism coverage is provided through captives, 

and about their reasons for using a captive insurer for terrorism coverage. In addition, they were 

asked about special terms and conditions associated with their TRIA-eligible and non-certified 

coverage, and about differences between limits and deductibles for TRIA-eligible and noncertified terrorism coverage. 

The next section of the policyholder survey covered respondents who do not purchase terrorism 

coverage, asking their reasons for declining the mandatory offer and the price they would be 

willing to pay for terrorism coverage. The last section of the policyholder survey asked a series 

of questions about general practices: whether more or less of the respondent organization’s 

terrorism risk coverage is purchased from alternative insurers relative to the norm for that 

organization, whether specific risk-mitigation measures had been adopted, and whether the 

organization is required to purchase TRIA-eligible or non-certified terrorism risk insurance for 

reasons involving loan covenants or lease contracts. 

Questions on Coverage After TRIA 

As a general rule, insurance policies written or renewed in the first part of 2005 extend into 

2006. By law, the Program expires at the end of 2005. Insurers’ charges for terrorism coverage 

and their use of special conditions to limit exposure are expected to adapt to the expiration of the 

Federal backstop. Policyholder purchase decisions are expected to change in response. New 

questions were added to the last wave of survey questionnaires to capture these effects. In all 

 

5

 For example, consider a policyholder who renews all commercial property and casualty insurance policies each 

July. Policies written or renewed at the beginning of July of 2003 spanned the first 6 months of 2004, when 

insurers’ deductibles were 10 percent of the prior year’s direct earned premium, as well as the last 6 months of 2003 

when insurers’ TRIA deductibles were 7 percent of the prior calendar year’s direct earned premium. The cost of 

similar policies written and renewed in early January of 2003 should be lower, all else equal, because in the latter 

case the lower seven percent insurer deductible was in effect throughout the entire coverage year. 
- 41 -

cases survey respondents were asked to respond in terms of policies actually written or renewed 

in the first two months of 2005. For clarity, coverage for terrorist events comparable to acts of 

terrorism covered under TRIA was called international terrorism coverage in the questionnaires. 

In both surveys the additional questions asked about the use of exclusions for international 

terrorism coverage in 2006, the use of special terms and conditions associated with international 

terrorism coverage, and about differences between the limits and deductibles for policies with 

terrorism coverage and those for non-certified coverage. 
- 42 -

Section 3.2 Survey Design 

This section focuses on the design of the TRIA surveys and the structure of the survey samples. 

Treasury contracted with Westat, a contractor with experience in the collection and analysis of 

confidential survey data, to draw nationally representatives samples, field test the questionnaires 

described above to evaluate tradeoffs between respondent burden and questionnaire detail, 

develop paper and web-based data collection instruments, follow up with survey respondents 

with clarifying questions as necessary, edit the data, develop sample weights, and provide 

summary statistics needed to evaluate data quality. Following new guidelines provided under the 

Confidential Information Protection and Statistical Efficiency Act of 2002 (CIPSE, Public Law 

107-347), Treasury collected the survey data under a pledge of confidentiality. Industry advisors 

commented in several contexts that this approach could increase survey participation, and 

thereby strengthen the reliability of the survey results. 

Design of Insurer Survey

The goal of the insurer survey was to collect data that can be used to analyze insurer behavior in 

response to the passage of TRIA. The number of commercial property and other liability 

insurers is small relative to the total number of corporations and other organizations in the U.S. 

economy. Furthermore large insurers account for a large share of total premiums in TRIAeligible lines (see Chapter 2), and a simple random sample of the population might not include a 

sufficient number of observations from large insurers to draw reliable conclusions about this 

group. In addition, because TRIA is a national Program, it is important to ensure that survey 

data are available from all major regions of the country. Therefore, Treasury specified that the 

sample of insurers selected for participation in the insurer survey should be statistically 

representative of the four major geographical regions within the U.S., and for each of three broad 

asset classes: insurers with less than $1 billion in total assets, insurers with $1 to $10 billion in 

total assets, and insurers with more than $10 billion in assets. Table 3.1 summarizes the sample 

domains of the TRIA insurer survey. 

 
- 43 -

Table 3.1 

TRIA Insurer Survey Sample Domains and Sub-Domains 

 

Broad Geographic Regions 

 Northeast 

 Midwest 

 South 

 West 

Broad Lines Sold 

 All TRIA-eligible lines, or all but workers’ compensation 

 Workers’ compensation only 

Asset Size Class 

 Insurers with less than $1 billion in assets 

 Insurers with $1-10 billion in assets 

 Insurers with over $10 billion in assets 

The NAIC provided Westat with a sample frame for the insurer survey. The sample frame listed 

all commercial property and casualty insurers with premiums in TRIA-eligible lines. 6 The final 

survey frame also included domains for a small number of foreign insurers, and for captive 

insurers registered in Vermont and Hawaii. 

Design of Policyholder Survey 

A large sample of policyholders is required to generate statistically reliable information on the 

commercial property and other liability policyholders within the U.S. economy. Industry 

representatives consistently emphasized the heterogeneity of different segments of the 

commercial property and casualty insurance market. To fulfill the mandate that Treasury 

evaluate the availability and affordability of insurance for acts of terrorism covered under TRIA, 

it was essential that the survey be representative of all major regions and industrial sectors within 

the economy. The survey data also needed to be representative of large corporations and other 

organizations that account for a disproportionate share of total economic activity. High sampling 

rates were also important to ensure the availability of information on sub-populations mentioned 

explicitly in the law, as sources of particular concern: trucking, railroads, and public transit.7

 

6

 Treasury is indebted to the NAIC for providing Westat, Treasury’s survey contractor, with the information needed 

to develop the insurer sample frame. 

7

 An alternative source of data is broker surveys. While they have the advantage of a higher response rate, it is 

generally thought that the clientele served by brokers is not representative of all major sectors of the economy. 

Marsh, an insurance broker, has released a number of independent studies on the topic of terrorism risk insurance. 

These are based on client records. The most recent of these studies, titled MarketWatch: Terrorism Insurance 2005,

included data from 2,371 firms. The median total insured value (TIV) of the firms included was $200 million; the 

median for property premiums was $275,000; the median for terrorism premiums was $13,000. Data are reported 

through year-end 2004. Key results from this study include the following. 
- 44 -

Taking these factors into account, the policyholder survey was designed to generate reliable 

estimates of take-up rates and costs for the groups listed in Table 3.2.8

 This approach ensured 

that Treasury would be able to compare and contrast survey results along the dimensions 

specified in Table 3.2. 

As noted above, data collection was undertaken “at arm’s length” from Treasury to preserve the 

confidentiality of the information collected in the survey. No directly identifying information 

was provided to Treasury analysts, and data were masked as required, following established 

statistical procedures, to prevent indirect disclosure at the level of the individual respondent. No 

directly or indirectly identifying survey information has been or will be released in any Treasury 

report or publication. All contractor staff involved in the TRIA surveys have signed pledges of 

confidentiality, and have been notified that violators of these pledges are subject to substantial 

fines, imprisonment, or both. This approach was taken to ensure compliance with the CIPSE, 

which safeguards the confidentiality of data collected for exclusively statistical purposes. 

 

 Marsh found that about 49 percent of Marsh’s clients purchased property terrorism insurance in 2004, compared to 

the 2003 average of 27 percent. More specifically, the take-up rate increased from 23 percent in the second quarter 

of 2003 to 44 percent in the first quarter of 2004, but remained fairly steady throughout 2004. The purchase of 

property terrorism coverage in 2004 varied significantly depending on a company’s TIV; smaller companies (less 

than $100 million TIV) were much less apt to purchase this coverage. Take-up rates—the percentage of companies 

buying the coverage—varied considerably among regions in 2004: about 53 percent in the Northeast and Midwest, 

47 percent in the South, but only 34 percent in the West. 

The cost of terrorism coverage was measured both as a rate—premiums divided by TIV—and as a percentage of a 

client’s overall property premium. Marsh found that the median terrorism premium rate for 2004 was 0.0057 

percent, essentially unchanged from 2003. The rate decreased as the TIV of the client increased. 

The median percentage of a company’s annual property insurance costs attributable to terrorism premiums rose from 

4.4 percent in 2003 to 4.7 percent in 2004. Larger companies spent a smaller percentage of premium dollars on 

terrorism insurance in 2003. In 2004, the opposite occurred: the largest companies spent 5.25 percent of their 

property premium budget on terrorism insurance, compared to only 4.5 percent in companies with TIV under $100 

million. 

Marsh found that 81 percent of companies purchased TRIA coverage in their primary general liability (GL) 

programs in 2004, a decline from 93 percent in 2003. As a percentage of premiums for the overall coverage the 

charge for terrorism coverage held steady at about 1 percent. 

To the extent that similar calculations have been undertaken, our findings from the policyholder survey, presented in 

Chapter 5, are broadly consistent with the findings reported by Marsh, particularly for large policyholders. The 

Marsh estimates are based on a sample of Marsh client records and are unlikely to be representative of the broader 

group of commercial property and casualty policyholders represented in our survey. 

8

 The frame for the policyholder sample was constructed by Westat, the survey contractor, using data from Dunn 

and Bradstreet and the Census of Governments. 
- 45 -

Table 3.2 

TRIA Policyholder Survey Sample Domains and Sub-Domains 

 

Broad Industries 

 Heavy industry: mining, utilities, construction and manufacturing 

 Trade: wholesale and retail trade, transportation and warehousing 

 Information and business services: information; finance and insurance; real 

estate, rental and leasing; professional, scientific and technical services; 

management 

 Other services: administrative, support, waste management, and 

remediation services; educational services, health care, and social assistance 

services; arts, entertainment and recreation; accommodation and food 

services; other services not specified elsewhere 

 State and local governments 

Industries of Special Concern 

 Real estate 

 Railroads 

 Trucking 

 Special districts at high risk, including public transit 

 Municipality services, including water supply systems 

Urban and non-urban locations 

 Cities with populations of at least 350,000 in 2000 

 Cities with populations less than 350,000 in 2000 

Broad Geographic Regions 

 Northeast 

 Midwest 

 South 

 West 

High-Risk Cities and Iconic Locations 

 Chicago, Houston, Los Angeles, New York City, San Francisco, 

Washington, D.C., and businesses with iconic locations 

Asset Size Class 

 Organizations with less than $10 million in assets 

 Organizations with $10 to $100 million in assets 

 Organizations with $100 million to $1 billion in assets 

 Organizations with over $1 billion in assets 
- 46 -

3.3 Data Collection 

Distribution of questionnaires for the first wave of policyholder questionnaires began on 

November 8, 2003, and continued through March 15, 2004. Distribution of questionnaires for 

the first wave of insurer questionnaires began on December 16, 2003. The full schedule of data 

collection efforts for all three waves is given below in Table 3.3. In every instance survey 

questionnaires were accompanied by a cover letter from Treasury Secretary Snow, urging 

cooperation with the survey and providing assurances about the confidential nature of the data 

collection effort. Parallel cover letters from Westat also accompanied each questionnaire; these 

letters pledged to safeguard the confidentiality of survey responses, provided unique passwords 

to enable confidential web-based data entry, and gave email and telephone contact information. 

Detailed information about data security procedures was also made available on the web in 

accordance with the Privacy Information Act of 2002. 

 Table 3.3 

 Data Collection Commenced Data Collection Ended 

 

Wave One 

Policyholders November 8, 2003 March 15, 2004 

Insurers December 16, 2003 April 5, 2004 

 

Wave Two 

Policyholders September 24, 2004 December 15, 2004 

Insurers September 24, 2004 December 15, 2004 

 

Wave Three 

Policyholders January 28, 2005 March 18, 2005 

Insurers January 26, 2005 March 18, 2005 

 

Reinsurers November 29, 2004 February 7, 2005 

Throughout the data collection process care was taken to protect the identities of survey 

respondents. Access to the full database at Westat was restricted to a few key staff members. 

Questions from Treasury staff about the consistency of individual survey responses were referred 

to Westat for follow-up with the survey respondent by referencing a survey identification 

number. For cases in which an industry is so dominated by a small number of entities that it is 

impossible to analyze information from that industry without discerning company-level results, 

the data were analyzed separately at Westat according to Treasury specifications and only 

aggregated results were forwarded to Treasury. 

After the first survey wave, Treasury and Westat agreed upon a number of specific measures 

designed to gauge and/or improve the integrity of the data. Measures taken to improve the 

integrity of the data include post-stratification of the insurer survey results with NAIC data on 

total premiums in TRIA-eligible lines, sustained telephone follow up with large wave one nonrespondent policyholders who were contacted late during the initial survey wave, and optimal 
- 47 -

sub-sampling of wave one non-respondents for increased efficiency. Measures taken to assess 

the reliability of the data include a follow-up survey to assess the possibility of non-response bias 

in the policyholder survey, a second follow-up survey with policyholders who reported no 

workers’ compensation insurance coverage to check for respondent reporting error, and the 

purchase of additional information from Dunn and Bradstreet for use in the development of 

statistical adjustment factors to compensate for possible non-response bias and attrition bias. 
- 48 -

Section 3.4 Strengths and Weaknesses of Survey Data 

While the insurer and policyholder surveys were contracted out concurrently, the two surveys 

provide two distinct and independent sources of quantitative information about terrorism risk 

insurance coverage. The following chapters show that the two sets of survey results show 

similar trends over time, and therefore they are mutually reinforcing. 

Westat’s final response rate estimate for the first wave of the insurer survey is 50 percent overall, 

and 52 percent on an asset-weighted basis. The corresponding response rate for the 2004 crosssection data is 58 percent overall, and 53 percent on an asset-weighted basis. 

Response rates for the policyholder survey are lower. Unweighted response rates, in which large 

respondents receive greater weight because the largest organizations were sampled with 

certainty, are 20 percent for wave one, and 17 percent for wave two. Population-weighted 

estimates of policyholder response rates are 17 percent for the first survey wave, and 14 percent 

for the second wave. This result is not entirely unexpected. For context, it is helpful to note that 

response rates to complex financial surveys often fall below 40 percent even when the surveys 

are mandatory.9

 Clearly response rates will be lower in the case of a complex financial survey 

that is voluntary. 

Westat’s final analysis of policyholder survey response rates shows low overall survey response 

rates to be attributable to very low response rates among small organizations; the response rates 

of larger organizations are much higher. Large organizations are responsible for a 

disproportionately large share of total economic activity. For example, the category “very large 

firm or organization” includes 12 businesses and one state government with more than 300,000 

employees each. Table 3.4 below shows that the wave one survey response rate for very large 

organizations was roughly 32 percent, and the corresponding response rate for the 2004 crosssectional data was 25 percent. 

 

9

 Philip Smith, “Perspectives on Response Rates and Nonresponse in Establishment Surveys,” presented to the 

Federal Economic Statistics Advisory Committee in Washington D.C. on December 14, 2004. Retrieved June 12, 

2005 from http://www.bls.gov. 
- 49 -

 Table 3.4 

Policyholder Groups Response Rate Estimates

 

 Percentages 

 2002-2003 2004 

Small firm – heavy industry, trade, information – high-risk city 9 7 

Small firm – heavy industry, trade, information – not high-risk city 15 13 

Small firm – other services – high risk industry 15 13 

Small firm – other services – not high risk industry 12 9 

Small organization – government 37 28 

Mid-size or large organization – government 57 44 

Mid-size or large organization – non-government 20 17 

Very large firm or organization 32 25 

 

Wave three response rates are relatively low in all instances, and for this reason data from 2005 

are discussed, but not presented graphically, in Chapters 4 through 6. 

Response rates to the reinsurer survey were too low to warrant the presentation of any 

quantitative results, despite substantial efforts to develop a useful questionnaire. A number of 

very large reinsurers responded to the survey. We are grateful for their efforts and we have taken 

their responses into consideration in our qualitative analysis. However the aggregate results are 

not statistically reliable and therefore they cannot be presented. 

In response to the obvious concern with policyholder response rates, Westat and Treasury agreed 

upon several efforts to evaluate possible measurement errors. The majority of these efforts were 

motivated by three basic concerns that arise in the context of the policyholder survey. The first 

involves respondent recall error. In 2003 some policyholders may not have known or recalled 

whether they had terrorism coverage in 2002 or 2003, particularly if their insurer provided 

terrorism coverage at no charge. On this count some of the increase in terrorism risk take-up 

rates shown in the policyholder survey results may be an artifact of improved respondent recall 

about the active decision to accept or decline terrorism coverage under the make available 

provision. 

Similar concerns about possible reporting errors arise with respect to workers’ compensation 

insurance coverage. Survey estimates of take-up rates in workers’ compensation lines are low. 

We know from comments made during the initial advisory group meeting mentioned above and 

from follow up conversation with the NAIC that self-insurance for workers compensation is 

prevalent.10 This explanation provides some credibility to the low workers’ compensation takeup rate estimates, but seem unlikely to be a complete explanation. It is also possible that some 

 

10 Eric Nordman, Director of Research at the NAIC, advised us that approximately 38 states permit workers’ 

compensation coverage through group self-insurance, and a number allow businesses to self-insure for their 

workers’ compensation exposure. 
- 50 -

respondents don’t recall purchasing terrorism coverage in workers’ compensation precisely 

because it is mandatory and no active purchase decision needs to be made.11 

To investigate the low workers’ compensation take-up rate estimates, Westat contacted 184 wave 

one survey respondents out of 464 who did not report workers’ compensation coverage in 2003. 

Among the 177 wave one respondents who participated in this follow-up survey, 55 percent 

reported that they actually did have workers’ compensation coverage. Westat reports that “many 

respondents simply did not think of their state WC program, or special nonprofit insurance pool, 

as an insurance policy.” Among the remaining follow-up survey respondents, 45 percent were 

self insured for workers’ compensation, 19 percent participated in the Federal Employers’ 

Liability Act program, and 8 percent reported that their employees were hired by temporary help 

agencies, were paid by professional employer organizations, or were self employed. A small 

number claimed that workers’ compensation was not required in their state if the establishment 

has fewer than 50 employees. These results indicate clearly that self insurance and respondent 

recall error both contribute to the low workers’ compensation take-up rate obtained with the 

survey. 

On the basis of these follow-up survey results, Westat recommended that overall sample-based 

estimates of workers’ compensation take-up rates be adjusted upward by 55 percent of the 

complement of the estimate.12 While this approach may be viable for overall estimates, the 

sample sizes in the follow-up survey are too small to support comparison of take-up rates in 

different groups of interest. We have concluded that the workers’ compensation take-up rate 

estimates are not statistically reliable and therefore we do not present them. 

Although state law requires that terrorism coverage be included in workers’ compensation 

policies, Westat found that only 6 of the 98 follow-up survey respondents who had workers’ 

compensation coverage were able to report on their workers’ compensation terrorism insurance 

premiums. This suggests either that their terrorism coverage is usually provided at no charge or 

that respondents don’t recall the charge. Policyholder survey estimates of the cost of terrorism 

coverage in workers’ compensation insurance policies are therefore unreliable, and as a result, 

unfortunately, policyholder reports of the cost of workers’ compensation coverage are not 

reported in this study. Cost data from insurers in workers’ compensation lines is reported in 

Chapter 5, however.

It should be noted that the TRIA surveys were sent to individuals responsible for most insurance 

decisions, typically in finance and accounting departments. Questionnaires were sent to persons 

with the title of President, Owner, Chief Executive Officer, Chief Financial Officer, Treasurer, 

Comptroller, Director of Actuarial Services, and so on. In many cases the individuals 

responsible for workers’ compensation insurance coverage may be different from those to whom 

the questionnaire was sent. The web-based data entry survey was designed to allow data entry 

 

11 Mary Jane Cleary of NCCI suggested this form of respondent recall error during a brief telephone conversation in 

the spring of 2004. 

12 For example, if the sample-based workers’ compensation take-up rate estimate is 40 percent, Westat estimates that 

55 percent of the remaining policyholders, who do not report having workers’ compensation coverage in their 

survey responses, nonetheless do have workers’ compensation coverage. They therefore recommend an adjusted 

uptake rate estimate of 73 percent. 
- 51 -

from persons in two separate departments, and separate questionnaires about workers’ 

compensation were developed to facilitate the collection of information on workers’ 

compensation coverage. Nonetheless we believe that the high item non-response in the 

policyholder survey data on workers’ compensation coverage, despite the fact that workers’ 

compensation coverage is mandatory in most instances, is attributable in part to the fact that 

workers’ compensation data is often handled in a separate department from the one that handles 

other insurance purchasing decisions. 

A different set of measurement concerns involves the possibility of non-response and survey 

attrition bias. To understand this issue, note that survey respondents who invest the time and 

effort required to respond to the survey might be more concerned than the average policyholder 

about terrorism risks, and that policyholders with the greatest concerns may be more likely to 

respond to all three survey waves. Westat’s non-response follow up study was designed to test 

for evidence of non-response bias of this sort in the first survey wave. This follow-up survey 

consisted of a small number of brief questions posed in telephone interviews, to ascertain 

whether or not the non-responding organization had in fact purchased terrorism coverage. These 

telephone interviews were attempted with a random sample of 1,000 organizations in the first 

wave of the policyholder survey that were known through initial telephone contact to be eligible 

to participate, but had not responded to the survey questions. Organizations that had not 

purchased terrorism coverage were asked to identify their reasons for declining coverage, 

selecting from a short list of reasons provided by the interviewer. The results from this survey 

were encouraging. They showed no evidence of survey non-response bias for estimates of 

uptake for the population as a whole, and for most sub-groups of interest. The results show 

evidence of survey non-response bias in some groups.13

Unfortunately we do see some evidence of attrition bias in the second wave of the policyholder 

survey. Attrition bias is similar to non-response bias in the sense that it occurs when survey 

respondents differ systematically, in ways that influence their survey responses, from survey 

non-respondents. However attrition bias occurs when a former survey respondent declines to 

participate in later survey waves. For example, in Chapter 5 we show a striking increase in takeup rates among large policyholders in 2004, when compared with the take-up rate estimates for 

this group in 2002 and 2003. When calculating take-up rate estimates among large policyholders 

who participated in the first survey wave separately for those who also participated in the second 

wave and those who did not participate in the second wave, we find that the 2003 take-up rate 

estimate of the group that participated in the second survey wave is double the 2003 take-up rate 

estimate for the group that did not participate in the second survey wave. This suggests that 

 

13 Statistically significant discrepancies were found with some regularity in take-up rate estimates for the Western 

region, large cities, real estate, railroads, government, and organizations with $100 million-$1 billion in assets. 

They were found with somewhat less regularity in take-up rate estimates for Washington D.C., San Francisco, 

business services, and organizations with $1 billion or more in assets. In most instances in which statistically 

significant discrepancies were noted, the likelihood that the respondent had purchased any insurance coverage in a 

given line was found to be understated in the initial (and much longer) TRIA policyholder survey, and the likelihood 

of having purchased terrorism risk insurance was overstated in 2003. While some statistically significant 

discrepancies are to be expected simply because both sets of estimates are based on random samples, the clustering 

of several discrepancies for one sub-group suggests that the estimates for these groups are less reliable than the 

estimates in which no clustering of this sort is observed. It should be noted, however, that Westat employed a 

conservative testing procedure to flag possible discrepancies.
- 52 -

survey respondents who are more likely to purchase terrorism risk insurance are represented 

disproportionately in the second wave of survey data. The group that did not participate in the 

second survey wave represented roughly 30 percent of the population of large policyholders in 

2003, so this is unlikely to be a trivial effect in quantitative terms. It is also a believable result: 

higher-risk organizations are likely to be more interested in terrorism and terrorism related 

issues, to be more aware of TRIA and terrorism insurance, and to be more motivated to 

participate in the survey during successive waves because TRIA is potentially beneficial to them. 

For some organizations, and especially those managing large numbers of complex insurance 

policies in TRIA-eligible lines, the resources required to complete three waves of the TRIA 

survey can be quite burdensome. Therefore it seems plausible that large organizations with little 

interest in terrorism risk insurance would be more likely to drop out of the survey after the first 

wave than large organizations that have a vested interest in TRIA. For this reason our discussion 

of 2004 results from the policyholder survey in Chapter 5 is guarded. 

The third concern that arose during the course of the survey involved the selection of reporting 

categories. Insurance industry representatives advised us that they would be able to report data 

in the following broad categories: commercial property, workers’ compensation, and other 

liability and casualty. Our survey contractor recommended that we collect separate information 

on umbrella and package policies because they often span several lines. This approach did not 

raise problems in field tests and focus groups employed to evaluate the questionnaire, but a 

number of wave one respondents indicated that information on their package policies was 

included when they reported on commercial property coverage. Realizing that package policies 

are an identifiable component of commercial property policies under NAIC reporting 

conventions we modified the wave two questionnaires to ask separately about umbrella and 

package lines. Many wave two respondents then shifted the composition of their policy data 

away from commercial property and into package lines.14 The upshot is that we cannot 

disentangle package from umbrella policies in wave one, and some wave one data on 

commercial property policies likely includes information from package policies. Large shifts in 

the composition of policy data by broad line that were revealed in data analysis were referred to 

Westat for follow up with the survey respondent, but the follow ups were not successful in all 

instances and we can say nothing about small composition shifts that are less obvious. We 

usually aggregate the policy information into two broad categories: all lines except workers’ 

compensation, and workers’ compensation insurance. Because our basic unit of analysis is the 

entire organization, this aggregation does not present serious problems for interpretation. 

 

14 In waves two and three information was requested in the following broad lines. (1) Commercial property, 

including policies covering losses in business interruption, fire, allied lines, farm owners’ multiple peril, commercial 

multiple peril (non-liability portion), burglary and theft, inland marine and boiler and machinery. (2) Workers’ 

Compensation. (3) Other liability and casualty, including the remaining property and casualty policies such as 

commercial multiple peril (liability portion), products liability, other liability, commercial auto no-fault, other 

commercial auto liability, commercial auto physical damage, surety, ocean marine, financial & professional liability, 

aircrafts (all perils) and event cancellation. (4) Umbrella and/or excess policies, defined as those that include 

coverage for losses above the limit of an underlying policy or policies that impact property or casualty policies. 

While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader 

than those of the underlying policies. (5) Package policies that cover more than one type of insurance risk under the 

same policy. 
- 53 -

We also note two minor points that are relevant in the assessment of data quality. The first is 

that the survey results presented in the balance of the study are, whenever possible, presented in 

ratio form. This approach has two advantages. First, in the case of data that were collected near 

the end of 2004, the comparability of the resulting estimates to annual estimates from 2003 is 

good. Second, when respondents report in different orders of magnitude from wave to wave 

(reporting in dollars in wave one but in thousands of dollars in wave two, for example) ratios 

from the two time periods remain comparable. 

The second point is simply that, unless indicated otherwise in the text, the survey data are 

weighted to be representative of the population that was eligible to participate in the survey. 

Estimates from the insurer survey are representative for the population of insurers who collected 

more than $10 million in commercial insurance premiums and sold some policies in TRIAeligible lines. Estimates from the policyholder survey are weighted to be representative of 

corporations and other organizations with at least 10 employees who are not part of the Federal 

Government. This approach is adopted because the organization itself is the basic unit of 

analysis. Changes in reported values within asset size classes are indicative of changes in the 

market conditions facing and/or the behavior of organizations with an identifiable set of 

characteristics. These are listed in the descriptions of the insurer and policyholder 

questionnaires. 

Chapter 4 Results from Surveys of Insurers

This chapter presents quantitative information on the availability, affordability, and cost of 

terrorism risk insurance immediately prior to and during the TRIA Program. The findings are 

based on Treasury surveys of commercial property and casualty insurers, described in Chapter 3. 

The analysis is focused on commercial property and casualty insurance lines that are eligible for 

TRIA coverage. The data cover 2002 to 2005, and therefore reflect adjustments in this market to 

the events of September 11th, 2001 and the subsequent introduction of TRIA. The supply of 

terrorism risk insurance in 2002, prior to the passage of TRIA, is used throughout as a baseline 

for comparison. Ideally one would also like to report on the availability and affordability of 

terrorism risk insurance prior to September 11th, but this information is not available. It is our 

understanding that terrorism risk insurance was nearly universal and available at little or no 

charge to the vast majority of policyholders in the United States prior to September 11th. 

This chapter also presents data on the writing and purchase of terrorism coverage for events not 

covered by TRIA, also known in the industry as non-certified coverage. Terrorism risk insurance 

as defined and covered under TRIA is known in the industry as certified coverage, because the 

law requires that an act be certified by the Secretary of Treasury as an act of terrorism before the 

Federal backstop becomes effective.1

 Non-certified coverage is commercial property and 

casualty coverage for acts of terrorism that would not meet the conditions for certification as 

required by TRIA if they occurred. 

The private market offers non-certified coverage without a Federal backstop, even though there 

is recent experience with domestic terrorist attacks.2 Developments in the market for noncertified coverage provide a useful point of comparison when evaluating the development of the 

market for TRIA-eligible coverage. Industry experts generally believed that the risks associated 

with non-certified terrorism are somewhat different and less severe than those associated with 

certified terrorism. Domestic terrorist attacks are widely expected to occur with less frequency 

and severity than foreign terrorist attacks. Nevertheless, data on non-certified coverage provide 

insights into the terrorism-insurance market in the absence of a Federal subsidy. 

Prior to September 11th terrorism risk insurance was general in nature and the cost of such 

coverage was not generally specifically or separately priced by insurers. In general, after 

September 11th, but before the enactment of TRIA, terrorism risk insurance was specifically or 

separately priced only for policyholders thought to be at risk of attacks. This terrorism risk 

coverage generally covered both certified and non-certified risks. Our analysis compares this 

somewhat more inclusive pre-TRIA terrorism coverage to the terrorism risk insurance written 

under TRIA. For clarity of exposition we use the term terrorism risk insurance to refer to both 

overall terrorism coverage in 2002 and TRIA coverage (late 2002 through 2005). Differences in 

actual coverage should be considered when evaluating the cross-period comparisons provided 

below. 

 

1

 An act of terrorism is defined in part as an act that has been committed by an individual or individuals acting on 

behalf of any foreign person or foreign interest. 

2

 Most notable among these is the1995 bombing of the Alfred P. Murrah Federal Building in Oklahoma City, 

Oklahoma. 
 - 56 -

The unit of analysis in this chapter is the insurance company or insurance group. An insurance 

group is the highest level of corporate organization, and may include several insurers. The 

choice of insurers as the unit of analysis may obscure the composition of insurers’ policies and 

premiums. The data provide information on overall writing of and charges for terrorism 

coverage, but no detail about particular policies. We note that this aggregation may obscure 

vulnerabilities confronting insurers who write commercial property and liability coverage for 

high-risk sub-populations within their client base.3,4 Ultimately, time and resource constraints 

prevented the collection of policy-level data from individual insurers. 

The exact relationship between the cost of terrorism coverage and total insured values covered 

for terrorism risks at the level of individual policies cannot be examined with precision on the 

basis of the survey data presented here. Instead, these survey data provide a broad summary of 

results for all insurers in TRIA-eligible lines, and for sub-groups with characteristics of particular 

interest, such as size and type of terrorism risk. 

Annual data from 2002 through 2004, from the first two waves of the insurer survey, are 

presented graphically. The third and final survey wave collected data on policies written or 

renewed in the first two months of 2005. Because of the cyclicality of premiums within the 

calendar year, data from 2005 is not incorporated into the graphical presentation. Instead, we 

discuss results from the 2005 wave in the text where appropriate. 

 

3

 For example, large insurance groups may include some insurers that write standardized coverage for small 

businesses and other organizations and some insurers that specialize in writing of commercial property and other 

casualty coverage for trophy buildings. The average cost of terrorism coverage may be very low in the case of the 

provider of coverage for a large number of small, standardized policies but very high for the company that writes 

insurance coverage for trophy buildings. 

4

 Another aggregation issue involves disentangling seasonal from cyclical effects. For approximately 26 percent of 

insurers, our survey results suggest that policies representing the largest share of their commercial property coverage 

are written or renewed in January. For roughly 13 percent of insurers, July appears to be the primary policy renewal 

month. For roughly 8 percent of the surveyed population, policies representing the largest share of premiums in 

commercial property lines are renewed in October. If the market begins to soften in the third quarter of the year 

demand conditions facing approximately 30 percent of the surveyed population, i.e., those that are most active 

between July and December, may be quite different from the conditions confronting those who write or renew 

primarily in the first half of the year. Both forms of temporal fluctuation will be embedded in data on policies 

written or renewed during the calendar year. This problem can be mitigated through the use of terrorism cost shares 

rather than reported premiums to measure the cost of terrorism coverage, as noted in Chapter 3, but some seasonal 

and cyclical effects may remain. 
 - 57 -

4.1 Terrorism Risk Insurance Written and the Cost of Terrorism Coverage 

This section addresses the overall writing and cost of terrorism risk insurance by insurers. Most 

of the discussion is focused on aggregated data on property and casualty lines excluding 

workers’ compensation. Because state regulations forbid the exclusion of terrorism coverage 

from workers’ compensation policies, terrorism coverage is included in nearly all workers’ 

compensation insurance and generally does not reflect a choice on the part of either the insurer or 

the policyholder. We address terrorism risk insurance in the workers’ compensation line later in 

this chapter. 

We note two points at the outset. First, the survey data refer explicitly to policies written or 

renewed in a given calendar year, rather than those that were in effect during most of the 

calendar year. As such, results from 2002 are predominately pre-TRIA results, because TRIA 

was passed in late November of that year. Results from 2003 onward are post-TRIA results; 

they characterize policies written or renewed during the course of the 2003 calendar year. 

Second, the data are weighted to represent the population of insurers covering TRIA-eligible 

lines. We therefore obtain a representative view of all insurers in such lines, and examine the 

behavior across insurers.5

 This approach also lends itself to subsequent evaluation of terrorism 

risk insurance written by insurer asset size class. 

Availability of Terrorism Risk Insurance 

The first broad measure of availability we examine is the proportion of insurers writing any 

terrorism coverage. While insurers are required by TRIA to make available terrorism coverage 

in eligible lines under the same terms and conditions applied to the rest of their coverage, TRIA 

does not set the price at which insurers must offer that coverage. Insurers are required to 

disclose a price for terrorism coverage, which policyholders may decline. In fact, policyholders 

may elect to decline all terrorism risk coverage except in the case of workers’ compensation. 

Unless price offers violate state law or regulation, insurers who prefer not to sell terrorism risk 

insurance can therefore price it at levels unlikely to be accepted by policyholders. 

Survey data summarized in Figure 4.1 indicate that roughly 73 percent of commercial property 

and casualty insurers wrote some terrorism coverage in TRIA-eligible commercial property and 

casualty lines (excluding workers’ compensation) in 2002. That percentage increased to 

approximately 91 percent in 2003 and stabilized at that level in 2004.6

 

 

5

 Two alternative weights are policy and premiums weight. Premium-weighted results are difficult to interpret, 

especially since effective reinsurance prices and portfolio risk exposure change over time. We examined policyweighted coverage, and found qualitatively similar results. Policy-weighted results effectively represent the 

behavior of large insurers. 

6

 Item non-response rates for the data underlying this percentage, and similar ones presented below, are typically 

less than two percent. Item non-response rates are reported explicitly in instances when the item non-response rate 

for the eligible population is greater than five percent. 
 - 58 -

Figure 4.1 

Insurers Writing Any Terrorism Risk Insurance

Commercial Property and Casualty Lines

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004

Percent Insurers

The average share of all commercial property and casualty and liability insurance policies 

written with terrorism coverage in TRIA-eligible lines represents a second measure of coverage 

in the market. The increase in this share since 2002 is evidence of an expansion of terrorism risk 

coverage. 

The average share of policies in TRIA-eligible lines with terrorism coverage, shown in Figure 

4.2, increased between 2002 and 2004. Insurers, on average, wrote insurance coverage for 

terrorism in approximately 60 percent of 2002 policies in commercial property and casualty lines 

covered by TRIA. Terrorism risk coverage was therefore written even prior to the passage of 

TRIA. After the enactment of TRIA in late 2002, the average percentage of policies with TRIAeligible coverage increased to approximately 67 percent. While suggestive, this result does not 

necessarily represent evidence of a TRIA effect. Identifying a TRIA effect requires, at a 

minimum, disentangling its effect from that of the natural underwriting cycle described in 

Chapter 2. 

Figure 4.2 

Policies Written with Terrorism Risk Coverage

Relative to Total Policies Written 

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004

Avearge Percent
 - 59 -

Between 2003 and 2004 the TRIA deductible increased from 7 percent to 10 percent of prior 

year direct written premium. Despite this reduction in the Federal backstop, the share of policies 

including terrorism risk coverage remained stable over the period. 

The finding that insurers included terrorism coverage in 60 percent of their 2002 policies on 

average runs counter to anecdotal information reported in the marketplace at the time. Shortages 

in the supply of terrorism coverage were a matter of concern. The decision of state regulators to 

allow terrorism exclusions in order to preserve the capacity of insurers increased this concern. 

We do not have exact figures on the availability of terrorism risk insurance prior to September 

11th, but it is generally assumed that the vast majority of commercial property and casualty 

insurance policies at that time included terrorism coverage either explicitly or implicitly (i.e. 

terrorism risk insurance was not excluded). 

Survey results suggest that many insurers, and particularly small insurers with little or no 

exposure to terrorism risk, continued to write terrorism coverage for no charge in 2002. The 

widespread inclusion of such coverage in 2002 suggests that the supply of terrorism risk 

insurance was not restricted by many insurers. 

The insurer survey collected data on policies written or renewed in 2002. Many policies in effect 

during 2002 were written in 2001 when terrorism exclusions were not permitted. It is unlikely 

that this affects our results. Respondents were specifically asked to report on policies written 

and renewed in 2002 rather than on policies in effect during 2002 so as to not overstate the share 

of insurers’ policies written after September 11th that included terrorism coverage. 

A third measure of the extent of terrorism risk coverage is the ratio of premiums from policies 

with terrorism risk coverage to total premiums in TRIA-eligible lines. When compared with the 

number of policies that included terrorism coverage relative to the total number of policies, this 

ratio of dollar values assigns more importance to higher-priced terrorism coverage. Over the 

period examined, premium-weighted shares of total policies that are written with terrorism risk 

insurance coverage look similar to the corresponding policy-weighted shares, though increases in 

the dollar-weighted ratio over time are slightly more pronounced. Premiums from policies with 

terrorism coverage represented 59 percent of total premiums in 2002, and 68 percent in 2003 and 

2004. 

The data from the first two months of 2005 are consistent with 2003 and 2004, and suggest 

continued writing of terrorism risk insurance. More than 97 percent of insurers wrote policies 

with coverage for terrorism risk insurance, and slightly more than 70 percent of policies 

continued coverage of terrorism risks. Data from the first two months of 2005 data therefore 

suggest that coverage continued to expand, despite further increases in the TRIA deductible. 

Figure 4.3 shows the distribution of insurers’ policies written with terrorism risk coverage 

between 2002 and 2004. The figure shows the share of insurers that included terrorism coverage 

in either all or none of their policies, as well as the intermediate cases: the percentage of insurers 

who included terrorism coverage in less than 10 percent of their policies, 10 to 50 percent, 50 to 

90 percent, or 90 to 100 percent of their policies in TRIA-eligible lines. 
 - 60 -

Figure 4.3 

Policies Written with Terrorism Risk Coverage

Distribution of Insurers by Percent Written with Terrorism

0

10

20

30

40

50

zero LE 10 10 to 50 50 to 90 90 to 100 100

Range of Percent Written with Terrorism Risk Coverage

Percent Insurers

2002 2003 2004

The figure reveals substantial heterogeneity among commercial property and casualty insurers 

with respect to the terrorism risk coverage actually written. This heterogeneity may differentiate 

insurers who serve relatively low-risk clients from those insurers for whom it is more 

problematic to write terrorism coverage because their clients’ exposures are substantial. It is 

particularly noteworthy that roughly 40 percent of surveyed insurers reported including terrorism 

coverage in every policy; for these insurers the ratio of policies with terrorism coverage to the 

total number of policies is one. This proportion of insurers is quite stable over time, declining 

only slightly between 2002 and 2004. The fact that a substantial proportion of insurers included 

terrorism insurance in all of their policies might be interpreted as evidence that some insurers are 

able to insure such risks despite the events of September 11th. (However the inclusion of 

terrorism risk insurance coverage in these policies does not necessarily indicate that the coverage 

is not limited.) 

On the other hand, the data suggest a dramatic decline between 2002 and 2003 in the percentage 

of insurers who always excluded terrorism coverage. These insurers report a value of zero when 

asked the number of policies that include terrorism risk coverage. The percentage of insurers 

who report providing terrorism coverage relatively infrequently, in less than 10 percent of their 

policies, increased steadily from a value of about 6 percent in 2002 to almost 17 percent in 2004. 

The percentage of insurers providing coverage in 10 to 50 percent of their policies doubled in 

2003, but then returned to the year-earlier value in 2004; these patterns may reflect changes in 

the composition of the client base of some insurers. 

Figure 4.4 provides additional detail on the insurers who did and did not write coverage in 2002. 

The figure compares the average percentage of policies written with terrorism risk insurance in 

2003 and 2004 with the average percentage of policies written with terrorism risk coverage in 

2002. Among insurers who wrote terrorism insurance in 2002 and continued to write terrorism 

coverage in later years, roughly 75 percent of policies written in 2003 and 2004 included 

terrorism risk coverage. In contrast, among new entrants to the terrorism risk insurance market, 

roughly 50 percent of policies written included terrorism coverage. 
 - 61 -

Figure 4.4 

Policies Written with Terrorism Risk Coverage

New Entrants vs. Established Suppliers

0

10

20

30

40

50

60

70

80

90

100

Insurers that Did Not Write Terrorism Risk

Coverage in 2002

Insurers that Wrote Terrorism Risk

Coverage in 2002

Average Percent

2002 2003 2004

Cost of Terrorism Risk Insurance 

Next we describe the average costs for terrorism risk insurance derived from the insurer surveys. 

The basic unit of analysis in this section is total premiums for terrorism coverage as a share of 

total premiums for policies with terrorism coverage included. We generally refer to this concept 

as the terrorism cost share, and interpret it as the relative price or relative cost of terrorism 

coverage. This cost-share ratio is used to assess the affordability of terrorism coverage under 

TRIA. We prefer this measure to a simple dollar value of terrorism coverage because the ratio of 

terrorism coverage to total coverage provides some control for differences in average risk and 

insured value among different insurers. Furthermore commercial property and casualty 

insurance prices are known to be cyclical, and normalization by total premiums helps to control 

for these cyclical effects. 

Figure 4.5 shows that, averaging over all insurers who provided terrorism coverage in a given 

year, terrorism risk insurance cost shares increased over time despite TRIA.7

 Several factors 

contributed to this pattern. Chief among these, as discussed and documented below is a decline 

in the percentage of insurers writing terrorism risk insurance coverage at no explicit charge. 

 

 

7 Data on terrorism risk insurance premiums were not reported by some survey respondents. Therefore terrorism 

cost shares cannot be calculated for 12 percent of 2002 values, 18 percent of 2003 values, and 8 percent of 2004 

values. The majority of these (47, 64 and 49 percent in waves 1, 2 and 3 respectively) are insurers with less than $1 

billion in total assets. These item non-response rates apply to all terrorism cost share statistics reported in this 

chapter.
 - 62 -

Figure 4.5 

Average Terrorism Cost Shares

Average Premium for Terrorism Coverage

Relative to Total Premium for Policies with Terrorism Coverage

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Average Percent

Cyclical declines in the overall cost of policies apart from the cost of terrorism coverage may 

also contribute to the increases in average terrorism risk shares shown above. Some industry 

reports have suggested that this has occurred recently. 

TRIA was designed to provide insurers with time to adjust their pricing policies in the face of 

increased terrorism risks. In this sense these cost share increases are to be expected. In the case 

of terrorism risk insurance coverage, standardized loss cost estimates developed by the Insurance 

Services Office, Inc. (ISO) in 2003 are believed to have contributed to the determination and 

stabilization of terrorism insurance rates, once the rate filings backed by these loss cost estimates 

were reviewed and approved by state regulators.8 These loss cost estimates are defined as a 

fixed percentage of property values, and it is known that property values in many parts of the 

country increased rapidly during the period examined. Increased awareness of the threat of 

terrorism is also likely to have affected terrorism risk insurance coverage costs in nonstandardized, negotiated terrorism risk insurance for large properties. 

Finally, increases in average terrorism cost shares may be due in part to a demonstration effect: 

TRIA may have encouraged some insurers who otherwise might have continued to write 

coverage at no cost to adopt a positive charge for terrorism risk insurance coverage instead. That 

is, the reporting requirement may have encouraged insurers who otherwise would have charged 

for terrorism risk insurance coverage implicitly in the overall cost of coverage to adopt an 

explicit price in 2003. Based on our data we are unable to differentiate between these combined 

 

8

 Erwann Michel-Kerjan and Burkhard Pedell, “Terrorism Risk Coverage in the Post-9/11 Era: A Comparison of 

New Public-Private Partnerships in France, Germany, and the U.S.” The Geneva Papers, 2005, 30, pp. 144-170. 

The authors report that these negotiated loss cost estimates were defined in terms of zip codes, encompassing three 

risk “tiers.” Specified zip codes within Chicago, New York City, San Francisco and Washington, D.C. are assigned 

to the highest tier; maximum loss costs within this tier were $0.03 per $100 property value. For the second tier, 

consisting of areas within Boston, Houston, Los Angeles, Philadelphia and Seattle as well as portions of the cities 

listed in the preceding sentence, loss costs were specified as $0.018 per $100 of property value. Loss costs for the 

balance of the country were set at $0.001 per $100 of property value. The authors assert that prices for terrorism 

coverage began to come down once standardized loss cost estimates were approved by NAIC. 
 - 63 -

effects: a general trend towards adopting higher prices for terrorism coverage in the postSeptember 11th era, and the countervailing effects of TRIA. 

Estimates of total terrorism risk insurance coverage premiums collected (in TRIA-eligible lines) 

provide another useful perspective on the growth in terrorism coverage during the past three 

years. Using the TRIA survey data in combination with publicly-available information from the 

NAIC, we estimate that total terrorism risk insurance premiums in TRIA-eligible lines, apart 

from workers’ compensation, were roughly $700 million in 2002. TRIA premiums, again 

excluding workers’ compensation, were approximately $2.3 billion in 2003 and $2.7 billion in 

2004. 

These estimates of total terrorism risk insurance premiums are obtained by using TRIA survey 

data to calculate the annual ratio of total terrorism risk insurance premiums to total premiums in 

TRIA-eligible lines. (This differs from the cost share reported above because the cost share is 

the share of premiums associated with terrorism only on policies that include terrorism 

coverage.) These survey-based estimates, which are roughly 0.5 percent in 2002, 1.4 percent in 

2003, and 1.6 percent in 2004, are applied to published data from the NAIC9

 reporting total 

premiums in TRIA-eligible lines to obtain the estimates given here. 

These aggregate results mask important differences between priced coverage and coverage 

provided at no charge. A major factor contributing to the increase in average terrorism risk 

insurance cost shares shown above is a substantial decline, from over 75 percent of all insurers in 

2002 to roughly 45 percent in 2004, in the percentage of insurers who provided terrorism 

coverage at no charge. This can be seen in Figure 4.6, which also shows increases in the 

percentage of insurers charging a positive terrorism risk insurance cost share of less than 2 

percent. The percentage of insurers reporting average terrorism risk insurance cost shares within 

this range increased from 10 percent in 2002 to roughly 35 percent in 2004. The percentage of 

insurers reporting average cost shares over 2 percent increased from less than 15 percent in 2002 

to nearly 20 percent in 2003 and 2004. Thus a major component of the increase in the terrorism 

cost share is likely the movement from unpriced to priced policies with terrorism coverage. 

The persistence of insurers writing terrorism coverage for no charge is unexpected in view of the 

widespread concern about the availability and costs of terrorism risk insurance coverage that 

motivated passage of TRIA. Even the 2005 data suggest that 35 percent of insurers charged 

nothing for terrorism coverage. 

 

9

 The 2004 estimates of total premiums in TRIA-eligible lines are obtained by applying third-quarter 2003 to thirdquarter 2004 annual growth rates to the NAIC total for 2003. 
 - 64 -

Figure 4.6 

Average Terrorism Cost Shares

Distribution of Insurers By Average Terrorism Cost Share 

0

20

40

60

80

100

zero LE 2 Percent 2 to 100 Percent

Range of Insurers' Average Terrorism Cost Shares

Percent Insurers

2002 2003 2004

The large percentage of insurers writing terrorism risk insurance coverage at no charge parallels, 

and is similar in magnitude to, the large and relatively stable percentage of insurers who include 

terrorism coverage in all of their policies. In particular, these results suggest that roughly 40 

percent of insurers in the surveyed population perceive their client’s exposure to terrorism risk to 

be small. 

Much of the increase in average cost shares, especially between 2002 and 2003, is due to the 

reduction in free certified coverage. In Figure 4.7 we compare average cost shares among 

insurers providing terrorism risk insurance coverage at a non-zero cost. In this sub-sample, 

average non-zero terrorism cost shares declined from approximately 3.7 percent of total 

premiums in 2002 to approximately 2.4 percent in 2003. Average terrorism cost shares among 

this group of insurers returned to approximately 3 percent in 2004. For the first two months of 

2005 this average cost share appears to have increased to approximately 3.5 percent. These 2005 

results, however, are not comparable to the annual measures for 2002 through 2004, for reasons 

cited above. 

Figure 4.7

Average Terrorism Cost Shares 

Among Insurers Reporting Positive Charges

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Average Percent
 - 65 -

The interaction between insurers’ pricing and willingness to write terrorism risk insurance is 

explored in Table 4.1. This table shows the estimated percentage of insurers in each category 

that report average terrorism cost shares in one of three categories: zero, positive but less than 2 

percent of total premiums, and greater than 2 percent of total premiums. Insurers reporting that 

they include terrorism risk insurance coverage in all their policies are also likely to write 

terrorism risk insurance coverage at no cost. In 2002, for example, 94 percent of insurers who 

included terrorism risk insurance coverage in all of their commercial property and liability 

policies reported that they did not charge for terrorism risk insurance coverage. This percentage 

falls to roughly 80 percent in 2003 and 2004. In 2002, 64 percent of insurers that included 

terrorism risk insurance coverage in half to 99 percent of their policies did so at no cost; these 

percentages decline to 22 percent in 2003 and 5 percent in 2005. Among insurers that included 

terrorism risk insurance coverage in less than half of their policies 37 percent reported that they 

wrote terrorism risk insurance coverage at no cost in 2002; this percentage declined to 4 percent 

in 2003, but increased to 12 percent in 2004. 
 - 66 -

Table 4.1

Cost Share by Share of Coverage Including Terrorism 

Positive Positive 

Cost Share Cost Share

Zero Cost Less or Equal Greater then

Terrorism Coverage Written Share to 2 percent 2 percent Total

Less Than 50 percent 37.2 17.7 45.1 100.0

Between 50 and 99 percent 63.9 18.3 17.8 100.0

100 percent 94.2 5.8 0.0 100.0

Positive Positive 

Cost Share Cost Share

Zero Cost Less or Equal Greater then

Terrorism Coverage Written Share to 2 percent 2 percent Total

Less Than 50 percent 3.5 28.0 68.6 100.0

Between 50 and 99 percent 22.4 65.8 11.8 100.0

100 percent 80.4 17.4 2.2 100.0

Positive Positive 

Cost Share Cost Share

Zero Cost Less or Equal Greater then

Terrorism Coverage Written Share to 2 percent 2 percent Total

Less Than 50 percent 11.7 29.8 58.5 100.0

Between 50 and 99 percent 4.9 81.4 13.7 100.0

100 percent 82.3 16.3 1.5 100.0

2002

Cost Share

2004

Cost Share

Cost Share

2003
 - 67 -

These data suggest that the immediate response by some insurers to the events of September11th 

may have been to exclude terrorism risk insurance coverage for risky policyholders without 

charging lower-risk policyholders for terrorism risk insurance coverage. However the proportion 

of insurers writing terrorism risk insurance coverage for less than 100 percent of policyholders 

and who also wrote the coverage at no cost declined significantly in 2003 and 2004. This result 

may reflect greater use of pricing to differentiate between policyholder types. 

Insurers who included terrorism risk insurance coverage in less than half of their policies were 

most likely to have average terrorism cost shares greater than 2 percent. Insurers who included 

terrorism risk insurance coverage in 50 to 99 percent of their policies were most likely to have a 

positive cost share of less than 2 percent in 2003 and 2004, although they were most likely to 

include free terrorism risk coverage in 2002. As discussed above, insurers reporting that they 

write terrorism risk insurance coverage for 100 percent of policyholders are most likely to write 

the coverage at no cost. In short, the survey data suggest that insurers’ propensity to write 

terrorism risk coverage, as measured by the share of total policies written that included terrorism 

coverage, was inversely related to their average terrorism cost shares. Among insurers with 

relatively high average costs for terrorism risk insurance, the average percentage of policies 

written with terrorism risk insurance is relatively low, presumably because the policyholders 

served by these insurers decline the mandatory offer. This strongly suggests that insurers are 

using pricing to differentiate between risk-types and to manage their exposure to risk. 
 - 68 -

4.2 Terrorism Risk Insurance and Terrorism Cost Share by Insurer Size 

This section reviews the percentage of policies written with terrorism risk insurance and 

terrorism risk insurance cost shares within three insurer asset size classes. Throughout this 

section we compare and contrast results from insurers with less than $1 billion in assets, insurers 

with $1-10 billion in assets, and insurers with more than $10 billion in assets. This comparison 

is motivated by the general notion that in the absence of the Federal backstop large insurers may 

have a competitive advantage in the writing of terrorism risk insurance and coverage for other 

large, but infrequent, events such as natural catastrophes10 while, under TRIA, larger firms 

generally have larger TRIA deductibles than smaller firms.

We expect that insurers of different sizes will serve different segments of the overall commercial 

property and casualty insurance market. Asset size classes are intended to isolate the relatively 

small number of large insurers who account for a large share of economic activity when 

measured in value terms, smaller insurers who tend to serve smaller regional markets and lowerrisk clients, and more average or typical insurers who may serve both markets. To make these 

ideas more concrete it is helpful to note that TRIA survey responses suggest insurers with less 

than $1 billion in assets account for 55 percent of all insurers, but only 10 percent of premiums 

in TRIA-eligible lines. Insurers with $1-10 billion in assets account for about 32 percent of all 

insurers and about 20 percent of premiums in TRIA-eligible lines. In contrast, large insurers 

with more than $10 billion in assets account for more than 70 percent of total premiums in 

TRIA-eligible lines although they represent only 14 percent of all insurers. 

Asset size classes are also correlated with other characteristics that provide insight into the types 

of coverage likely to be offered and the diversity of markets served. Large insurers are more 

likely to serve national and global markets, and small insurers are more likely to serve 

specialized or regional markets. For example, among insurers who operate from a single 

location roughly 80 percent report assets of less than $1 billion. In contrast, among insurers with 

multiple locations in the U.S. more than 50 percent report assets of $1 to $10 billion and roughly 

20 percent report assets over $10 billion. Among insurers with multiple national and global 

locations, 25 to30 percent report assets of $1 to $10 billion and more than 60 percent report 

assets greater than $10 billion. 

The average percentage of terrorism risk insurance policies written within asset size classes is 

shown below in Figure 4.8.11 Increases in the average ratio of policies with terrorism risk 

insurance coverage to the total number of policies are most evident among insurers with $1-10 

billion in assets. The increase in the percentage of terrorism risk insurance written among 

medium-sized insurers may be related to the structure of TRIA. To the extent that large insurers 

hold a more diversified portfolio of insurance policies than smaller insurers, large insurers’ 

deductibles could be a larger share of their total liability than the corresponding share among 

small and medium insurers. Large well-diversified insurers may have TRIA deductibles that are 

 

10 Anne Gron, “Insurer Demand for Catastrophe Reinsurance,” The Financing of Catastrophe Risk, Kenneth Froot 

(ed), Chicago: University of Chicago Press, 1999, pp. 23-49. 

11 Data on the total assets of captive insurers are not available. Therefore data from captive insurers cannot be 

included in the analysis by asset size class. Captives represent approximately 7 percent of survey respondents for 

2002, 2003 and 2004, and less than 5 percent of survey respondents in 2005. 
 - 69 -

sufficiently large to make the dollar value of their benefits from the Federal backstop provided 

by TRIA relatively small. Some insurance industry representatives have argued that the structure 

of the TRIA deductible effectively provides smaller and medium-sized insurers with a relative 

advantage in the sale of terrorism risk insurance coverage under TRIA. While only descriptive, 

survey data showing growth in the percentage of terrorism risk insurance coverage written by 

medium-sized insurers are consistent with this argument. The behavior of small insurers is not 

consistent with this argument. 

Figure 4.8 

Percent of Policies Written with Terrorism Risk Coverage 

By Total Insurer Assets 

0

20

40

60

80

100

Under $1 billion $1 to 10 billion Over $10 billion

Total Assets

Average Percent

2002 2003 2004

The averages above conceal substantial variability in the percentage of policies written with 

terrorism risk insurance coverage across asset size class. Overall, more than 40 percent of 

insurers provided terrorism risk insurance coverage in all their policies throughout the period 

2002-2004, and a declining percentage provided no terrorism coverage. Across asset size 

classifications, the data reveal different changes in the average share of policies with terrorism 

risk insurance. The top panel of Figure 4.9 reports on the percentage of smaller insurers who 

write terrorism risk insurance by share of total policies, ranging from zero to 100 percent in six 

intervals, the second panel provides the same information on medium-sized insurers, and the 

bottom panel presents parallel information on large insurers. 

Comparing the figures, we find that small insurers are the most likely to write coverage in all of 

their policies; about 48 percent of small insurers wrote terrorism coverage in all their policies 

between 2002 and 2004 (2005 results are consistent). A relatively small percentage of small 

insurers wrote no terrorism risk insurance coverage after 2002, but the decline in the percentage 

of insurers who included terrorism risk insurance coverage from all of their policies is mirrored 

by a parallel increase in the percentage that wrote terrorism risk insurance coverage in less than 

10 percent of their policies. Among the three asset size classes, small insurers are most likely to 

write terrorism risk insurance coverage in some, but less than 10 percent of their policies overall. 
 - 70 -

Figure 4.9 

Average Percent of Policies with Terrorism Risk Coverage

Distribution for Insurers with less than $1 Billion Assets

0

10

20

30

40

50

Zero LE 10 10 to 50 50 to 90 90 to 100 100

Percent of Policies Written with Terrorism Risk Coverage

Percent Insurers

2002 2003 2004

Distribution for Insurers with $1 Billion to $10 Billion Assets

0

10

20

30

40

50

Zero LE 10 10 to 50 50 to 90 90 to 100 100

Percent of Policies Written with Terrorism Risk Coverage

Percent Insurers

2002 2003 2004

Distribution of Insurers with over $10 Billion Assets

0

10

20

30

40

50

Zero LE 10 10 to 50 50 to 90 90 to 100 100

Percent of Policies Written with Terrorism Risk Coverage 

Percent Insurers

2002 2003 2004

 Note: A missing bar indicates that no survey respondents provided an answer within the specified range. 

Compared with small insurers, a smaller but still substantial and stable percentage of insurers in 

the $1-10 billion asset size class wrote terrorism risk insurance coverage for all their 

policyholders throughout the period 2002-2004. Compared with small insurers, medium-sized 

insurers are more likely to include terrorism risk insurance coverage in 50-99 percent of their 

policies. 
 - 71 -

Among large insurers, in clear contrast with insurers in the smaller asset size classes, we see a 

decline over time in the percentage of insurers who write TRIA-eligible coverage on all of their 

policies. There is also a parallel decline in the percentage of insurers who do not write TRIAeligible coverage. Relative to the two other size categories, a notably larger percentage of large 

insurers provided terrorism risk insurance coverage in 50 to 99 percent of their policies. The 

Federal backstop under TRIA may contribute to the willingness of approximately 20 percent of 

large insurers in the surveyed population to include terrorism risk insurance in all of their 

policies in 2004, but in view of the role of total premiums in the determination of deductibles it 

seems as likely that these insurers do not believe their exposure to terrorism risk is substantial. 

Next we provide more detail on terrorism cost share and the distribution of terrorism risk 

insurance cost shares by company size. The move away from unpriced terrorism risk insurance 

to positive terrorism cost shares subsequent to the passage of TRIA suggests that some insurers 

are only slowly adapting to the post-September 11th view of terrorism risk. As discussed earlier, 

the large drop between 2002 and 2003 in the percentage of insurers writing unpriced terrorism 

risk insurance may be attributable in large part to the make available provision, which requires 

that the insurer provide an explicitly-documented price for terrorism risk insurance written on 

terms and conditions comparable to other coverage included in the policy. 

Figure 4.10 reports on the cost of terrorism risk coverage calculated separately within asset size 

classes. The largest increases in terrorism risk insurance cost shares are reported by smaller 

insurers, whose average charges for coverage increased from less than one percent in 2002 to 

approximately two percent of premiums in 2004. Insurers with $1 to 10 billion in assets reported 

smaller increases in average terrorism risk insurance cost shares, from just under 1 percent in 

2002 to almost 1.7 percent in 2004. These results are contrary to the generally reported trend: 

an overall decrease in the cost of coverage that is not free and an increase in availability since the 

enactment of TRIA. This difference is likely explained by the large market share of large 

insurers: declines in average terrorism cost shares are reported by this group. Our estimates 

suggest that average terrorism risk insurance cost shares charged by large insurers declined 

between 2002 and 2004, from nearly 2 percent to roughly 1.6 percent. For the small and large 

insurers, these overall patterns continue in data from the first two months of 2005. 

Figure 4.10 

Average Terrorism Cost Shares 

Terrorism Premium Relative to Total Premium, by Total Insurer Assets

0.0

1.0

2.0

3.0

4.0

5.0

Under $1 billion $1 to 10 billion Over $10 billion

Total Assets

Terrorism Cost Shar

e

2002 2003 2004
 - 72 -

Figure 4.11 shows the range of cost shares reported by small, medium and large insurers. 

Examination of the results suggests that larger insurers were generally less likely than the small 

and medium asset size class insurers to offer terrorism risk insurance coverage at no cost in 

2002. 

Figure 4.11 

Distribution of Terrorism Risk Insurance Cost Shares 

Distribution for Insurers with less than $1 Billion Assets

0

20

40

60

80

100

Zero LE 2 Percent 2 to 100 Percent

Terrorism Premium relative to Total Premium

Percent Insurers

2002 2003 2004

Distribution for Insurers with $1 Billion to $10 Billion Assets

0

20

40

60

80

100

Zero LE 2 Percent 2 to 100 Percent

Terrorism Premium relative to Total Premium

Percent Insurers

2002 2003 2004

Distribution for Insurers with over $10 Billion Assets

0

20

40

60

80

100

Zero LE 2 Percent 2 to 100 Percent

Terrorism Premium relative to Total Premium

Percent Insurers

2002 2003 2004

 Note: A missing bar indicates that no survey respondents provided an answer within the specified range. 
 - 73 -

The top panel of Figure 4.11 shows that insurers in the less than $1 billion asset class size 

continue to write terrorism risk insurance coverage for no charge on more than 55 percent of 

their terrorism risk insurance policies in 2003 and 2004. The middle panel of Figure 4.11 shows 

the percentage of insurers in the $1 to 10 billion asset size class who shifted out of zero cost 

share coverage and into cost share ranges of 0-2 percent and above is more pronounced than it is 

for small insurers. 

The bottom panel shows a similar 40 percent decrease, from nearly 60 percent in 2002 to 20 

percent in 2003, in the proportion of large insurers who wrote terrorism coverage at no charge. 

By 2004, although Figure 4.10 suggests a slight decrease in average cost share charged by large 

insurers, the cost share distribution in Figure 4.11 shows a continued trend towards priced 

coverage. More than half of large insurers reported average terrorism cost shares greater than 

zero but less than 2 percent in 2004, while roughly 30 percent reported average terrorism cost 

shares over 2 percent. Over time, some of these terrorism cost share increases are probably 

attributable to increasing TRIA deductibles. 

The higher percentage of larger average terrorism cost shares reported by large insurers may be 

attributable, as well, to the fact that large insurers are more likely to write insurance coverage for 

large, high-risk policyholders. The reasons why large insurers are more likely to write terrorism 

risk coverage for large policyholders include the following. First, large insurers typically have 

the capacity to cover large exposures and high-risk locations, as well as the technical capabilities 

required to underwrite terrorism risks. Second, large insurers typically hold the diversity of 

product lines and the diversity of covered properties’ locations needed to insure against terrorist 

attacks.12 Third, high-risk clients whose total insured values are substantial are more likely to be 

sensitive to the threat to their own liquidity that could result from a terrorist attacks affecting 

multiple insurance lines and locations. Therefore large insurers whose capacity is considered 

secure may command a higher price for coverage of catastrophes and terrorist events.13 

 

12 Neil A. Doherty, Integrated Risk Management: Techniques and Strategies for Reducing Risk, New York: 

McGraw-Hill, 2000. 

13 Gron, “Insurer Demand,” and Kenneth A. Froot, “Risk Management, Capital Budgeting, and Capital Structure 

Policy for Insurers and Reinsurers,” NBER Working Paper 10184, December 2003. 
 - 74 -

4.3 Special Terms and Conditions 

As a measure of affordability, the cost share has a well-recognized weakness. Policyholders who 

decline the legally mandated offer of certified coverage on terms and conditions comparable to 

that in their existing policies may negotiate a lower price in a contract that includes higher 

deductibles or lower sub-limits for terrorism coverage. In such cases the relationship between 

cost and insurer exposure is difficult to ascertain in the absence of extensive details from 

individual policies, and the reporting burden required to collect these details would have been 

prohibitive. 

To address this problem, we asked insurers to indicate whether the policies they sold that 

included terrorism coverage generally imposed special conditions on that coverage. Most 

questions yielded few positive responses. Figure 4.12 reports on the two special conditions that 

had non-trivial positive responses – limits on aggregate losses and use of scheduled locations. 

Limiting aggregate losses entails insurers adopting a policy of restrictions on the aggregate 

payment to a single policyholder in a single year, to control insurer losses in the event of 

successive attacks. Scheduled locations refers to the practice of writing terrorism risk coverage 

that excludes specified locations (or includes only a specified list of locations). The use of both 

restrictions increased between 2002 and 2003 but declined in 2004. Restrictions on aggregate 

payments continued its declining trend in the first two months of 2005, while constraints on 

locations stabilized. 

Figure 4.12 

Special Conditions Associated with Terrorism Coverage

0

5

10

15

20

25

Limit Aggregates Excluded Scheduled Locations

Percent Insurers

2002 2003 2004

Figure 4.13 reports on responses to a follow-up question addressed only to insurers who wrote 

some terrorism risk insurance coverage in higher-risk locations (large cities, high-risk cities and 

iconic locations). Insurers who reported that some of their policies cover higher-risk locations 

were asked whether special conditions and restrictions were used more frequently in policies 

with terrorism risk coverage for high-risk locations than in policies that included terrorism risk 

insurance coverage not including high-risk locations. A small percentage of these insurers 

reported greater use of aggregate limits and restrictions to scheduled locations in policies for 

terrorism risk insurance coverage in high-risk locations, relative to their normal terrorism risk 

insurance coverage. A small percentage also reported that they are more likely to write 
 - 75 -

standalone terrorism coverage for high-risk areas. The proportion of insurers reporting that they 

are more likely to impose conditions in high-risk locations as opposed to locations that are not 

considered to be high risk fell slightly between 2003 and 2004. 

Figure 4.13 

Special Conditions Associated with Terrorism Coverage 

Imposed More Frequently for High-Risk Locations

0

5

10

15

20

25

Limit Aggregates Excluded Scheduled Locations

Percent Insurers

2003 2004

Special Conditions for 2006 

In the last wave of the TRIA surveys insurers were asked a small number of additional questions 

about their policies written or renewed in January and February of 2005. Although annual 

policies written or renewed within the first two months of 2005 do not extend far into 2006, 

responses to these questions nonetheless provide some insight into insurers’ willingness to write 

terrorism risk insurance coverage going forward.14 

The first question asked whether policies written or renewed in the first two months of 2005 

incorporate coverage for international terrorism in 2006 that is roughly similar to their 2005 

certified terrorism risk insurance coverage, when those policies include terrorism risk coverage 

in 2005. Our estimates suggest that roughly half of the insurer population answered this question 

in the affirmative. Thus half of insurers report that they are not providing terrorism coverage in 

2005 that is roughly similar to TRIA coverage. 

A follow-up question was asked of the 50 percent of insurers who indicated that they do not 

write international terrorism risk insurance coverage for 2006 that is broadly comparable to 

TRIA coverage in policies that included TRIA coverage in 2005. Specifically, they were asked to 

indicate whether their policies that included certified terrorism risk insurance coverage in 2005: 

 

14 These questions ask about policies actually written during the first two months of 2005, rather than language 

drafted for policies to be written in the future, to minimize the speculative nature of the responses. 
 - 76 -

(a) excluded international terrorism coverage unconditionally in 2006, 

(b) incorporated contingent exclusions for international terrorism coverage in 2006, or 

(c) did not exclude international terrorism coverage for 2006, but the international terrorism 

risk insurance coverage written for 2006 is not comparable to the certified terrorism risk 

coverage written for 2005. 

Figure 4.14 shows the results. Among respondents writing coverage that does not include 

international terrorism coverage in 2006 under terms and conditions comparable to that written 

for certified coverage in 2005, our estimates suggest that roughly 55 percent of the insurer 

population that writes certified coverage in 2005 nonetheless exclude international terrorism risk 

insurance coverage in 2006. Twenty-two percent of this group uses a contingent exclusion for 

terrorism risk insurance coverage once the policy period runs into 2006. The remaining 24 

percent do not exclude international terrorism coverage. The last group of respondents is writing 

international terrorism coverage for 2006 that is in some way not similar to the certified 

terrorism risk insurance that they are writing for 2005. 

Figure 4.14 

Non-Comparable Terrorism Coverage After TRIA Expires

When Terrorism Risk Insurance Coverage is Written for 2005

0

20

40

60

80

100

Do Policies Written in January and February of 2005 Exclude International 

Terrorism Coverage after TRIA Expires on December 31, 2005?

Percent Insurers

Terrorism Excluded

Contingent Exclusion for Terroism

Included But Not Comparable

When asked to compare the total premiums for policies with certified terrorism risk insurance 

coverage in 2005 that also included international terrorism coverage in 2006, on the one hand, 

with those that included certified terrorism risk insurance coverage in 2005 but excluded 

international terrorism coverage in 2006 on the other, most insurers replied that there was no 

increase in cost associated with the international terrorism coverage in 2006. Of course, the 

amount of 2006 exposure spanned by policies written or renewed in the first part of the year is 

not large, and therefore it seems quite possible that these cost shares will increase during the 

course of the year, as the proportion of annual exposure attributable to coverage in 2006 

increases. 
 - 77 -

4.4 Nuclear, Biological, Chemical and Radiological (NBCR) Terrorism Insurance 

TRIA’s definition of insured loss, under the Program, does not exclude NBCR losses under a 

commercial property and casualty insurance policy, nor does the TRIA definition of an act of 

terrorism exclude these risks. If an insurer included coverage for these risks in a commercial 

property and casualty insurance policy and otherwise meets Program conditions for payment, the 

insurer would receive Federal payment for such losses. An insurer may exclude coverage for 

NBCR losses if 1) such policy exclusion is also applied to losses arising from events other than 

acts of terrorism and 2) it is permitted by applicable state law.15 In general, insurers who write 

NBCR coverage have expressed concern about their exposure in the event of an act of terrorism 

because the geographical range of damage can be extensive. They have expressed similar 

concerns with respect to the duration of damage over time. On average, 35 percent of insurers in 

TRIA-eligible lines report that NBCR terrorism risks were included in some of their policies 

written in 2003 and 2004, not including workers’ compensation policies.16 

The stability of this figure conceals a distinct shift in the size of insurers writing NBCR 

coverage: the percentage of insurers with less than $1 billion in assets who provided any 

terrorism risk insurance coverage for NBCR decreased by roughly six percent between 2003 and 

2004. This decline was offset by an increase of 12 percent in the number of insurers with $1 to 

10 billion in assets who wrote any TRIA-eligible NBCR coverage, and an increase of 17 percent 

among insurers with more than $10 billion in assets. 

In all asset size classes, the percentage of insurers writing some NBCR coverage during the first 

two months of 2005 was higher than the annual values reported for 2003 and 2004. The 2005 

survey results indicate that roughly 43 percent of insurers wrote or renewed policies with some 

NBCR coverage. Seasonal effects may be incorporated in these results and consequently they 

are not directly comparable to the annual values from 2003 and 2004. 

Figure 4.15 

Insurers Providing Any NBCR Terrorism Risk Insurance

Overall and by Total Insurer Assets

0

20

40

60

80

100

Overall Under $1 billion $1 to 10 billion Over $10 billion

Percent Insurers

2003 2004

 Note: Responses to this question for 2003 are missing for 16 percent of survey respondents; the item non- 

 response rate for 2004 is 9 percent. 

 

15 U.S. Treasury, Terrorism Risk Insurance Program Office, Interpretive Letters, “Make Available; Property and 

Casualty Insurance (Nuclear, Biological & Chemical),” March 24, 2004. 16 Item non-response rates over five percent are reported explicitly throughout the chapter. 
 - 78 -

4.5 Non-Certified Coverage

The non-certified terrorism insurance market is relevant to our evaluation precisely because it is 

not eligible for TRIA coverage. Although the risk characteristics of TRIA-eligible insurance are 

generally thought to be different following the events of September 11th,17 the non-certified 

market offers some insight into the development of a terrorism risk insurance market. 

We start with a description of coverage of non-certified terrorism risk. Data show that about 38 

percent of insurers write non-certified terrorism insurance. This overall provision rate masks 

substantial heterogeneity across insurer asset size class, however. Among small insurers (less 

than $1 billion in assets), only about 15 percent provide non-certified coverage. Among the next 

size class of insurers ($1-10 billion in assets), roughly 50 percent write some non-certified 

coverage. A much larger percentage of large insurers (with assets over $10 billion) wrote noncertified terrorism coverage during 2003 and 2004, however. Over time, we find a stable share 

of smaller insurers providing non-certified coverage, but and increasing share of large insurers 

providing such coverage. The proportion of large insurers that provided non-certified coverage 

increased by about 30 percent between 2003 and 2004: from 65 percent to 85 percent. 

Figure 4.16 

Insurers Providing Any Non-Certified Terrorism Risk Insurance

Overall and by Total Insurer Assets

0

20

40

60

80

100

Overall Under $1 billion $1 to $10 billion Over $10 billion

Percent Insurers

2003 2004

 Note: Responses to this question for 2003 are missing for 17 percent of survey respondents; the item non- 

 response rate for 2004 is 8 percent. 

Prior to the implementation of TRIA, our data show that about 70 percent of insurers wrote 

insurance for (any) terrorism risk. It is useful to recall that during this period, there was no 

distinction between types of terrorism coverage. The introduction of TRIA seems to have 

introduced a sharp break in the share of insurers writing certified as opposed to non-certified 

terrorism insurance. In 2003, about 40 percent of insurers in TRIA-eligible lines reported 

writing policies that cover non-certified terrorism risk (Figure 4.16). This rate compares with 

some 90 percent of insurers writing policies covering certified terrorism risk (Figure 4.17). 

 

17 See, for example, Risk Management Solutions, Managing Terrorism Risk, 2003. 
 - 79 -

Comparing provision of non-certified coverage to certified coverage, we find more insurers 

writing certified terrorism insurance overall and within in each insurer-size class than noncertified coverage. This comparison suggests that TRIA has encouraged insurers who otherwise 

would likely not have participated in this market to write certified terrorism coverage. 

Figure 4.17 

Insurers Providing Any Certified Terrorism Risk Insurance

Overall and by Total Insurer Assets

0

10

20

30

40

50

60

70

80

90

100

Overall Under $1 billion $1 to $10 billion Over $10 billion

Percent Insurers

2003 2004

Comparing provision of certified and non-certified coverage across insurers of different sizes, we 

find that large insurers are substantially more likely than smaller insurers to write non-certified 

terrorism risk insurance. It is reasonable to argue that this pattern is representative of the likely 

market outcome for certified coverage in the absence of the Federal backstop. These 

comparisons therefore suggest that TRIA has encouraged smaller insurers to write certified 

terrorism risk insurance coverage that they might otherwise not write in the absence of TRIA. 
 - 80 -

4.6 Workers’ Compensation 

As explained in Chapter 2, workers’ compensation insurance is compulsory for most 

organizations under state law. The net effect is that terrorism risk insurance coverage is 

effectively mandatory in workers’ compensation insurance policies. 

Figure 4.18 plots cost shares from terrorism coverage included with workers’ compensation. 

Average terrorism cost shares for workers’ compensation coverage increased from roughly 0.25 

percent in 2002 to roughly 0.75 percent in 2003. The average terrorism cost share in workers’ 

compensation lines increased further, to nearly 1.5 percent, in 2004. 

Figure 4.18 

Average Terrorism Cost Shares in Workers' Compensation

Average Premium for Terrorism Coverage

Relative to Total Premium for Policies with Terrorism Coverage

0

0.5

1

1.5

2

2.5

2002 2003 2004

Average Percent

 Note: Responses to this question for 2002 are missing for 23 percent of survey respondents that write some 

 workers’ compensation policies; item non-response rates for respondents eligible to answer this question fall 

 to 14 percent and 6 percent for 2003 and 2004 respectively. 

Figure 4.19 reports on average costs for TRIA-eligible coverage in workers’ compensation lines, 

calculated separately by the median number of covered employees at a single location from the 

policies written by the insurer. Roughly 30 percent of insurers report a median number of 

employees covered at a single location less than or equal to five. Presumably these insurers 

specialize in insurance for small businesses and the self-employed. The largest average cost 

share reported for 2004 is by insurers whose median number of employees is between one and 

five. 

 
 - 81 -

Figure 4.19 

Average Terrorism Cost Shares in Workers' Compensation

By Median Number of Employees Covered

0.0

0.5

1.0

1.5

2.0

2.5

5 or less 5 to 10 10 to 50 over 50

Median Number of Covered Employees

Average Percent

2002 2003 2004

 Note: A missing bar indicates that no survey respondents provided an answer within the specified range. 

 The item non-response rate for the median number of employees covered is 35 percent for 2002 and 39 

 percent for 2003; item non-response falls to 22 percent for 2004. 

Because terrorism risks associated with workers’ compensation coverage are more concentrated 

in large establishments, insurers were asked in the surveys whether there had been a change in 

their willingness to write workers’ compensation coverage to organizations with fewer than 100, 

100 to 1,000, and more than 1,000 employees at a single location. In reference to 2002 coverage 

the survey asked about willingness to write workers’ compensation coverage after September 

11th, but before passage of TRIA. With respect to subsequent coverage (in 2003 and 2004), 

insurers were asked about changes in their willingness to write workers’ compensation to 

locations in these same size classes since passage of TRIA. 

For most size categories, insurers predominantly responded that there has been no change in 

willingness to write workers’ compensation coverage. Regarding large employers (locations 

with 1,000 or more employees), the data suggest a decline in the fraction of insurers who are less 

willing to write workers’ compensation coverage, and a very slight increase in the percentage of 

insurers who report a greater willingness to write workers’ compensation coverage to 

organizations with more than 1,000 employees in a single location. 

Chapter 5 Results from Surveys of Policyholders 

This chapter presents evidence on the availability and cost of terrorism risk insurance from 

surveys of policyholders.1

 The data provide insight into the use of terrorism risk insurance by 

commercial property and casualty insurance policyholders, including individual firms, 

municipalities and organizations. 

The surveys cover 2002 to 2005, and therefore follow the adjustment of this insurance market to 

the events of September 11th and the subsequent enactment of TRIA. Chapter 3 describes the 

TRIA surveys and provides additional information and detail on the design and timing of the 

surveys. Policyholders were asked whether they purchased terrorism risk coverage in each broad 

line of commercial property and casualty insurance. 

Because TRIA’s make available rule restricts the ability of insurers to exclude terrorism 

coverage, the policyholder data provides insight into policyholder decisions to decline such 

coverage. 

We emphasize that the discussion of results here is based primarily on data aggregated over all 

property and casualty lines, excluding workers’ compensation. Because state laws and 

regulations prohibit the exclusion of terrorism coverage from workers’ compensation insurance 

policies, terrorism coverage is included in such policies by definition. 

This chapter is organized as follows. Section 5.1 presents estimates of total terrorism insurance 

take-up and prices reported by policyholders. The following three sections disaggregate the data, 

first by organization size and by the amount of coverage purchased (Section 5.2), then by 

policyholder-risk characteristics (Section 5.3) and finally by industry and region (Section 5.4). 

We examine various features of the market in the following two sections, including special terms 

and conditions associated with certified coverage (Section 5.5), and take-up of NBCR-terrorism 

coverage (Section 5.6). A persistent criticism of subsidized insurance is that it dampens 

mitigation by policyholders. We examine mitigation activities among policyholders in Section 

5.7. We report on reasons for non-purchase in Section 5.8. 

 

1

 For brevity of exposition, we use the term terrorism risk insurance to refer to both overall terrorism coverage in 

2002 and TRIA coverage for December 2002 through 2005 when discussing the empirical results presented in this 

chapter. 
 

- 84 -

5.1 Take-up and Prices of Terrorism Insurance 

Policyholder take-up rates are defined throughout this chapter as the share of policyholders who 

purchased any amount of terrorism risk insurance, either as stand-alone coverage or in 

conjunction with a regular policy in TRIA-eligible lines. Policyholders were asked to report on 

the number of policies, and premium paid for policies written or renewed in a specific calendar 

year.

 2 For example, an annual policy renewed in October 2003 and extended through September 

of 2004, would be included in 2003 data. This approach allows us to separate pre-TRIA and 

post-TRIA outcomes.3

 

The data suggest that the proportion of respondent policyholders taking any terrorism coverage 

has been increasing steadily since 2002. Figure 5.1 shows that roughly 27 percent of surveyed 

policyholders reported some terrorism insurance in commercial property and casualty lines in 

2002. The take-up rate rose to more than 39 percent in 2003 and to 54 percent in 2004. Data 

from January and February of 2005 suggests that take-up of terrorism insurance remained stable. 

Figure 5.1 

Policyholder Terrorism Risk Insurance Take-up Rates

0

10

20

30

40

50

60

70

80

90

100

2002 2003 2004

Percent Policyholders

We note that the observed increase in take-up rates since 2002 corresponds to the introduction of 

the Federal backstop. However, the observed increase does not necessarily represent a TRIA 

effect. The data reported here do not eliminate other factors that might drive take-up of such 

insurance, such as the underwriting cycle or increasing awareness of terrorism risks. The 

increase in take-up rates also occurred as the TRIA deductible increased from 7 percent in 2003 

to 10 percent in 2004 and finally to 15 percent in 2005. This reduction in the subsidy is 

predicted to have a negative effect on take-up rates. 

 

2

 Although it would be helpful to know more about the percentage of the organizations’ policies that include 

terrorism coverage, in this survey policyholders were not asked to report on the number of policies that included 

terrorism risk insurance coverage due to concerns about respondent burden and potential attrition from the sample. 

3 The take-up rate estimates for 2002 may be slightly biased downward because terrorism risk insurance coverage 

need not have been priced explicitly and some policyholders may have obtained coverage that included terrorism 

risk insurance without realizing it was included. 
 

- 85 -

The policyholder take-up rates shown in Figure 5.1 are different from, and not directly 

comparable with, the measures of insurer policy writing reported in the preceding chapter (for 

example figure 4.2). Several factors limit the comparability of policyholder take-up rates, on the 

one hand, and the percentage of insurer policies written with terrorism coverage relative to the 

total number of policies written, on the other. First, the two measures of availability are based on 

different units of reference. The ratio of insurer policies with terrorism coverage included is the 

share of insurance policies that cover terrorism averaged over all insurers, whereas policyholder 

take-up is the share of policyholders with terrorism coverage. Large policyholders, who may 

have multiple policies and are more likely to have terrorism insurance, would have more weight 

in the insurer measure of availability than in the policyholder measure. 

The average insurer is also quite different from the average policyholder. The TRIA insurer 

survey was designed to be representative of 495 insurance companies and insurance groups with 

more than $10 million in premiums. In contrast, respondents to the policyholder survey 

represent almost 1.1 million organizations that are not part of the Federal Government and have 

at least 10 employees. As we note in Chapter 2, insurers are quite diverse in terms of both 

markets served as well as market share. These differences suggest that direct comparison of 

these two ratios is generally not informative. 

We next examine the cost of terrorism risk insurance to policyholders, measured by the share of 

total premiums paid for terrorism coverage in TRIA-eligible lines.4

 For consistency, we 

calculate the cost share in 2002 in lines that would become TRIA-eligible. In all subsequent 

years, the cost share is calculated in lines that are TRIA-eligible. Standard practices in the 

insurance industry before the enactment of TRIA was to combine certified and non-certified 

terrorism coverage. The 2002 cost share estimate therefore refers to both types of coverage, 

whereas the 2003 and 2004 cost shares refer only to TRIA coverage. 

In 2002, data suggest that the cost share of terrorism coverage was about one percent of TRIAeligible premiums (Figure 5.2).5

 That percentage increased to roughly 1.6 percent in 2003 and 

1.7 percent in 2004. Overall, the policyholder terrorism risk insurance cost share estimates are 

consistent with the average terrorism cost share estimates obtained from insurer data (see Figure 

4.5). 

 

4

 We refer to this as the terrorism risk insurance cost share. 

5 Data on terrorism risk insurance premiums were not reported by some survey respondents. Therefore terrorism 

cost shares cannot be calculated for 19 percent of 2002 values, 23 percent of 2003 values, and 19 percent of 2004 

values. These item response rates apply to all terrorism cost share statistics reported in this chapter. Item nonresponse rates are typically less than two percent. Item non-response rates are reported explicitly when the item 

non-response rate for the eligible population is greater than five percent.
 

- 86 -

Figure 5.2 

Average Policyholder Terrorism Risk Insurance Cost Shares

Average Premiums for Terrorism Coverage

Relative to Total Premiums for Policies with Terrorism Coverage

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

These estimates are based on all respondents, including policyholders who paid nothing for 

terrorism coverage. Figure 5.3 shows that a substantial proportion of policyholders received 

terrorism risk insurance coverage at no charge. In fact, 70 percent of policyholders with 

terrorism risk insurance were not charged explicitly for that coverage in 2002. That rate, 

however, declined sharply to 42 percent in 2003 and further to 37 percent in 2004. This decline 

in the policyholders with free coverage mirrors the decline in zero cost share terrorism coverage 

observed in the insurer data. 

The data suggest a marked change in the spread of terrorism cost shares between 2002 and 2004. 

By the end of the period, fewer policyholders faced a zero cost share, while more faced cost 

shares between zero and 5 percent of premiums. Most policyholders who pay for terrorism 

coverage pay at most two percent of premiums. The share of policyholders with cost shares at or 

below 2 percent nearly tripled over the period, from 15 percent in 2002 to 35 percent in 2003, 

and finally to 42 percent in 2004. The share of policyholders paying between 2 percent and 5 

percent of their total premium in TRIA-eligible lines doubled from 7 percent in 2002 to 14 

percent in 2003 and 2004. 
 

- 87 -

Figure 5.3 

Average Policyholder Terrorism Risk Insurance Cost Shares

Distribution of Policyholders By Average Terrorism Cost Share 

0

20

40

60

80

100

Zero Below 2 Percent 2 to 5 Percent Above 5 Percent

Percent Premiums

Percent Policyholders

2002 2003 2004

 

We note that a relatively stable proportion of policyholders obtained terrorism coverage for no 

charge throughout the period examined, because declines in the percentage of policyholders 

obtaining terrorism risk insurance coverage at no cost are offset by increases in uptake rates. 

This group represents approximately 19 percent of all policyholders in 2002, 16 percent in 2003, 

and 20 percent in 2004.6

 At the same time, an increasing fraction of policyholders purchased 

priced terrorism coverage. Approximately 8 percent of all policyholders purchased terrorism 

risk insurance coverage for a non-zero price in 2002. In 2003 roughly 23 percent of 

policyholders purchased terrorism risk insurance of a positive price, and 34 percent did so in 

2004. These increases in take-up rates for priced terrorism risk insurance are consistent with 

declines in average non-zero prices. 

Excluding policyholders who received terrorism risk insurance at no charge, the average cost of 

terrorism coverage declined between 2002 and 2004. In 2002, survey data suggest that the nonzero cost share of terrorism coverage was about 4 percent of TRIA-eligible premiums. That 

percentage fell to roughly 2.8 percent in 2003 and 2.7 percent in 2004. Clearly the overall 

increase in costs presented in Figure 5.1 reflects three broad patterns: an increase in 

policyholders who are paying for terrorism coverage, a decline in the cost faced by paying 

policyholders, and a fairly stable percentage of policyholders who continue to obtain terrorism 

risk insurance for no charge. Policyholders obtaining free terrorism risk insurance are 

presumably those confronting low terrorism risks. 

 

6

 For example, 27 percent of all policyholders had terrorism risk insurance coverage in 2002 and 70 percent of 

policyholders received terrorism coverage for no charge. Thus 19 percent of all policyholders received terrorism 

risk insurance coverage at no charge in 2002. 
 

- 88 -

Figure 5.4 

Average Policyholder Terrorism Risk Insurance Cost Shares

Among Policyholders Reporting Positive Charges

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

Captive Insurers 

A captive insurer is an entity formed primarily to insure or reinsure the risks of one policyholder. 

It may be owned by a corporation or an association, domiciled onshore or offshore, and has the 

option of writing the business of unrelated parties. Captive insurers typically underwrite 

insurance for one or a small number of organizations and therefore have low premiums. Because 

the TRIA deductible is calculated based on previous-year’s direct written premiums, captives 

will face a low TRIA deductible and therefore receive Federal support for a large share of 

terrorism losses. This raises a concern that TRIA encourages the use of less-diversified captives 

by policyholders. 

For the most part, the policyholder survey does not ask policyholders questions about the nature 

of insurers from whom they purchase coverage. But in the second and third waves of the survey, 

we did ask a question about whether policyholders purchased any terrorism risk insurance 

coverage from captive insurers. 

While we cannot explicitly measure whether TRIA increases the use of captives, our data 

suggest that about 3 percent of all policyholders purchased terrorism coverage through a captive 

in 2004. Data from January and February of 2005 suggest that use of captives for terrorism risk 

insurance coverage may have increased to almost 8 percent. 

Non-Certified Terrorism Coverage 

We estimate that approximately 57 percent of commercial property and casualty policyholders 

had non-certified terrorism risk insurance coverage in 2004, and estimates for the first two 

months of 2005 are comparable. Survey responses about the cost of non-certified coverage were 
 

- 89 -

too limited to provide reliable estimates. We believe, however, that the majority of 

policyholders do not pay an explicit price for non-certified coverage.7

5.2 Take-up and Price by Policyholder Size and Amount of Coverage 

In this section, we examine the take-up of terrorism coverage by firm size, measured by the value 

of assets.8 Figure 5.5 shows that take-up rates increased in every policyholder size class, in each 

year examined. Terrorism insurance take-up in 2002 was highest among larger policyholders, 

but the difference between 2002 and 2003 take-up is quite small for these large policyholders. 

Between 2002 and 2003 estimated take-up rate increased by 11 percentage points among 

policyholders who reported less than $10 million in assets, by 15 percentage points among 

policyholders with $10 to $100 million in assets, and by 16 percentage points among 

policyholders with $100 million to $1 billion in assets. Take-up increased by only 4 percentage 

points among policyholders with more than $1 billion in assets. 

Figure 5.5 

Policyholder Terrorism Risk Insurance Take-up Rates

By Total Assets of Policyholder

0

20

40

60

80

100

Under $10 million $10 to $100 million $100 million 

to $1 billion 

$1 billion or more

Percent Policyholders

2002 2003 2004

 Note: Take-up rates for 2004, for policyholders in the largest asset size class, may be unreliable. The bar 

 is shaded to reflect the tentative nature of the estimate. 

The take-up rate also increased in each size class between 2003 and 2004: take-up rates 

increased by 17 percentage points among policyholders with less than $10 million in assets, 8 

percentage points among policyholders with $10 to $100 million in assets, and 2 percentage 

points among policyholders with $100 million to $1 billion in assets. 

 

7

 Results from a recent survey conducted by Moody’s also suggest that non-certified coverage is included in a large 

percentage of policies, for little or no charge. James Eck, “Moody’s Special Comment: Terrorism Risk Remains 

Material for Insurers as TRIA Expiration Looms,” Moody’s Investors Service Global Credit Research, June 2005. 

8

 Census Bureau Enterprise Statistics data show that companies with under $250,000 in sales receipts account for 

half (51 percent) of all companies in the private sector, but only 6 percent of employment and 3 percent of payroll. 

Statistics of Income data from the IRS shows that they count for roughly 1 percent of total assets. In contrast, 

companies with $50,000,000 or more in sales receipts are a trivial share of all companies, but account for 86 percent 

of total assets, 46 percent of employment and 54 percent of total payroll. 
 

- 90 -

In the case of large policyholders with $1 billion or more in assets, the 2004 take-up rate estimate 

reported in Figure 5.5 may be overstated as a result of attrition bias, as discussed in Chapter 3. 

The survey questionnaires were particularly complex, and therefore potentially burdensome, for 

large policyholders. It is possible that large respondents who participated in the survey 

repeatedly did so because they were more concerned about their terrorism risk exposure, and 

therefore more likely to purchase terrorism risk insurance coverage, than large organizations that 

declined to participate in the second survey wave. But comparisons across asset size classes can 

be instructive, and large policyholders account for a large share of total economic activity. 

Therefore we present the 2004 results from large policyholders throughout this chapter, but the 

estimates should be interpreted with caution. 

Figure 5.6 shows take-up rates within comparable ranges for replacement cost values. 

Replacement cost value is defined as the cost of replacing property with like kind and quality 

without a reduction for depreciation. Land values are omitted from replacement cost values 

because land cannot be replaced in this way. These estimates are reported in Figure 5.6. The 

results are similar to the analysis by asset size; the largest replacement value class had the 

highest 2002 take-up, but the smallest take-up differential between 2002 and 2003.9

Between 2002 and 2003 we estimate that take-up increased by 12 percentage points among 

policyholders with replacement cost values of less than $5 million, by 12 percentage points 

among policyholders with replacement cost values of $5 to $50 million, and by 19 percentage 

points among policyholders with replacement cost values of $50 to $500 million. There was 

only a 4 percentage point increase among policyholders with replacement cost values of $500 

million or higher. 

In 2004 we estimate that the take-up rate among policyholders reporting replacement cost values 

of less than $50 million was 53 percent and the take-up rate was 61 percent among policyholders 

with replacement cost values of $50 to $500 million. The attrition bias discussed above may 

have affected the 2004 take-up rate among the largest replacement cost value category and 

should be interpreted with caution. 

 

9

 Once again the very high 2004 take-up rate estimates for the largest asset size class should be viewed with caution. 
 

- 91 -

Figure 5.6 

Policyholder Terrorism Risk Insurance Take-up Rates

By Total Replacement Value of Property Insured

0

20

40

60

80

100

Under $5 million $5 to 50 million $50 to $500 million $500 million or higher

Percent Policyholders

2002 2003 2004

 Note: Take-up rates for 2004, for policyholders in the largest total replacement value class, may be unreliable. 

 The bar is shaded to reflect the tentative nature of the estimate. 

Figure 5.7 reports on average terrorism risk insurance cost shares calculated separately by asset 

size class. These data suggest that charges for terrorism coverage increase with the policyholder 

asset size. Among policyholders with less than $10 million in assets, average terrorism risk 

insurance cost shares increased from 1 percent in 2002 to 1.3 percent in 2003 and 1.6 percent in 

2004. Among policyholders with $10-100 million in assets average terrorism cost shares 

increased from 1.7 percent in 2002 to 2.1 percent in 2003, and then declined to 1.8 percent in 

2004. Average cost shares among organizations with $100 million to $1 billion in assets 

increased from 1.7 percent in 2002 to 2.5 percent in 2003, and declined to 1.7 percent in 2004. 

Among policyholders with over $1 billion in assets average terrorism cost shares increased from 

2.2 percent in 2002 to 2.8 percent in 2003. The 2004 cost share estimate for the largest asset 

class size increase is subject to concern about possible attrition bias. 

Figure 5.7 

Average Policyholder Terrorism Risk Insurance Cost Shares

By Total Assets of Policyholder

0.0

1.0

2.0

3.0

4.0

5.0

Under $10 million $10 to $100 million $100 million to 

$1 billion

$1 billion or more

Percent Premiums

2002 2003 2004

 Note: Cost shares for 2004, for policyholders in the largest asset size class, may be unreliable. The bar is 

 shaded to reflect the tentative nature of the estimate. 
 

- 92 -

Figure 5.8 shows terrorism cost shares by replacement value of property insured. This analysis 

is generally consistent with the pattern of cost shares shown above. Policyholders reporting a 

replacement value of property insured of $500 million or more, reported very high cost shares 

(nearly 5 percent) in 2002. These cost shares drop significantly in 2003 and 2004, essentially 

coming into line with the other replacement value categories. This may reflect an increased 

capacity of insurers to offer coverage on large, valuable properties. As above, we urge caution in 

the interpretation of 2004 cost shares for the highest replacement value category. 

Figure 5.8 

Average Policyholder Terrorism Risk Insurance Cost Shares 

By Total Replacement Value of Property Insured

0.0

1.0

2.0

3.0

4.0

5.0

Under $5 million $5 to 50 million $50 to 500 million $500 million or higher

Percent Premiums

2002 2003 2004
 

- 93 -

5.3 Take-up and Price by Policyholder Risk Characteristics 

The surveys asked policyholders to provide information to help us understand their relative risk 

or exposure to terrorism risk. Because policyholders were surveyed at the aggregate 

organization level, rather than at a building or property level, the measures are not precise, but 

rather provide a general sense of take-up by broad organizational characteristics related to risk. 

Figures 5.8 through 5.10 present take-up by organizations located in a large city, a high-risk city, 

or an iconic location.10 A high-risk city is one of the large cities considered to be at highest risk 

for a terrorist attacks when the questionnaire was developed: Chicago, Houston, Los Angeles, 

New York, San Francisco, Seattle, and Washington, D.C., as designated by Homeland Security.11 

A large city is defined to be one of the 48 U.S. cities with a population of 350,000 or more in the 

year 2000, apart from the seven high-risk cities explicitly listed. An iconic location is a building 

or property location with a significant political, national or economic prominence. Iconic 

locations represent the most narrow risk category among those examined. Terrorism risk 

insurance take-up rates are highest among organizations with at least one iconic location. 

Approximately 13 percent of policyholders reported locations in large cities (apart from the 

seven high-risk cities) in 2002 and 2003 and 18 percent of policyholders reported locations in 

large cities in 2004. Data presented in Figure 5.9 show slightly higher take-up of terrorism risk 

insurance by large-city policyholders in 2002: about 29 percent compared to 27 percent of 

policyholders without a large city presence. Over time, more large-city policyholders purchased 

terrorism coverage relative to those without a large-city presence: 45 percent as compared with 

38 percent in 2003, and 61 percent as compared to 52 percent in 2004. 

Figure 5.9 

Policyholder Terrorism Risk Insurance Take-up Rates 

Policyholders With Locations in Large Cities vs. With None

0

20

40

60

80

100

2002 2003 2004

Percent Policyholders

Large City None

 

10 Item non-response rates for questions in which policyholders indicate that they have some locations in a large city 

or a high-risk city are roughly seven percent for 2002 and 2003; these item non-response rates fall to less than one 

percent in 2004 and 2005. Item non-response rates for iconic locations are approximately 19 percent in 2002 and 

2003, declining to less than 4 percent in 2004 and 2005. 

11 See Chapter 3, footnote 4 for details on the identification of these high-risk cities. 
 

- 94 -

Approximately 8 percent of policyholders reported locations in high-risk cities in 2002 and 2003 

and 11 percent of policyholders reported locations in high-risk cities in 2004. Figure 5.10 

compares take-up rates for organizations that had locations in these high-risk cities with those 

that did not. Terrorism risk insurance take-up rates are consistently higher among organizations 

with some presence in these cities than among organizations with no locations in high-risk cities. 

In 2002, prior to the enactment of TRIA, the terrorism risk insurance take-up rate for companies 

and other entities with locations in high-risk cities was roughly 34 percent, as compared with 26 

percent among policyholders with no locations in these cities. In 2003 and 2004, take-up rates 

for policyholders with some presence in a high-risk city were 46 and 67 percent respectively, as 

compared with 39 percent in 2003 and 52 percent in 2004 among policyholders without high-risk 

city locations. 

Figure 5.10 

Policyholder Terrorism Risk Insurance Take-up Rates

Policyholders With Locations in High-Risk Cities vs. With None

0

20

40

60

80

100

2002 2003 2004

Percentage Policyholders

High-Risk City None

Respondents representing six percent of policyholders reported divisions, branches, subsidiaries 

or other entities in iconic locations. Figure 5.11 shows that take-up rates among organizations 

with iconic locations are consistently higher than take-up rates among organizations without such 

locations. Terrorism coverage among organizations with iconic locations more than doubled 

over the period, from 34 percent in 2002 to 62 percent in 2003 and 70 percent in 2004. Take-up 

rates among policyholders without iconic locations were 25 percent in 2002, 38 percent in 2003, 

and 53 percent in 2004. 
 

- 95 -

Figure 5.11 

Policyholder Terrorism Risk Insurance Take-up Rates

Policyholders With Iconic Locations vs. With None

0

20

40

60

80

100

2002 2003 2004

Percent Policyholders

Iconic Locations None

Figures 5.12 to 5.14 on the following pages present the corresponding costs faced by 

policyholders in different locations. Between 2002 and 2003, the cost of terrorism coverage 

increased moderately for policyholders with locations considered to be at higher risk for terrorist 

attacks (large cities, high-risk cities and iconic locations), but then declined in 2004. Between 

2002 and 2004, the cost generally rose for policyholders with no locations in these areas. This 

trend partially reflects a shift over time by low-risk policyholders into small but non-zero charges 

for terrorism coverage that they previously received for no cost. Data from 2004 suggest a large 

decline in the cost shares for organizations with locations in high-risk areas, and a steady rise in 

the cost shares for organizations without locations in these high-risk areas. This occurs to such a 

degree that lower-risk policyholders reported paying a larger terrorism cost share than those in 

large and iconic cities. 

This result may reflect better and more precise pricing methods by insurers, greater competition 

for urban and higher-risk policyholders, the effects of state rate regulation, and the effects of 

TRIA. Calculations using a sample of policyholders that participated in each of the survey 

waves show a similar result, suggesting that the pattern, particularly the decline in 2004 terrorism 

risk insurance cost shares in the higher-risk location policyholder groups, is not a function of 

selective survey participation. The result is broadly consistent with the result found in the 

insurer data (Figure 4.10) that small insurers charged, on average, the highest cost shares in 

2004. One alternative explanation is that non-terrorism premiums were higher for organizations 

with locations in these high risk areas than for organization without locations in these areas. 
 

- 96 -

Figure 5.12 

Average Policyholder Terrorism Risk Insurance Cost Shares

Policyholders With Locations in Large Cities vs. With None

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

Large City None

Figure 5.13 

Average Policyholder Terrorism Risk Insurance Cost Shares

Policyholders With Locations in High-Risk Cities vs. With None

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

High-Risk City None

Figure 5.14 

Average Policyholder Terrorism Risk Insurance Cost Shares

Policyholders With Iconic Locations vs. With None

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

Iconic Locations None

Figures 5.15 through 5.17 present the terrorism risk insurance share for policyholders reporting a 

non-zero cost share. These figures show the same basic pattern for higher-risk policyholders as 
 

- 97 -

is shown above, but cost shares are flat or declining for policy-holders without higher-risk 

locations. 

Figure 5.15 

Average Positive Policyholder Terrorism Risk Insurance Cost Shares 

Policyholders With Locations in Large Cities vs. With None

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

Large City None

Figure 5.16 

Average Positive Policyholder Terrorism Risk Insurance Cost Shares

Policyholders With Locations in High-Risk Cities vs. With None

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2002 2003 2004

Percent Premiums

High-Risk City None

Figure 5.17 

Average Positive Policyholder Terrorism Risk Insurance Cost Shares 

Policyholders With Iconic Locations vs. With None

0.0

1.0

2.0

3.0

4.0

5.0

2002 2003 2004

Percent Premiums

Iconic Locations None
 

- 98 -

Figure 5.18 provides additional detail on the terrorism cost shares paid by organizations with 

different risk characteristics. The figure compares the range of terrorism cost shares reported by 

policyholders with at least one location in a high-risk city to the range of terrorism cost shares 

for policyholders without locations in high-risk cities. In 2002, nearly 73 percent of the lowerrisk policyholders had free terrorism risk insurance coverage compared to 54 percent of 

policyholders with locations in high-risk cities. The decline in zero cost share coverage between 

2002 and 2003 is much more striking among the low risk population and undoubtedly accounts 

for much of the change in the high-risk/non-high-risk cost share differential. The proportion of 

low-risk policyholder receiving free terrorism risk insurance coverage falls by 30 percentage 

points, from 73 to 43 percent, between 2002 and 2003. Comparing across all three years we see 

that both the high- and low-risk groups are increasingly paying for terrorism risk insurance, and 

that their charges are most likely to fall within the less than 2 percent range. 

Figure 5.18 

Distribution of Policyholders by Average Terrorism Cost Share 

Policyholders With and Without High-Risk City Locations 

Policyholders With Locations in High-Risk Cities

0

20

40

60

80

100

Zero Below 2 Percent 2 to 5 Percent Above 5 Percent

Range of Policyholders' Average Terrorism Cost Shares

Percent Policyholders

2002 2003 2004

Policyholders With No Locations in High-Risk Cities

0

20

40

60

80

100

Zero Below 2 Percent 2 to 5 Percent Above 5 Percent

Range of Policyholders' Average Terrorism Cost Shares

Percent Policyholders

2002 2003 2004
 

- 99 -

5.4 Take-up and Cost Shares by Industry and Region 

Industry 

Figure 5.19 presents terrorism insurance take-up rates by major industrial sector. Take-up rates 

have increased substantially in all major sectors. The terrorism risk insurance take-up rate in 

wholesale and retail trade was particularly low in 2002, at 19 percent, as compared with 25 

percent in heavy industry, 35 percent in business, and 30 percent in the service sector and 

government.12 On average, take-up rates are estimated to have increased roughly 12 percent per 

year in 2003 and 2004. By 2004 the terrorism insurance take-up rate had increased to 45 percent 

in wholesale and retail trade, to 47 percent in heavy industry, to 65 percent in business, to 57 

percent in services and to 43 percent in government. The highest take-up rates are in business 

and services. 

Figure 5.19 

Policyholder Terrorism Risk Insurance Take-up Rates

By Major Industrial Sector

0

20

40

60

80

100

Heavy Industries Trade Business Services Government 

(NAICS 1,2,3) (NAICS 4 ) (NAICS 51-55) (NAICS 56+,7,8) 

Percent Policyholders

2002 2003 2004

Figure 5.20 shows the terrorism risk insurance cost share by industry classification of 

policyholders. The low cost share paid by firms reporting their primary classification as Heavy 

Industry is of particular interest. It is also interesting to note that the cost share paid by firms 

reporting their primary classification as Trade fell in 2004. 

 

12 Business includes industries in information; finance and insurance; real estate and rental and leasing; professional, 

scientific and technical services; and management of companies and enterprises. 
 

- 100 -

Figure 5.20 

Average Policyholder Terrorism Risk Insurance Cost Shares 

By Major Industrial Sector

0.0

1.0

2.0

3.0

4.0

5.0

Heavy Industries Trade Business Services Government 

(NAICS 1,2,3) (NAICS 4 ) (NAICS 51-55) (NAICS 56+,7,8) 

Percent Premiums

2002 2003 2004

The TRIA specifically directed Treasury to examine the availability and affordability of 

terrorism insurance for policyholders in railroads, trucking, and public transit. Take-up estimates 

for those groups are included in Figure 5.21 below.13 Among railroads, survey results indicate 

that take-up rates were approximately 25 percent in 2002, 31 percent in 2003, and 32 percent in 

2004. In trucking, survey results suggest that take-up rates increased from 23 percent in 2002 to 

31 percent in 2003 and 43 percent in 2004. The corresponding estimates for public 

transportation are 2 percent in 2002, 20 percent in 2003, and 36 percent in 2004. 

Figure 5.21 

Policyholder Terrorism Risk Insurance Take-up Rates

Industries of Special Interest

0

20

40

60

80

100

Rail Transportation Truck Transportation Public Transit

Percent Policyholders

2002 2003 2004

Cost share estimates for these populations are even less precise because they are based on 

smaller sample sizes (only respondents with terrorism coverage provide cost information). The 

cost share estimates for railroads are 5 percent of premiums in 2002 and 2003, increasing to 8 

 

13 The number of companies in railroads and trucking is too small to ensure the confidentiality of survey results 

without undue masking, and the same is true for providers of public transportation. Therefore these estimates were 

developed by Westat, following Treasury specifications. The number of observations underlying these estimates is 

quite small, especially for the cost share estimates for railroads and public transit. 
 

- 101 -

percent of premiums in 2004. These estimates, however, are based on only 13-15 observations 

(out of a population of 421 railroads). Cost share estimates for trucking, where sample sizes are 

reasonably good, fall from 0.68 percent in 2002 to 0.55 percent in 2003 and rise to 1.06 percent 

in 2004. Cost share estimates for public transit are based on samples too small to report. 

Figure 5.22 

Average Policyholder Terrorism Risk Insurance Cost Shares

Industries of Special Interest

0

1

2

3

4

5

6

7

8

9

10

Rail Transportation Truck Transportation

Percent Premiums

2002 2003 2004

Region 

Figure 5.23 shows take-up across major geographical sectors. The increase in take-up between 

2002 and 2003 suggests that policyholders in the Northeast and West are no more likely to 

purchase terrorism risk insurance coverage than policyholders in the Midwest and South. In all 

major geographical regions, policyholder survey data yield terrorism risk insurance take-up rates 

of slightly less than 30 percent in 2002, around 40 percent in 2003, and near 50 percent in 2004. 

The two exceptions evident are the slightly lower than average take-up rates estimated for the 

South in 2002 and 2003 and the higher than average 2004 take-up rate estimated for the 

Northeast. Terrorism insurance take-up rate estimates for the Northeast increased sharply in 

2004 to 64 percent. Overall, however, these results indicate take-up of terrorism risk insurance 

coverage increased relatively uniformly throughout the country. 
 

- 102 -

Figure 5.23 

Policyholder Terrorism Risk Insurance Take-up Rates

By Region

0

20

40

60

80

100

Northeast Midwest South West 

Percent Policyholders

2002 2003 2004

Figure 5.24 shows cost share by region. These results are consistent with the general perception 

that the Northeast and West are considered to be at higher risk for acts of terrorism. 

Figure 5.24 

Average Policyholder Terrorism Risk Insurance Cost Shares 

By Region

0.0

1.0

2.0

3.0

4.0

5.0

Northeast Midwest South West

Percent Premiums

2002 2003 2004
 

- 103 -

5.5 Special Terms and Conditions

Mirroring the insurer survey, the policyholder survey asked a set of questions about whether 

special terms and conditions are generally applied to policies with TRIA coverage relative to 

policies without TRIA. Out of a broad range of special conditions, policyholders only gave 

positive responses in two areas, the use of annual aggregates and exclusion of scheduled 

locations. Figure 5.25 shows results for these special conditions.14 The percent of policyholders 

reporting use of either type of restriction fell from 2002 to 2004.15 

Figure 5.25 

Special Terms and Conditions for Terrorism Risk Insurance 

Relative to Policies with No Terrorism Risk Insurance Coverage

0

20

40

60

80

100

Annual Aggregates Excluded Scheduled Locations

Percent Policyholders

2002 2003 2004

Special Conditions for 2006 

In the last wave of the TRIA surveys, policyholders were asked about their policies actually 

written or renewed in January and February of 2005. Although policies written or renewed 

within the first two months of 2005 do not extend far into 2006, responses to these questions 

nonetheless provide some insight into arrangements made for terrorism risk insurance coverage 

post-TRIA. For clarity of exposition, terrorism risk insurance coverage comparable to certified 

terrorism risk insurance provided under TRIA is identified as international terrorism risk 

insurance coverage for the purposes of this discussion, and the 2006 counterpart to non-certified 

coverage is identified as domestic terrorism. 

Among policyholders that purchased or renewed commercial property or casualty insurance 

coverage with certified terrorism coverage in the first two months of 2005, approximately 26 

percent are estimated to have exclusions for international terrorism risk insurance coverage for 

the portion of their policy year that extends into 2006. For policyholders with coverage 

 

14 Annual aggregates are restrictions on the aggregate payments to a single policyholder in a single year - this 

controls insurer losses in the event of successive attacks. Restricted locations policies are policies that either 

exclude specified locations from coverage or include only a specified list of locations. 15 Item non-response rates for these variables ranged between 11 and 14 percent in 2002 and 2003, declining to 5 to 

7 percent in 2004. 
 

- 104 -

extending into 2006 survey data suggest that the use of restrictions for international terrorism 

coverage is comparable to that reported for certified coverage. Comparing 2005 and 2006 

coverage, roughly 4 percent of policyholders report more coverage conditions that are specified 

in terms of annual aggregates for 2006 coverage, and roughly 3 percent report special conditions 

that are specified in terms of restricted locations for 2006. 

Because the 2006 coverage period spanned by policies written in the first two months of this year 

is relatively short, it is possible that the adjustments described above are less severe than those 

being adopted now. 
 

- 105 -

5.6 Take-Up of Nuclear, Biological, Chemical or Radiation Risk (NBCR) Coverage 

TRIA requires that Nuclear, Biological, Chemical and Radiological (NBCR) terrorism insurance 

be offered by an insurer only if such NBCR coverage is offered by the insurer as part of the 

policyholder’s overall commercial property and casualty insurance. The percentage of 

policyholders reporting that they purchase NBCR terrorism risk insurance coverage is extremely 

small. In each of 2002, 2003 and 2004, less than 3 percent of policyholders reported NBCR 

coverage in lines other than worker’s compensation. This contrasts with the results from the 

insurer survey in which 30 percent of insurers reported that they provided some terrorism 

coverage for NBCR. 

Policyholders that did not purchase NBCR terrorism risk coverage were asked why they had not 

done so. As shown in Table 5.1 the dominant reason policyholders reported for not purchasing 

coverage is that policyholders believed that they were not at risk. Another major reason was that 

many policyholders reported that they felt that the premiums were too high; the share of 

policyholders reporting the latter as a major reason, however, declined from 31 percent in 2003 

to 15 percent in 2004. In 2003, 11 percent of policyholders reported that the restrictive terms 

under which NBCR coverage was offered was a major reason to decline coverage; in 2004 this 

percentage declined to 7 percent. Roughly 8 percent of the surveyed population reported that 

they could not find adequate NBCR terrorism coverage; this figure declined to 5 percent in 

2004.16 

 

16 Item non-response rates for the variables reported in Table 5.1 were between 4 and 5 percent in 2003, increasing 

to 12 to 14 percent in 2004, and therefore changes over time should be interpreted with caution. 
 

- 106 -

Table 5.1 

Reasons for Not Purchasing NBCR Coverage 

Not at risk High 

premiums

Restrictive 

terms

Inadequate 

coverage

Other

Not a reason 11.2 33.59 56.96 63 92.93

Minor reason 14.96 30.68 27.29 23.74 1.62

Major reason 69.73 30.87 10.88 8.27 0.62

No response 4.11 4.86 4.86 4.99 4.83

Not at risk High 

premiums

Restrictive 

terms

Inadequate 

coverage

Not Offered Other

Not a reason 24.55 61.46 72.55 75.17 66.88 84.23

Minor reason 8.41 11.1 8.09 6.72 4.63 0.6

Major reason 55.18 14.79 6.59 5.42 16.13 1.19

No response 11.87 12.64 12.77 12.7 12.36 13.98

2003

Policyholder Reasons for not purchasing NBCR

2004

Policyholder Reasons for not purchasing NBCR
 

- 107 -

5.7 Mitigation Activities 

One of the standard arguments against government-subsidized insurance programs is that such 

programs create problems of morale hazard. In theory, because the cost of insurance is lower 

than the natural market-clearing price, corporations will naturally purchase more insurance and 

invest less in measures designed to prevent damages. The cost of insurance and the availability 

of insurance are among two of several factors that influence policyholder decisions with regard 

to mitigation activities. The cost of the mitigation itself, the availability of knowledge about 

effective mitigation measures, concerns about employee/customer safety and public relations, the 

perception of peril, and the time passed since the last hazardous event all enter into 

consideration. 

With these issues in mind, policyholders were asked about measures they have taken to reduce 

losses associated with certified or non-certified attacks. More specifically, policyholders 

reported the degree to which the policyholder organization has undertaken the following efforts 

to reduce potential loss associated with a foreign or domestic terrorist attacks: 

• Increased expenditures on security 

• Decentralized operations 

• Made egress and fire prevention plans 

• Created employee incentive schemes to reward safe practices 

• Restricted products or services in current business operations 

Responses to these questions are summarized in Table 5.2. Among the alternatives listed, small 

changes in egress and fire prevention plans were reported by 16 to 22 percent of respondents, 

and large changes in egress and fire prevention plans were reported by an additional 6 to 7 

percent. Roughly 17 to 20 percent of respondents reported that they had increased security to a 

small extent and approximately 11 to 14 percent reported that they had, to a small extent, offered 

rewards for safe practices. Roughly 5 percent reported that they had restricted their supply of 

products or services to a small extent.17 

 

17 Note that item non-response rates to the variables reported in Table 2.1 were between 23 and 24 percent in 2003, 

declining to 9 to 10 percent in 2004, and therefore changes in these reported values over time should be interpreted 

with caution. 
 

- 108 -

Table 5.2 

Loss Reduction Measures 

Increased 

security

Decentralized 

operations

Egress and fire 

prevention 

plans

Reward safe 

practices

Restricted 

products or 

services 

Not at all 57.61 73.26 53.24 63.23 69.94

To a small extent 16.77 2.97 16.26 11.19 5.69

To a large extent 2.15 0.31 6.63 1.84 0.65

No response 23.46 23.46 23.87 23.74 23.72

Increased 

security

Decentralized 

operations

Egress and fire 

prevention 

plans

Reward safe 

practices

Restricted 

products or 

services 

Not at all 68.38 83.26 62.09 73.54 82.19

To a small extent 20.16 5.26 21.69 13.53 5.23

To a large extent 2.04 0.76 6.39 2.19 1.91

No response 9.43 10.71 9.83 10.74 10.68

2003

2004

Focusing on the loss reduction measures that entail relatively modest costs, 23 to 28 percent of 

respondents reported making improvements in egress and fire prevention plans, and 19 to 22 

percent of respondents reported making improvements in security. Without knowing more about 

the baseline of activities and vulnerabilities, it is difficult to draw a conclusion about whether 

these results should be viewed as encouraging or discouraging. 

At the same time, it is important to be aware that we do not know to what extent, if any, 

policyholders’ mitigation efforts would have been different in the absence of the TRIA backstop. 
 

- 109 -

5.8 Reasons for Non-Purchase of Terrorism Coverage 

Policyholders that declined terrorism risk insurance were asked their reasons for declining 

coverage. This information provides additional insight into the role TRIA may have played in 

improving the availability of terrorism risk insurance. 

Figure 5.26 shows a substantial increase, from 49 percent in 2003 to 89 percent in 2004, in the 

percentage of policyholders without terrorism coverage who selected “we feel our company is 

not at risk” as one reason they declined the offer of insurance for acts of terrorism covered under 

TRIA. We also see, however, an increase in the percentage of the surveyed population that 

declined coverage because the cost was too high. The estimated percentage of respondents 

reporting that they declined coverage because the cost was too high increased from 24 percent in 

2003 to 36 percent in 2004. This result is consistent with the shift away from free coverage and 

into priced coverage that is documented in both the insurer and policyholder survey results. 

In both 2003 and 2004, roughly 10 percent of the surveyed population without terrorism 

coverage cited inadequate coverage as one of the reasons for non-purchase. 

The vast majority of policyholders without terrorism coverage reported that they felt they were 

not at risk. 

Figure 5.26 

Reasons for Declining Terrorism Risk Insurance Coverage

Policyholders with No Terrorism Risk Insurance Coverage

0

20

40

60

80

100

Not at Risk Cost Too High Restrictive

Conditions

Inadequate

Coverage

Percent Policyholders

No Terrorism Coverage

2003 2004

Chapter 6 Reinsurance

This chapter provides quantitative information on the use of reinsurance. Reinsurance is 

insurance purchased by insurance companies to manage their risk exposure. In the case of 

terrorism, primary insurers are likely to use reinsurance to protect against catastrophic loss, 

either resulting from a single act of terrorism or from the aggregation of a large number of 

smaller acts of terrorism. It is known that large insurers typically reinsure a relatively small 

share of their exposure to natural catastrophe risk: the share of total exposure reinsured declines 

as insurer size increases, reflecting in part the ability of larger insurers to diversify risk using 

other mechanisms.1

 Our data allows us to examine whether a similar pattern is observed for 

TRIA-eligible lines of property and casualty insurance. The data come from questions in the 

2002 to 2005 waves of the survey to insurers, and cover use of reinsurance for all risks as well as 

TRIA exposure. 

Under TRIA, insurers maintain all terrorism risk exposure below their TRIA deductible, which is 

a fixed percentage of the previous year’s direct earned premiums, and 10 percent of exposure 

beyond the deductible. Large insurers, especially diversified insurers offering coverage in 

several lines, face a terrorism risk deductible that is significant in dollar terms.2

 Nevertheless, 

because this reinsurance only covers TRIA deductibles and co-payments, the share of terrorism 

risk exposure reinsured is a fraction of what total exposure would be in the absence of the 

Federal backstop, for equivalent coverage. 

Almost 90 percent of insurers in our sample purchased some reinsurance in 2004, but only 65 

percent purchased reinsurance for TRIA deductibles and co-insurance.3,4 The share of insurers 

purchasing reinsurance for TRIA-eligible coverage dropped from 70 percent in 2003 to 65 

percent in 2004, but rose to 75 percent in early 2005. 

To examine the extent of use of reinsurance in different TRIA-eligible lines, insurers who 

provided TRIA-eligible coverage in commercial property and casualty insurance lines were 

asked to estimate the percent of deductible and co-payment for TRIA losses that they reinsured 

in each year. These results are presented in the following three figures. 

Insurers’ use of reinsurance for TRIA deductibles and co-payments for commercial property 

lines of insurance is shown in Figure 6.1. In interpreting these results it is important to note that 

as the TRIA deductible percentage increases through time (it was 7 percent in 2003, 10 percent 

in 2004 and 15 percent in 2005) a similar share of retention reinsured represents a larger dollar 

amount of exposure reinsured. 

 

1

 Anne Gron (1999), “Insurer Demand for Catastrophe Reinsurance,” in The Financing of Catastrophe Risk, 

Kenneth Froot (ed), Chicago: University of Chicago Press, 1999, pp. 23-49. 

2

 For example, data from NAIC on direct earned premiums in TRIA-eligible lines suggests that the 2005 TRIA 

deductible of some large insurers is over $2 billion. 

3

 The questions and answers provided on the first wave of the insurer survey, for 2002 and 2003, did not provide 

enough information to clearly separate insurers without any reinsurance and insurers without reinsurance for 

terrorism risk. 

4

 Reinsurance questions in the survey refer to TRIA deductible and co-payments in commercial property and 

casualty lines, including workers’ compensation. 
 

- 112 -

Comparing 2003 and 2004, insurers were less likely to reinsure, and they reinsured a smaller 

share of terrorism risk exposure in 2004.5

 However data from the first two months of 2005 

suggest an increase in the use of reinsurance in commercial property lines. Our disaggregation 

by size, presented later in the chapter, suggests that much of the 2004 decline in reinsurance for 

TRIA-eligible coverage is attributable to larger insurers. This pattern of declining use of 

reinsurance by large insurers continued in the first two months of 2005. 

Figure 6.1 

Share of TRIA Deductibles and Co-Payments Reinsured

Distribution for Commercial Property Lines

0

10

20

30

40

50

No reinsurance

for TRIA for this

line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

 Note: The item non-response rate is 6 percent for 2003. 

Overall, the survey data suggest that while insurers reinsure a substantial portion of their retained 

risk, reinsurance purchases have not increased. The percentage of insurers reporting that they 

had no reinsurance for TRIA exposures increased between 2003 and 2004, there is a slight 

increase in use between 2004 and the first two months of 2005. Among insurers using 

reinsurance, an increasing percentage reported that they reinsured between 26 and 75 percent of 

their deductible and co-payment exposure, while the percentage of insurers reporting that they 

insured between 1 and 25 percent of their TRIA exposure declined. Fewer insurers reported that 

they reinsured more than 76 percent of their TRIA exposure in 2004 than in 2003; this result is 

analyzed further below. 

The use and extent of reinsurance purchased for TRIA deductibles and co-payments for other 

liability and casualty lines are shown in Figure 6.2. Between 2003 and 2004 the percentage of 

insurers using reinsurance decreased (the percentage without reinsurance increased). In the first 

two months of 2005 our results suggest that insurers’ use of reinsurance returned to 2003 levels. 

Examining the percentage of TRIA deductible and co-payment reinsured, the proportion of 

insurers reinsuring between 76 and 100 percent of their TRIA deductibles and co-payments 

declined, while the percentage of insurers with terrorism risk reinsurance for between 26 and 75 

percent of their TRIA deductible and co-payment increased slightly. 

 

5

 Item non-response rates over five percent are reported explicitly throughout the chapter. 
 

- 113 -

Figure 6.2 

Share of TRIA Deductibles and Co-Payments Reinsured

Distribution for Other Liability Lines

0

10

20

30

40

50

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

The availability of reinsurance for workers’ compensation is particularly important to insurers 

because coverage of terrorism risk in those policies is generally mandatory under state law. 

While most states approved blanket terrorism risk exclusions for other regulated commercial 

property and casualty policies after the September 11th attacks, states did not extend these 

exclusions to workers’ compensation policies. Similarly, the recently approved conditional 

exclusions for terrorism risk if TRIA expires do not cover workers’ compensation. 

The data presented in Figure 6.3 show greater use of reinsurance for the TRIA deductible and copayment along the extensive margin (the purchase of reinsurance) as well as the intensive margin 

(the amount of reinsurance) in workers’ compensation policies. Between 2003 and 2004, a 

smaller share of insurers reported that they had no reinsurance for workers’ compensation, and a 

larger share of insurers reported that they reinsured between 1 and 75 percent of their deductible 

and co-payment exposure. Similar changes were reported between 2004 and 2005. Overall the 

data suggest insurers have reasonably good and improving access and ability to reinsure TRIA 

exposures in workers’ compensation. 

Figure 6.3 

Share of TRIA Deductibles and Co-Payments Reinsured

Distribution for Workers' Compensation

0

10

20

30

40

50

No reinsurance

for TRIA for this

line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004
 

- 114 -

Use of Reinsurance by Insurer Size 

In Chapter 4 we provided information on pre- and post-TRIA terrorism risk insurance coverage 

written by insurers in different asset size categories. Paralleling that presentation, the two figures 

that follow show use of reinsurance in general (Figure 6.4) and use of reinsurance for TRIA 

deductibles and co-payments (Figure 6.5) by insurers with less than $1 billion in assets, $1 to 

$10 billion in assets, and more than $10 billion in assets respectively.6

Figure 6.4 

Overall Reinsurance Take-up Rates in 2004 

by Total Assets

0

20

40

60

80

100

Under $1 billion $1 to 10 billion Over $10 billion

Percent Insurers

Figure 6.5 

Terrorism Reinsurance Take-up Rates 

by Total Assets

0

10

20

30

40

50

60

70

80

90

100

Under $1 billion $1 to 10 billion Over $10 billion

Percent Insurers

2003 2004

The data in Figure 6.5 suggest that mid-sized insurers -- those in the $1 to $10 billion in assets 

range -- were the most likely to use reinsurance for TRIA exposure in 2004, followed closely by 

large insurers. Use of reinsurance by medium-sized insurers has been increasing through time, 

 

6

 Data from captive insurers are omitted from estimates presented by asset size class. Therefore estimates for all 

insurers, in Figures 6.1 through 6.3 are not directly comparable to those reported below for specific asset size 

classes. 
 

- 115 -

including into 2005. Data from the first two months of 2005 suggest that small insurer use of 

reinsurance increased, after decreasing in 2004. In contrast, between 2003 and 2005 the use of 

reinsurance for TRIA exposure by the largest insurers decreased. 

The discussion below focuses on both the use and extent of use of reinsurance by insurers within 

specific lines and by insurer asset size class. The results suggest differences in the use of 

reinsurance across insurer size classes. Examining the extent of terrorism risk reinsurance 

purchased, however, we find that insurers with less than $10 billion in assets are much more 

likely than the largest insurers to reinsure a substantial percentage of their TRIA deductible and 

co-payment. Figures 6.7, 6.8 and 6.9 summarize data on insurers’ use of reinsurance for the 

TRIA deductible and co-payment (above the deductible), by broad insurance line and insurer 

size. The horizontal axis indicates the approximate amount of TRIA deductible and co-payment 

the insurer estimates they have reinsured while the vertical axis indicates the percent of insurers 

reporting reinsurance use. Figure 6.6 is for commercial property, Figure 6.7 is for other lines and 

liability, and Figure 6.8 is for workers’ compensation. 
 

- 116 -

Figure 6.6 

Share of TRIA-Eligible Deductibles and Co-Payments Reinsured 

By Insurer Asset Class: Commercial Property 

Assets Less Than $1 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for this

line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

Assets of $1 to $10 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for this

line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

Assets Greater Than $10 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for this

line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

 Note: A missing bar indicates that no survey respondents provided an answer within the specified range. 

 Item non-response rates for insurers with less than $1 billion in assets were eight percent in 2003 and seven 

 percent in 2004; for insurers with $1 to $10 billion in assets item non-response was six percent in 2003. 
 

- 117 -

Figure 6.7 

Share of TRIA-Eligible Deductibles and Co-Payments Reinsured 

By Insurer Asset Class: Other Liability and Casualty

Assets Less Than $1 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

Assets $1 Billion to $10 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

Assets Greater Than $10 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

 Note: A missing bar indicates that no survey respondents provided an answer within the specified range. 

 The item non-response rate for insurers with less than $1 billion in assets was seven percent in 2003. 
 

- 118 -

Figure 6.8 

Share of TRIA-Eligible Deductibles and Co-Payments Reinsured 

By Insurer Asset Class: Workers’ Compensation 

Assets Less Than $1 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

Assets of $1 Billion to $10 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

Assets Greater Than $10 Billion

0

10

20

30

40

50

60

70

No reinsurance

for TRIA for

this line

1 to 25% 26 to 50% 51 to 75% 76 to 100%

Percent Insurers

2003 2004

 Note: A missing bar indicates that no survey respondents provided an answer within the specified range. 
 

- 119 -

In commercial property lines of insurance the use of reinsurance to diversify terrorism risks 

generally increased for medium insurers, but decreased among smaller and larger insurers in 

2003 and 2004. Figure 6.6 shows a decline in use of reinsurance by insurers in the smallest asset 

size class between 2003 and 2004. Insurers in the medium, $1 to $10 billion, asset size 

categories increased use of reinsurance between 2003 and 2004. Data from the first two months 

of 2005 suggest that all small insurers have reinsurance for TRIA deductibles and co-payments 

in commercial property lines and use of reinsurance by medium-sized insurers also increases. 

There appears to be a general trend toward greater use and extent of reinsurance for terrorism 

risk insurance coverage in commercial property lines among insurers with less than $10 billion in 

assets. 

Conditional on having reinsurance, among smaller insurers there are substantial increases in the 

percentage reporting 26 to 75 percent of their exposure reinsured between 2003 and 2004. There 

is a slight net increase in medium-sized insurers reporting 26 to 75 percent of their exposure 

reinsured. Apart from the decline in the percentage of small insurers with reinsurance for 76 to 

100 percent of their exposure, there appears to be a general trend toward greater extent of 

reinsurance for terrorism risk insurance coverage in commercial property lines among insurers 

with less than $10 billion in assets. 

In sharp contrast, there is a steady decline in the use of reinsurance for TRIA deductibles and copayments among large insurers in commercial property lines. Among these larger insurers, use 

of any reinsurance for commercial property coverage declines, and among those using 

reinsurance the extent of coverage decreased. In 2003 a very small percentage of large insurers 

reported purchasing reinsurance for 51 to 75 percent of the terrorism risk insurance policies 

written, and none reported purchasing reinsurance for 76 to 100 percent of their deductibles and 

co-payments. In 2004, no large insurers reported purchasing terrorism risk reinsurance for 50 to 

100 percent of their co-payment and deductible. Throughout this period the majority of large 

insurers purchasing terrorism risk reinsurance covered 1 to 25 percent of their deductible and copayment, and the same is true in the first months of 2005. 

In other liability and casualty lines (Figure 6.7) the use of terrorism risk reinsurance between 

2003 and 2004 declined among small insurers. This pattern is reversed in the 2005 data which 

suggest the use of reinsurance by these insurers with less than $10 billion in assets is increasing. 

In 2004 more than 30 percent of small and medium-sized insurers purchased reinsurance for 76 

to 100 percent of their deductible and co-payment. 

In contrast, less than 10 percent of large insurers purchased reinsurance for 76 to 100 of their 

terrorism risk exposure in 2003 and 2004. Among large insurers the majority with reinsurance 

for TRIA deductibles and co-payments reinsure between 1 and 26 percent of their TRIA 

exposure. Data from the first two months of 2005 suggest the use of reinsurance by larger 

insurers remained largely unchanged from 2004. 

Finally, in workers’ compensation the data suggest a general trend towards greater use and 

coverage of reinsurance among insurers with less than $10 billion in total assets, as shown in 

Figure 6.8. Although the share of small insurers using reinsurance fell slightly between 2003 

and 2004, data from the first two months of 2005 suggest use of reinsurance by small and 
 

- 120 -

medium-sized insurers is on the rise. As in the other lines, the extent of use of reinsurance by 

small and medium-sized insurers with reinsurance is greater than among large insurers. More 

than 20 percent of small and medium insurers purchased reinsurance for 76 to 100 percent of 

their TRIA deductible and co-payments in 2003 and 2004. Only 5 percent of large insurers 

reported purchasing reinsurance coverage 76 to 100 percent of their TRIA deductibles and copayments in 2003 and no large insurers purchased terrorism risk reinsurance for 51 to 100 

percent of their deductible and co-payment in 2004, according to survey estimates. In the first 

two months of 2005 use of reinsurance by large insurers was largely unchanged from 2004. 

Overall we see that small and medium-sized insurers were much more likely, when using 

reinsurance, to reinsure a large share of their exposure from TRIA deductibles and co-payments. 

This is in contrast to large insurers who did not use reinsurance to the same degree. 

Reasons for Not Purchasing Reinsurance 

We asked insurers that sold certified coverage, but did not use reinsurance for terrorism risk, a 

series of questions on reasons why they chose not to purchase terrorism risk reinsurance. The 

surveys provided insurers with a selection of several possible reasons for not purchasing 

reinsurance. The responses offer some insight into the workings of the terrorism risk reinsurance 

market. In 2003 10 percent of insurers reported that they did not purchase reinsurance because 

the take-up rate among their clients was so low that they did not feel they needed reinsurance 

coverage; this estimate declined to 3 percent in 2004. In both 2003 and 2004, less than 5 percent 

of respondents reported that restrictive policy terms and conditions were the reason they did not 

purchase terrorism risk reinsurance. In the limited 2005 survey, nearly 10 percent of respondents 

cited this as a reason for not purchasing terrorism risk reinsurance. Virtually no insurers reported 

an inadequate amount of coverage offered as the reason to forgo reinsurance coverage. 

Approximately 20 percent of insurers reported they did not purchase reinsurance coverage in 

2003 because the cost was too high. Only eight percent indicated that cost was one reason why 

they did not purchase terrorism risk reinsurance in 2004. Survey results from the first two 

months of 2005 suggest that, among insurers with no terrorism risk reinsurance in at least one 

broad line, five percent cited cost as a reason for their decision not to purchase reinsurance for 

their TRIA-eligible deductible and co-payment. These results may be due in part to increases in 

TRIA-eligible deductibles, although seasonal effects and attrition bias may also come into play. 

Non-Certified Reinsurance

As discussed in Chapter 4, a significant number of insurers provide coverage for non-certified 

terrorism events. These are terrorism events that do not meet the TRIA definition of an act of 

terrorism and therefore would not be eligible for TRIA coverage if they occurred. As discussed 

in Chapter 4, non-certified coverage and the development of the non-certified market is of 

interest in our analysis because it may provide an insight into the development of a terrorism risk 

insurance market outside of TRIA, albeit one with different risk characteristics. Among insurers 

who wrote some non-certified terrorism risk insurance coverage, we estimate that the percentage 

of insurers purchasing coverage for non-certified coverage rose from 53 percent in 2003 to 56 

percent between 2003 and 2004. This estimate increased to 77 percent in the first months of 

2005. 
Chapter 7 Terrorism Risk Insurance After TRIA

As set out in Chapter 1, the Terrorism Risk Insurance Act requires the Treasury Department to 

assess the effectiveness of the Program and conditions in the terrorism risk insurance market at 

the end of the Program. In particular, TRIA specifies an evaluation of the “...likely capacity of 

the property and casualty insurance industry to offer insurance for terrorism risk after 

termination of the Program... ”1

 The goal of this chapter is to present a framework and to 

provide evidence from our surveys and from insurance industry statistics, data, and information 

to inform such an assessment. 

Our evaluation is made with reference to the purpose of the legislation, which in part is “...to 

establish a temporary Federal program... in order to... allow for a transitional period for the 

private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any 

future losses... ”. 

We evaluate the likely ability and capacity of the property and casualty insurance industry to 

offer insurance for terrorism risk after expiration of TRIA in terms of the general “insurability” 

of terrorism risk insurance and the likely provision of coverage after the expiration of TRIA. 

This chapter is organized as follows. In Section 7.1, we discuss developments in insurers’ ability 

to model and quantify terrorism loss exposure. In Section 7.2, we discuss developments in the 

insurance industry’s financial status since September 11th. In Section 7.3, we review evidence 

gathered from our surveys of insurers and policyholders. This section also discusses the 

implications of eliminating TRIA for insurance markets and for the economy more generally. 

 

1

 See Section 108(d) of TRIA. 
 

- 122 -

7.1 Developments in Industry Capacity to Model Terrorism Risk 

In this section, we examine developments in insurers’ ability to model and quantify risks 

associated with terrorism. The ability of insurers to identify and quantify their risk of loss from 

large-scale terrorism attacks was in considerable doubt following September 11th. The survey 

data suggest that some insurers may have reacted to the attacks of September 11th using a very 

simple approach: excluding terrorism coverage for risky policyholders in 2002, but not charging 

lower-risk policyholders for terrorism coverage. Because insurers were re-assessing their 

exposure to such large-scale attacks and had experienced a shock that reduced surplus, customers 

in many locations considered to be at high risk throughout the nation found insurance not readily 

available or not affordable. 

Quantifying Risk 

The insurer makes a decision to provide coverage for a risk by comparing the revenue expected 

from the coverage to the costs. The revenue is the sum of premium and investment income 

generated from writing the coverage. The costs include the aggregate annual loss expected from 

the coverage, the direct and indirect expenses associated with writing, selling, and reinsuring the 

coverage, the cost of overhead, and the cost of holding additional surplus to protect sufficiently 

against the increased chance of insolvency associated with that coverage. The amount of capital 

or surplus held is guided most directly by the desire to maintain a good rating from the rating 

agencies because ratings are signals of quality to customers, regulators and financial markets, an 

important source of liquidity when claims volumes exceed predictions.2

 

Insurers seeking to ensure solvency and financial strength sufficient to maintain ratings 

acceptable to customers and financial markets carefully consider the range of possible losses and 

their probabilities. The range of losses is traditionally represented by a loss-exceedence curve, or 

equivalently a probable maximum loss (PML) curve. A loss-exceedence curve is a graphical 

depiction of the probability that losses from a peril will exceed certain amounts over a given time 

period, typically a year. The curves show the values and associated probabilities. The 

implications for solvency arise from consideration of the chances for loss and sizes of very large 

losses relative to the expected loss, referred to as the “tail” of the loss distribution. In order to 

decide how much reinsurance and surplus they want to hold, insurers consider various measures 

of the risk of insolvency from the tail losses. 

In the case of non-catastrophic risks, arising from independent attacks, the addition of more 

coverage from more policies increases the expectation of losses, but does not concomitantly 

increase the potential for outcomes that are very different from the expectation. In traditional 

insurance, the risk of the overall portfolio declines relative to its return, a mathematical result 

known as diversification. When a single attack could impact many policies at once, such as 

large-scale terrorism attacks or natural catastrophes, there is less diversification. Instead the 

insurer faces an accumulation risk. As coverage is increased in a footprint, insurers have 

incentives to hold more and more reinsurance and surplus to protect against insolvency. The 

 

2

 In this chapter we discuss insurers as if they are all organized as third party equity-owned corporations. Some 

commercial property and casualty insurers are organized as mutual insurers owned by their policyholders. 
 

- 123 -

premium that the insurer charges for the coverage reflects not only the expected loss and 

expenses, but the cost of acquiring and holding the surplus. 

If the probabilities of high losses are quite uncertain, the insurer (and the rating agencies) does 

not truly know the degree of protection afforded by a given amount of surplus. Insurers hold 

surplus that protects against insolvency across the full range of uncertainty in the loss associated 

with that probability. For example, the insurer may not know with confidence whether, at a 1-in500 probability, the loss amount, after reinsurance recovery, is $500 million or $1 billion. 

Modeling Terrorism Risk 

In order for insurance markets to operate efficiently, so that insurance is readily available and 

priced, insurers should be able to at least partially quantify their aggregate exposure to terrorism 

risk and measure and set premiums for individual customer risks. Insurers traditionally use 

actuarial analysis of potential losses, which examines historical information in order to derive 

statistical predictions of probability and severity of attacks, from which they can generate 

exceedence curves. In the case of catastrophic losses, including catastrophic terrorism losses, it 

is widely accepted that this approach is not feasible; there is simply not enough historical data to 

make accurate predictions. Instead insurers attempt utilize models of these risks, using scientific 

information – when they have it. There are two components to modeling: identifying and 

quantifying the severity of the insurers’ losses based on assumed risks and assessing the 

probability the loss will occur. When information is scarce, they may rely on the judgments of 

experts, but the results are subjective and have not been proven. 

Three major risk-modeling firms - EQECAT, Risk Management Solutions (RMS), and Applied 

Insurance Research (AIR) - have developed terrorism risk models and are actively researching 

terrorism risk modeling. The development of modeling by these firms has occurred in stages.3

 

The first stage was accumulation assessment. Accumulation assessment identifies and quantifies 

exposure concentration around potential terrorist targets, often within a simple circle based on 

the blast center of a conventional truck bomb. The identification of large accumulations allows 

the insurer to limit the amount of new business it writes in that area. 

The collection of data reporting locations and engineering characteristics of individual buildings 

within urban locations has made possible the development of deterministic modeling, an advance 

from accumulation analysis. Deterministic modeling imposes an attack’s damage “footprint” at 

a specified target in order to predict a weapon’s ability to do damage to the specific surroundings 

of a given target. Deterministic modeling is much more discriminating than the circle approach; 

a simple circle does not include the complex interaction of a weapon’s impact with the urban 

environment. The models can provide predictions of property losses at the ZIP code level and 

even by individual locations, allowing for risk differentiation within urban centers and between 

urban and other locales. 

Modelers have also made progress in measuring concentrations of workers’ compensation and 

business interruption risk, although these are harder to measure than property damage. Using 

this data, models can calculate the probability of damage being done to the terrorist target as well 

 

3

 John Tedeschi et al, “Terrorism Modeling,” Guy Carpenter, December 2004. 
 

- 124 -

as to the surrounding buildings. The deterministic methodology, in effect, reduces the overall 

capacity problem to a series of questions answerable by engineering, chemical, and biological 

sciences, in which some core results are reasonably well established.4

 

Recent advances in deterministic modeling include client-based accumulation measurement and 

the ability to calculate the PML of entire areas, making possible risk assessments for more 

venues and scenarios. For example, modeling firms offer computer programs to calculate 

accumulations from multiple financial perspectives, including gross, net, and reinsurance costs. 

This software offers a total assessment of the possible damages to a specific location in the event 

of a major terrorist attack. The software will flag any location that exceeds the maximum 

accumulation thresholds for the given policy. This feature allows insurance companies to 

evaluate whether or not they can even offer coverage to businesses with high levels of exposure 

accumulation. 

The final refinement, probabilistic modeling, is an important factor in pricing terrorism risk 

insurance. The models all rely on subjective recommendations from terrorism experts to help 

determine the probabilities of attacks. Some include refinements such as game theoretic 

approaches which attempt to parameterize the terrorists’ strategic behavior and adaptive response 

to deterrence activity at specific targets in light of their goals and resources. Other models use a 

Delphi method, in which the opinions of experts are statistically combined into probability 

distributions. In the Delphi method, the experts analyze the possible types of attacks by terrorists 

and then decide which targets “present the lowest technical, logistical, and security barriers to 

(terrorist) mission success.”5

 They then assign a probability to the location and the scenario. 

The Impact of Subjectivity 

Because of the difficulty inherent in assessing the probability of attack, use of terrorism 

predictive models is tempered by the large degree of uncertainty in their predictions. 

Comparative studies show that the three leading models yield strikingly different predictions. 

 

Figure 7.1 illustrates the magnitude of differences between two modelers’ predictions of 

workers’ compensation losses to which the insurance industry is exposed from all terrorist 

attacks. The figure shows that the predicted losses differ by more than 450 percent for the 100 

year return period. Return period is the inverse of probability. For example, a 100 year return 

period corresponds to an attack with annual probability of 1-in-100 or 1 percent. According to 

one study, the primary reason the results differ so dramatically is that the models assign different 

probabilities to particular types of terrorism attacks, and there is no reliable basis for determining 

which one is right.6

 

4

 Gordon Woo, “The Evolution of Terrorism Risk Modeling,” RMS Ltd., April 22, 2003. 

5

 “RMS Unveils Game Theory-Based Terrorism Risk Model,” Insurance Journal, September 2002. 6

 Towers Perrin, “Workers’ Compensation Terrorism Reinsurance Pool Feasibility Study,” 2004, pp. 23-24. 
 

- 125 -

Figure 7.1 

Industry WC Loss By Return Period

0

5

10

15

20

25

30

35

40

45

50

100 250 500

Return Period (Years)

Model Loss ($B's)

Model A Loss ($B)'s Model B Loss ($B)'s

 Return period is the inverse of probability. For example, a 100 year return period corresponds to a 1-in-100 

 event with annual probability of 1 percent. Graph from presentation by Tim Tetlow, AXIS Specialty Limited, 

 at the May 2005 Casualty Actuarial Society Meetings. 

The authors of the workers’ compensation study noted above conclude that the terrorism loss 

models can provide an order-of-magnitude indication of the size of potential terrorism losses. It 

is clear that today the losses of specific attacks are not known with certainty, and the 

probabilities assigned to attack occurrences are speculative.7 There are large differences even 

when the attack and the location are held constant across models. Predictions of property 

damage and workers’ compensation losses for a specific terrorism event for a specific building in 

New York vary similarly by 200 to 300 percent, suggesting that, even with the probability 

problems removed, the engineering assumptions for specific sites differ.8

 

The disparities in terrorism risk models are much greater than those for earthquakes or 

hurricanes.9 As long as model predictions differ so significantly and there is no reliable basis for 

determining which is more accurate, model users understandably assign a wide uncertainty to a 

model’s predicted outcomes. This degree of uncertainty is particularly important to users with 

greater exposure to the tails of the loss-exceedence curve predictions. The probability 

predictions for these attacks tend to be more uncertain than those of the lower loss portions of the 

loss-exceedence curve because they are heavily influenced by expert opinion and because 

differences among model predictions are larger for these attacks. Reinsurers, who typically 

insure the tails of loss distributions, have potentially even greater exposure to the uncertainties of 

the modeling.10 Furthermore, the availability of data enabling reinsurers to measure aggregations 

of risk in their portfolios of contracts with insurers has lagged behind that for insurers.11

 

7

 Towers Perrin, “Pool Feasibility Study,”Ibid., p. 25. 8

 Based on consultation with reinsurance industry representatives, May 2005. 

9

 Based on consultation with insurance industry broker representatives, April 2005. 10 Kenneth Froot, “Risk Management, Capital Budgeting, and Capital Structure Policy for Insurers and Reinsurers,” 

NBER Working Paper 10184, December 2003. 

11 Based on consultation with reinsurance industry representatives, May 2005, and presentation by Tim Tetlow, 

AXIS Specialty Limited, at the May 2005 Casualty Actuarial Society Meetings; and Daniel Wolak et al, “Pricing for 
 

- 126 -

Remaining Challenges 

The industry has clearly made progress in identifying aggregate exposure by location to estimate 

exposure to losses from physical damage. It has also made considerable progress in tracking 

aggregates of employees down to the level of individual locations to estimate exposure to 

workers’ compensation losses. Modelers have created and implemented sophisticated 

probabilistic loss estimates that are said to take account of terrorists’ shifting goals and 

strategies. Insurers writing coverage for high risk exposures are able to use multiple methods of 

assessing and managing terrorism risk. 

The critical challenge for catastrophic terrorism modeling, and the difficulty that distinguishes it 

from earthquake, hurricane, and other catastrophic modeling, is developing a quantitative, 

objective understanding of terrorist behavior. In order to effectively model the probability of 

terrorist attack – including identifying targets, estimating frequency of attacks, and forecasting 

attack size – modelers may need to be able to understand terrorists’ motivations, goals and 

resources, be they so-called foreign or domestic terrorists. In addition, modelers may need to 

understand terrorists’ adaptive reactions - changes in their methods and approaches - in response 

to improved deterrence. To the extent that these elements can be understood and parameterized 

mathematically, the use of subjective expert judgment, on which the models now rely, can be 

minimized. Other issues include predicting the spatial clustering of terrorist incidents, such as 

whether an attack in a particular location makes subsequent attacks more likely to take place 

nearby12 and in developing the ability to take into account mitigation efforts, such as existing and 

proposed security measures for a new location. An additional challenge for modeling the effects 

of nuclear, biological, chemical and radiological attacks is refining the modeling of the 

dispersion of the agents of these attacks, including incorporating the effects of weather and 

terrain on wind-borne contaminants, and simulating the effects of response in treating, 

quarantining and protecting populations exposed to outbreaks of disease agents. 

 Terrorism Risk in Group Life, Group Health, and Group Disability Products,” Section 23PD, Presentation at Society 

of Actuaries Spring Meeting 2003. 

12 "Spatial and Temporal Determinants of Terrorism Risk,” Research Projects, RAND Center for Terrorism Risk 

Management Policy, www.rand.org/multi/ctrmp/projects/determinants_terrorism_risk.html, 

accessed June 2005. 
 

- 127 -

7.2 Growth in Insurer Financial Capacity 

An insurer’s capacity to write coverage is limited to the maximum coverage it could provide, 

while retaining its ability to meet current and future obligations to its base of policyholders. The 

ability to meet its obligations is determined by its financial strength, which incorporates both 

balance sheet strength and operating performance, because a strong operating performance is 

needed to maintain balance sheet strength.13 The balance sheet strength is measured by the level 

of the insurer’s surplus, taking into consideration the exposure of surplus to losses from 

policyholder claims in relation to premiums it is charging, as well as other broad categories of 

risk to which the insurer is exposed. In this subsection we examine the financial strength of the 

insurers writing coverage in the TRIA lines.

Below we briefly summarize a few measures of balance sheet strength and operating strength 

and implications, making 3rd quarter to 3rd quarter comparisons14 from 1999 to 2004. 

The purpose of the analysis is to assess the industry’s rebuilding since the September 11th 

terrorist attacks. We compare the latest available financial measures to their values at the 

inception of the loss shock induced by the September 11th terrorist attacks. 

The industry’s recovery from a loss shock follows a recognizable pattern or loss cycle. The 

effects of shocks and subsequent recoveries – insurance cycles – have been the subject of study 

by academic researchers.15 A general result is that insurers respond to a sudden loss of surplus 

caused by a large unexpected loss by contracting their underwriting, particularly in the affected 

lines, followed by slowly rebuilding the lost capital from earnings, as well as by raising (more 

costly) external capital. If the unexpected loss shock causes insurers to re-evaluate their 

understanding of the risk, then supply may be reduced even further, until insurers’ underwriting 

rules and procedures are revised to reflect their new understanding of the risk. The reduction in 

supply of coverage results in price increases. Price can be subject to additional upward pressure 

if the demand for insurance also rises as policyholders revise their expectations regarding their 

need for coverage upward. If there are no subsequent unexpected large losses, capital is 

replenished by profits from the higher prices. If the price spike is sufficiently severe, so that 

profits exceed the additional costs of raising external capital, external insurance capital enters as 

well. As a result, quantities supplied rise and prices moderate.16 

 

13 This exposition of measures of balance sheet and operating strength is taken broadly from “Best’s Insurance 

Reports - Property/Casualty Edition,” 2004. 

14 The quarterly data are the most recently available data. The data represent 12 month cumulative totals from the 

3rd quarter of the previous year. 

15 Recent studies include Gron, “Capacity Constraints and Cycles in Property-Casualty Insurance Markets,” The 

RAND Journal of Economics, Vol. 25, No. 1 (Spring 1994), Lai et al, “Great (And Not so Great) Expectations: An 

Endogeneous Economic Explication of Insurance Cycles and Liability Crises,” Journal of Risk and Insurance, Vol. 

67, No. 4 (December 2000), pp. 617-652; Cummins and Doherty, “Federal Terrorism Reinsurance: An Analysis of 

Issues and Program Design Alternatives,” Wharton, Draft, December 7, 2001; Doherty, Lamm-Tennant and Starks,

Ibid. 16 Additional difficulties may face insurers with a concentration in workers’ compensation. State laws do not 

permit insurers to avoid writing coverage, and, in addition, may closely regulate its price. 
 

- 128 -

Our analysis only includes the insurance companies and groups writing coverage in the TRIAeligible lines. As noted in Chapter 4, this is a large portion of the industry. 

Surplus is an important measure of an insurer’s ability to withstand loss because it is the ultimate 

source of claims-paying ability. Figure 7.2 shows the growth in policyholders’ surplus for the 

insurers writing coverage in the TRIA-eligible lines. As the figure shows, surplus has been 

rebuilt since September 11th: the increase from 3rd quarter 2001 to 2004 is about 33 percent. 

Surplus is in fact higher than during any time over the past five years. This is likely to be the 

result of the higher prices during the recent hard market, which has generated substantial 

amounts of premium revenue. 

Figure 7.2 

Policyholders' Surplus by Quarter 

All Insurers Providing Coverage in TRIA-Eligible Lines

0

50

100

150

200

250

300

350

400

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

1999 2000 2001 2002 2003 2004

Quarter

Surplus ($billions)

 Source: A.M. Best

We next examine ratios that measure financial strength. To examine whether there were 

differences in performance by size and markets, we categorize the insurers by size in the same 

way as we did in Chapter 2. All insurer groups writing more than $10 million in premiums in the 

TRIA-eligible lines were assigned to categories, defined by ranking by direct written premiums 

that broadly reflect the range of markets they serve. These categories are as follows: 

● Top 25 Insurers – comprised of large national insurer groups generally writing in most or all 

states. 

● Insurers 26 to 50 – Approximately half national insurer groups, half large regional insurer 

groups, including some specialty writer groups. 

● Insurers 51 to 75 – Predominantly mid-size regional insurer groups. 

● Insurers 76 to 100 – Predominately smaller regional groups and some large groups providing 

insurance in only one or two states. 

● Insurers 101 + – Remaining insurer groups, mainly providing coverage in one or two states. 

Comparison of current premiums with surplus is an important measure of ability to bear 

unanticipated loss relative to loss that has been priced for in the underwriting process. All else 

equal, a higher premiums-to-surplus ratio signals lower ability to bear unexpected losses. Figure 
 

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7.3 shows the premiums-to-surplus ratio from 3rd quarter 2000 to 3rd quarter 2004 for the 

insurers writing in the TRIA-eligible lines. As the figure shows, the ratio was at its highest in 

2002, because premium growth outpaced surplus growth over that time, due to the increased 

prices; the ratio declined only slightly by 2003 and declined by a greater amount over 2004, 

because of the growth in surplus and the weakening of price growth. 

Figure 7.3 

Net Premiums to Surplus

0.0

0.5

1.0

1.5

2.0

1-to-25 26-to-50 51-to-75 76-to-100 101-to-End Total

Category

Ratio

2000 2001 2002 2003 2004

 Net premiums are after adjustment for reinsurance. Total refers to the total industry providing coverage in the 

 TRIA-eligible lines.

 Source: A.M. Best.

The risk-based capital (RBC) ratio, the ratio of total adjusted capital to required risk-based 

capital, is an alternative measure of risk-bearing ability. The RBC ratio compares surplus 

directly to measures of risk. Risk-adjusted surplus is surplus after applying NAIC statutory 

subtractions to an insurer’s surplus. Risk-based capital is the amount of capital required to 

support the three broad risk categories identified by the NAIC: underwriting risk, investment 

risk, and credit risk. Insurance regulators use RBC ratios to assist in assessing whether a 

company has sufficient capital to absorb the risk of losses and remain solvent. Regulators have 

defined a series of trigger capital levels, such that, if an insurer’s total adjusted capital dips below 

one of the trigger levels, the regulator may take certain actions. In particular, the minimum 

trigger level, the authorized control level RBC, is a signal of solvency concern; that is, if a 

company’s total adjusted capital falls to this trigger (RBC ratios of 100 percent or less), the 

company’s solvency is in question. Such a company may be placed under the control of the 

regulator. 

Figure 7.4 shows the RBC ratio for all the companies writing commercial property and casualty 

insurance over the period year end 1999 to 2003.17 As the figure shows, the ratio was at a low 

point during 2001 to 2002, but the sector had rebuilt its risk-based capital to some extent by 

2003. 

 

17 In contrast to the data for the other graphs, pertaining to the insurer group of which the insurer writing coverage in 

TRIA lines is a component, this ratio is specific to individual companies. The categories shown in Figure 7.4 are 

developed from rankings of individual companies. The figure compares year-end data because the latest available 

data from the NAIC was year-end 2003. 
 

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Figure 7.4 

Regulatory Capital Adequacy 

Risk-Adjusted Surplus as a Multiple of Authorized Control Level Risk-Based Capital

0

1

2

3

4

5

6

7

8

1-to-25 26-to-50 51-to-75 76-to-100 101-to-End Total

Category

Ratio

1999 2000 2001 2002 2003

 Source: NAIC

The performance of this ratio is suggestive of ability to bear additional risk because it 

demonstrates that insurers have capital in excess of that required for known risks, which could be 

used to absorb losses from a terrorist attack without pulling the insurers below regulatory 

solvency minimums. This suggests that insurers could absorb some losses from unexpected 

terrorist attacks without having capital reduced below regulatory required minimums. However, 

the risk-adjustment formula for the required capital is not geared specifically to the loss or 

associated costs from terrorist attacks, so it does not take into account the capital needed to 

protect the insurer’s policyholders from subsequent losses from terrorism attacks. Also the value 

of the insurer’s investment portfolio may drop following a terrorist attack, lowering the insurer’s 

liquidity and, hence, its claims-paying ability until markets recover. 

The combined ratio measures the ability to generate profits from underwriting. It compares an 

insurer’s losses and expenses to premiums. A combined ratio of 90 percent leaves an 

underwriting profit of 10 percent. A ratio above 100 indicates that losses and expenses exceed 

premiums and there is an underwriting loss. This has often been the case, because insurers 

counted on investment income to generate a portion of overall revenues with which to cover 

losses and expenses. Figure 7.5 shows the changes in combined ratio from 3rd quarter 2000 to 

3rd quarter 2004. 
 

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Figure 7.5

Combined Ratio

0

20

40

60

80

100

120

140

1-to-25 26-to-50 51-to-75 76-to-100 101-to-End Total

Category

Ratio

2000 2001 2002 2003 2004

 Source: A.M. Best

As the figure shows, combined ratios of all categories were above 100 from 2000 to 2002, and 

especially in 2001. In 2003 and 2004, however they are all very close to, or less than, 100 

percent, again suggesting that insurers have quickly rebuilt underwriting profitability. 

The return on surplus is the profitability from both the insurer’s underwriting and investment 

activity, including unrealized capital gains. It is thus an overall measure of the insurer’s ability 

to generate business and add to capacity. Figure 7.6 shows the returns on surplus from 3rd 

quarter 2000 to 3rd quarter 2004. 

Figure 7.6 

Return on Surplus

-30

-20

-10

0

10

20

1-to-25 26-to-50 51-to-75 76-to-100 101-to-End TOTAL

Category

Ratio

2000 2001 2002 2003 2004

 Source: A.M. Best

As the figure shows, overall returns for these insurers were negative in 2001 and 2002, but 

recovered considerably in 2003 and again in 2004, reflecting the recovery in underwriting 

profitability and the gains in investment return. 
 

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7.3 Terrorism Coverage Post-TRIA 

We note at the outset that the potential insurance market outcomes immediately after the 

expiration of TRIA (short term) may differ from the longer-term outcomes in the terrorism 

insurance market without the Federal backstop. The discussion in this section is focused on the 

immediate impact of removing TRIA, and should not be interpreted as an assessment of longerterm outcomes. 

Survey Results and Implications 

The results of the surveys described in Chapters 4, 5, and 6 lead us to conclude that terrorism risk 

in much of the country is now and has been broadly insurable and that it is partially insurable 

even for attacks that could lead to large losses. We briefly restate the main results of the insurer, 

policyholder and reinsurance analyses. 

Terrorism risk insurance capacity has increased

Even as the TRIA deductible has risen over time (increasing the private market’s exposure), 

terrorism risk insurance take-up has continued to increase and insurers have written coverage on 

a similar or greater share of policies. Moreover insurer surplus, a major source of insurer 

capacity to write coverage, has exceeded pre-September 11th levels. 

Insurers are increasingly pricing terrorism risk insurance 

Fully 70 percent of policyholders with terrorism risk insurance in 2002 reported that they 

received coverage at no cost. Only 42 percent of policyholders in 2003 and 37 percent of 

policyholders in 2004 reported receiving free terrorism coverage. This decline in free terrorism 

risk insurance was observed as well for policyholders with locations in high risk areas. In the 

cities deemed as facing high risk of terrorism attack, more than 50 percent of policyholders 

received coverage at no cost in 2002, but less than 30 percent received free coverage in 2004. 

The insurer survey shows that coverage for terrorism risk was provided without an explicit price 

by more than 75 percent of insurers in 2002, 46 percent in 2003 and about 40 percent in 2004. 

Insurers reinsure a substantial portion of their retained risk, but reinsurance purchases have not 

increased 

Our survey results do not allow us to compare reinsurance purchases pre- and post-TRIA. The 

results do show that reinsurance is available and purchased, for a sizable portion of the retained 

risk. Seventy percent of insurers purchased reinsurance for TRIA-eligible risks in 2003. The 

results also indicate, however, that over the time period covered by our study, purchases of 

reinsurance have remained relatively flat. 
 

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Expiration of TRIA - Potential Insurance Market Outcomes 

TRIA provides publicly-subsidized reinsurance, essentially transferring risks associated with 

terrorism losses from the private to the public sector. Because TRIA was established as a 

temporary program, there is likely a range of expectations in the private market about the timing 

of its expiration. We should expect a general response not when TRIA actually expires, but 

rather when the market has fully internalized that TRIA will expire. We therefore evaluate the 

market response to a general expectation that TRIA will expire. 

We assess capacity in terms of the financial strength of insurers and reinsurers, which 

incorporates both balance sheet strength and operating performance. The range of market 

responses, including the amount of terrorism risk insurance coverage that is likely to be written, 

will vary over time. As such, the particular industry response immediately after the expiration of 

TRIA may differ from the long term response. In any given period, however, the amount of 

insurance and reinsurance written will likely be related to the amount of surplus held by insurers 

and reinsurers. 

Data from the industry show that total surplus of insurer groups (including U.S. authorized 

reinsurers) writing in TRIA-eligible lines was $373 billion at 3rd quarter 2004, $211 billion of 

which was surplus of the top 25 insurer groups. Not all this surplus is exposed to terrorism risk 

because not all insurers would be affected by a large terrorist attack. 

We consider the impact of a terrorist attack causing $50 to $60 billion in losses, substantially 

more than those of September 11th,18 and affecting the majority of insurers. Under assumptions 

about the distribution of losses in the market, such a very large attack could reduce surplus of 

insurers and reinsurers by 20 to 25 percent. 

Discussions with A.M. Best indicate that loss exposure to natural catastrophes significantly 

above 10 percent of surplus may raise ratings agency concerns. The degree of that agency’s 

concern depends on an insurer’s financial strength, ability to replace capital, and exposure to 

large scale attacks. The experience with natural catastrophe risk underwriting and assignment of 

agency ratings suggests that in order to avoid ratings downgrades, insurers may significantly 

alter their approach to terrorism risk insurance, once they are certain of TRIA’s expiration.19 

Reinsurers are likewise sensitive to the risk of ratings downgrades. Insurers typically limit 

reinsurance purchases to reinsurers with at least A-ratings, and reinsurance contracts often 

contain cancellation clauses triggered by ratings downgrades or reductions in reinsurer surplus.20

 

18 We consider losses of this size because terrorist attacks causing such losses are possible, hence may be considered 

in determinations of the level of coverage to be offered. 

19 Moody's also sees a rating impact potential should an insurer’s exposure to losses from terrorist attacks be more 

than 10 percent of policyholder surplus. Moody's is encouraging insurers with more than 10 percent of policyholder 

surplus so exposed to limit terrorism accumulations, use terrorism exclusions and purchase reinsurance or explore 

other risk transfer options. See James Eck et al, “Terrorism Risk Remains Material for Insurers as TRIA Expiration 

Looms,” Moody’s Special Comment, June 2005. 

20 Benfield Group Limited, “Outrageous Fortune: Reinsurance Market and Renewals Review,” January 2005, 13-

15. 
 

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Without the subsidized reinsurance provided by TRIA, several options are available to insurers 

to avoid the prospect of ratings downgrades: (1) continue to provide the same coverage but at 

higher market prices, and purchase additional reinsurance21 or raise capital to accommodate this 

coverage; (2) limit exposure (coverage); or (3) a combination of these responses. 

Overall, our assessment is that the immediate effect of the removal of the TRIA subsidy is likely 

to be less terrorism insurance written by insurers, higher prices and lower policyholder take-up. 

States have granted insurers conditional exclusions for terrorism risks after the expiration of 

TRIA. About half of all insurers report that on policies written in the first months of 2005 they 

do provide coverage that is comparable to TRIA-subsidized coverage for the term of the contract 

after the expiration of TRIA (i.e., the first months of 2006). Similarly, three quarters of 

policyholders report that their coverage begun in 2005 includes comparable terrorism coverage 

for the term of the contract after the expiration of TRIA. 

Consistent with our survey data, industry observers expect that some insurers will use these 

exclusions. Recent insurance broker reports of contract renewals post-TRIA confirm our survey 

results.22 Brokers report that some insurers are capping their loss exposure by writing separate 

limits on losses due to TRIA attacks and by applying aggregate limits to their exposure in locales 

thought to be at specific risk. 

Over time, we expect that the private market will develop additional terrorism insurance 

capacity. We anticipate that the initial response of premiums in the market will spur the buildup 

of surplus as insurers tap into capital markets; the development of private reinsurance and other 

risk-shifting mechanisms23; and additional mitigation and terrorism deterrence efforts by 

policyholders. 

 

21 Non-authorized reinsurers, which are not included in the data used in the assessment, could reportedly offer some 

$5 billion or more of additional capacity at higher prices. (Treasury meeting with reinsurers and representatives of 

the Reinsurance Association of America, March 2005.) 

22 April 2005 discussions with Edward Ryan, Aon; Jill Dalton and Steven Lundin, Marsh; Roderick Thaler and 

others, Willis. 

23 After September 11th five new Bermuda reinsurers with capital of $6.4 billion (2001) were formed to take 

advantage of the hard markets. There is also interest by hedge funds in catastrophe reinsurance. Because these 

funds seek investments with quantifiable risks, uncorrelated with their existing portfolios, it is not clear how much 

capital they may make available over the longer term for terrorism risk reinsurance. See Benfield, “Outrageous 

Fortune,” Op. Cit., pp. 18-19. 
 

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Absence of Macroeconomic Effects 

Reaching firm, precise quantitative conclusions about the macroeconomic effects of providing 

subsidized terrorism insurance is, quite likely, impossible. Economic decisions concerning 

business investment, location of production plants, and individuals’ residential choices may well 

be influenced by the threat of terror activity for some time to come. Activities in high-risk areas 

may be reduced or, more likely, shifted. For example, manufacturing plants and office buildings 

may be located further from central cities. Such relocation may then stimulate economic activity 

in outlying areas. Moreover, industries and occupations engaged in security-enhancing activities 

may also be stimulated. An important factor impacting all such decisions will be the cost of 

insurance. 

As discussed in Chapter 2, in late 2001 and 2002, there was concern that there could be 

macroeconomic effects associated with the transition between a world in which terrorism 

coverage was provided for a negligible price and one where terrorism risk was considered a nonnegligible risk. The economic climate during the discussion of TRIA and its enactment was 

highly uncertain. Industrial production had peaked in mid-2000, and by September 2001 had 

already fallen more than 5 percent. The terrorist attacks of September 11th created 

macroeconomic uncertainties that most analysts believed would translate into a further sharp 

downturn in economic activity that would last at least two additional quarters. Nonresidential 

building activity tumbled about 33 percent at an annual rate in the fourth quarter of 2001, and 

continued to experience declines well in excess of 15 percent in the subsequent three quarters. It 

was difficult at the time to assess whether the substantial declines in nonresidential building were 

due to the chilling effect of terrorist activity, terrorism insurance issues or the result of a 

cumulative unwinding of activity more typical of a recession. 

Helped by tax cuts and monetary stimulus, the economy has since improved substantially. GDP 

growth rose from just 2.3 percent in 2002 to 3.9 percent in 2004 (fourth quarter over fourth 

quarter). The unemployment rate, which was 6 percent in December 2002, fell to 5.1 percent in 

May 2005. 

Despite the rising economy and the enactment of TRIA, nonresidential building has rebounded 

only slightly. Nonresidential building is currently 4.2 percent higher than the trough reached in 

the first quarter of 2003, but remains substantially below the previous peak. From our current 

perspective it appears that neither the potential lack of terror risk insurance nor a general 

economic downturn were responsible for weakness in nonresidential building activity. 

In any case, nonresidential building is only 2.2 percent of GDP, and commercial office 

construction is only 12.2 percent of the nonresidential building total. When the economy is 

fragile, concerns over weakness even in very small sectors of the economy (nonresidential 

construction) can loom large, and appropriately so. Such concerns recede as the economy 

strengthens. Given the small size of nonresidential and commercial office construction, 

stimulating this sector (whether through TRIA or otherwise) would be neither effective nor 

warranted.