Terrorism Insurance: Status of Efforts by Policyholders to Obtain Coverage
Published: 2008-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Terrorism Risk Insurance Act of 2002 (TRIA) specifies that the federal government assume significant financial responsibility for insured losses on commercial properties resulting from future terrorist attacks. While TRIA has been credited with stabilizing markets for terrorism insurance after the September 11, 2001, attacks, questions remain as to whether certain policyholders, especially those located in large urban areas viewed as being at high risk of attack, may still face challenges in obtaining coverage. GAO was asked to conduct a study to describe (1) whether the availability of terrorism insurance for commercial properties is constrained in any geographic markets, (2) factors limiting insurers' willingness to provide coverage, and (3) advantages and disadvantages of selected public policy options to increase the availability of such insurance. To address these objectives, GAO analyzed available data and interviewed industry participants, including those with expertise in specific geographic markets considered to be at high, moderate, or low risk of attack (Atlanta, Boston, Chicago, New York, San Francisco, and Washington, D.C.). GAO provided a draft of this report to the Department of the Treasury and the National Association of Insurance Commissioners (NAIC). Treasury and NAIC said the report was informative and useful.
section_title: What GAO Found
paragraphs: While some owners of high-value properties in major cities may face initial challenges obtaining terrorism insurance coverage compared with most policyholders nationwide, they generally have reported that they could meet current coverage requirements through a variety of approaches. Many industry participants said that terrorism insurance is currently available nationwide at prices viewed as reasonable and that the TRIA program was a key reason for these favorable conditions. However, some policyholders that own large, high-value properties in densely built urban areas viewed as at high risk of attack, particularly in Manhattan and to a lesser extent in Chicago and San Francisco, may still face initial challenges obtaining desired amounts of coverage at prices viewed as reasonable, according to industry participants. To address these challenges, some policyholders purchased coverage from a large number of insurers, which can be a time-consuming and complicated process for policyholders and their insurance brokers. Others purchased coverage in a separate policy (rather than as part of an overall property insurance package) which may be more costly, or self-insured. While TRIA specifies that the federal government assume substantial financial responsibility for insured losses associated with future terrorist attacks, the steps insurers take to manage the risks they do face appear to be the primary reason some policyholders face challenges in obtaining coverage. Insurers said they seek to mitigate potential terrorism losses by limiting the amount of property coverage that they offered in specific areas of cities, such as downtown locations or areas considered to be at high risk of attack. These risk mitigation efforts generally make obtaining coverage more difficult or costly for policyholders with high-value properties in these areas, according to a variety of sources GAO contacted. Industry participants also said that the availability of reinsurance (insurance for insurers) and the views of rating agencies can limit the availability of coverage in such cities. Industry participants had no consensus on whether TRIA should be modified or additional actions taken to increase the availability of terrorism coverage, and identified advantages and disadvantages of selected policy proposals that have been included in legislation, discussed in prior GAO reports, or suggested by industry participants to increase such coverage. A proposal to increase the federal government's current responsibility under TRIA for the insured losses associated with a future attack could make insurers more willing to offer coverage in affected areas. For example, one large insurer said that the proposal might make the company more willing to immediately offer additional coverage in cities viewed as at high risk of attack. However, any such benefits might be limited for reasons including the widespread insurance market disruptions that may result from another attack. This proposal, along with several other proposals analyzed in the report, also would increase the federal government's exposure to the losses associated with terrorist attacks, which is already 85 percent of losses up to $100 billion annually, after an industry deductible.

section_title: Letter
paragraphs: The terrorist attacks of September 11, 2001, are estimated to have resulted  in insured losses amounting to $32.5 billion, as of 2006. Subsequent to the  attacks, insurers largely stopped offering terrorism insurance coverage to  commercial property owners, which raised significant concerns about  potential negative economic consequences. For example, existing real  estate development projects faced delays and cancellations following  September 11 because they could not get terrorism coverage, which led to  concerns that the economy, which was already suffering as a result of the  attacks, would further deteriorate. To help restore confidence and stability  in property insurance markets, Congress enacted and the President signed  the Terrorism Risk Insurance Act of 2002 (TRIA). Under TRIA, insurers  generally are required to offer terrorism insurance to their commercial  clients on the same terms they offer other types of insurance, and, in the  event of a future terrorist attack, are responsible for paying a deductible of  20 percent of their direct earned premiums from the previous year to cover  related losses. The federal government is responsible for covering 85  percent of the insured losses up to a maximum of $100 billion on an annual  basis after insurance companies pay the deductible. While TRIA, which was  reauthorized in 2005 and again in 2007, generally has been credited with  stabilizing markets for commercial property insurance, some building  owners, Members of Congress, and others remain concerned that there may  still be gaps in coverage. In particular, they have expressed concerns about  the ability of policyholders that are located in large urban areas viewed as  being at high risk of attack to obtain terrorism insurance coverage.
To assist the committees in their oversight efforts of the insurance  industry, you asked that we conduct a study to determine if specific  markets in the United States have any unique constraints on the amount of  terrorism insurance available and evaluate options to enhance coverage.  As agreed with your staff, we are providing a report that describes   (1) whether the availability of terrorism insurance for commercial  properties is constrained in any geographic markets and the effect of any  constraints on pricing and coverage amounts, (2) factors limiting insurers’  willingness to provide coverage, and (3) advantages and disadvantages of  some public policy options to increase the availability of property  terrorism insurance.
To assess whether the availability of terrorism insurance for commercial  properties is constrained in any geographic markets, we compiled and  analyzed available data on insurance and reinsurance companies,  terrorism insurance take-up rates, and terrorism insurance pricing. We  also interviewed more than 100 industry participants with nationwide  perspective and expertise in specific geographic markets, including  Atlanta, Boston, Chicago, New York, San Francisco, and Washington, D.C.  We selected these high-, moderate-, and low-risk markets based on an  industry analyst’s ranking of cities by risk of terrorism. Our interviews  included insurer and policyholder trade associations, policyholders in a  variety of industries, national and regional insurance and reinsurance  brokers, insurance and reinsurance companies, and state regulators. To  identify the factors that may contribute to insurers’ willingness or ability  to provide terrorism insurance coverage, we selected large, national  insurance companies to interview based on their market share in the  states we studied. These national insurance companies held from 37 to 52  percent of the market share in the states we studied. In addition, we  interviewed representatives of regional insurance companies in our  selected markets. We also spoke with risk modeling firms and credit rating  agencies. To obtain views on the advantages and disadvantages of some  public policy options that have been proposed in legislation, discussed in  our prior reports, or suggested by industry participants to increase  insurers’ capacity (that is, their willingness or ability) to provide terrorism  coverage, we relied on our interviews with industry participants described  above. We also interviewed academics who have written on the topic of  terrorism insurance, research organizations, and consumer interest  groups. Although we selected industry participants to provide broad  representation of market conditions geographically and by industry, the  number of participants may not necessarily be representative of the  universe of insurers, insurance brokers, policyholders, and regulators. As a  result, we could not generalize the results of our analysis to the entire  national market for commercial property terrorism insurance. Appendix I  contains additional details of our objectives, scope, and methodology.
We conducted our audit in California, Georgia, Illinois, Massachusetts,  New York, and Washington, D.C., from January 2008 to September 2008, in  accordance with generally accepted government auditing standards. Those  standards require that we plan and perform the audit to obtain sufficient,  appropriate evidence to provide a reasonable basis for our findings and  conclusions based on our audit objectives. We believe that the evidence  obtained provides a reasonable basis for our findings and conclusions  based on our audit objectives.
subsections: section_title: Background
paragraphs: TRIA requires private insurers to offer terrorism coverage in commercial  property and casualty insurance, including workers’ compensation  insurance policies. Insurers must make terrorism coverage available to  their policyholders on the same terms and conditions, including coverage  levels, as other types of insurance coverage. For example, an insurer  offering $100 million in commercial property coverage must offer $100  million in coverage for property damage from a certified terrorist attack.  However, insurers could impose an additional charge for the coverage and  policyholders, except in workers’ compensation policies, generally have  the option of not purchasing it.
Under TRIA, the federal government is to reimburse insurers for a portion  of their losses from certified terrorist acts. Specifically, the federal  government would reimburse insurers for 85 percent of their losses after  the insurers pay a deductible amounting to 20 percent of the previous  year’s direct earned premiums. The federal funding is activated when  aggregate industry losses exceed $100 million and is capped at an annual  amount of $100 billion.
Originally enacted as a 3-year program, Congress has reauthorized the  program twice and recently extended it until 2014. In December 2005,  Congress passed the Terrorism Risk Insurance Extension Act that  increased the required amount insurers would have to pay in the aftermath  of a terrorist attack. In December 2007, Congress approved the Terrorism  Risk Insurance Program Reauthorization Act and eliminated the  distinction between terrorist acts carried out by foreign and domestic  actors. It also clarified language on insurers’ liability, stating that insurers  are not responsible for losses that exceed the federal government’s annual  liability cap of $100 billion.
Commercial property insurance policies can be simple or complex,  depending on the value and location of the properties being insured.  Property owners may insure properties individually or consolidate  multiple properties in a portfolio and insure them with a single policy. The  benefits of grouping properties include spreading the cost (premium)  across more than one building on the premise that all buildings in a  portfolio are unlikely to be damaged by the same peril in the same event.  Policies with high insured values can require multiple insurers to provide  coverage, with each providing a portion of the coverage up to the full  amount of the policy, because the total insured value is too great for any  one insurer to absorb (see fig. 1). According to a representative of a large  brokerage firm, policyholders typically buy property coverage, including  terrorism coverage, through one all-risk policy, which insures losses from  multiple perils.
Policyholders generally do not purchase terrorism insurance in amounts  that would cover the total replacement value of the insured property, but  rather purchase insurance in amounts that reflect the maximum amount of  foreseeable losses that could occur in a terrorist attack. Also,  policyholders may determine the amount of terrorism coverage to  purchase based on amounts required by a lender providing the mortgage  on the property.
States have primary responsibility for regulating the insurance industry in  the United States, and state insurance regulators coordinate their activities  in part through the NAIC. The degree of oversight of insurance varies by  state and insurance type. In some lines of insurance, insurers may file  insurance policy forms with state regulators that help determine the extent  of coverage provided by a policy by approving the wording of policies,  including the explicit exclusions of some perils. According to a NAIC  representative, while practices vary by state, state regulators generally  regulate prices for personal lines of insurance and workers’ compensation  policies but not for commercial property/casualty policies. In most cases,  state insurance regulators perform neither rate nor form review for large  commercial property/casualty insurance contracts because it is presumed  that businesses have a better understanding of insurance contracts and  pricing than the average personal-lines consumer. Reinsurers generally are  not required to get state regulatory approval for the terms of coverage or  the prices they charge.
section_title: Terrorism Insurance Generally Is Available Nationwide, although Some Policyholders Had to Take Additional Steps to Obtain Coverage
paragraphs: According to a variety of sources, commercial property terrorism  insurance currently appears to be widely available on a nationwide basis  at rates viewed as reasonable, largely due to the TRIA program and the  current “soft” insurance market. However, some policyholders in urban  areas viewed as being at higher risk of a terrorist attack, particularly in  Manhattan and to a lesser extent in some other high-risk cities such as  Chicago and San Francisco, may be forced to take additional steps to  overcome challenges they may have initially faced in obtaining desired  amounts of coverage at prices viewed as reasonable. Policyholders  generally have been able to obtain desired or required amounts of  terrorism coverage by increasing the number of carriers in what already  may be large and complex insurance programs, adding to what can be a  time-consuming and complicated process for policyholders and their  insurance brokers. Others secure needed coverage by purchasing all or a  portion of their terrorism coverage in a separate insurance policy, or self- insuring through a captive insurance company.
subsections: section_title: Terrorism Insurance Generally Is Available Nationwide at Rates Viewed as Affordable Largely Due to the TRIA Program and the Soft Insurance Market
paragraphs: According to data compiled by two large insurance brokers, a majority of  their commercial clients nationwide purchase terrorism insurance  coverage, and the premium rates for such coverage generally have been  stable in recent years. As shown in figure 2, one of these brokers reported  that approximately 60 percent of its clients purchased some form of  terrorism coverage each year from 2005 through 2007. Another large  insurance broker reported that take-up rates for its large property clients  have remained between 60 percent and 65 percent since 2004. According  to a large broker, the Northeast, which includes New York City, has the  largest percentage of companies that purchase terrorism coverage for  properties, with about 70 percent having purchased it in 2007. Real estate  companies account for the largest percentage of clients that purchased  terrorism insurance coverage, with more than 80 percent of these clients  having done so in 2007. Manufacturing and construction companies had  the lowest purchase rates, with 45 percent and 34 percent, respectively,  having purchased coverage in 2007. Data collected by one of these large  brokers also show that the premiums that their clients paid for terrorism  coverage, expressed as a percentage of the commercial property  premiums, generally have been stable at around 4 percent since 2003 (fig.  2). Another large broker also reported that premiums have been stable at  around 4 percent, on average, since 2006.
An official from one of these brokerages told us steady purchase rates  between 2005 and 2007 may indicate that policyholders who want to  purchase terrorism coverage have been able to purchase it. According to  representatives from these two brokers, the primary reason why  approximately 40 percent of clients did not purchase terrorism coverage is  that they may not have perceived themselves at risk of a terrorist attack,  particularly those in nonurban areas or those in industries perceived to be  at lower risk of attack, such as manufacturing. Other reasons clients may  not have purchased coverage include the absence of lender requirements  or the cost of coverage, according to one large broker.
Information we collected in a range of interviews with policyholders,  national and regional brokers, insurers, and others was consistent with the  view that terrorism insurance coverage is available nationwide at premium  rates viewed as reasonable. Several policyholders we contacted that own  large and small portfolios of real estate throughout the United States,  including national hotel chains, sports stadiums, office towers, shopping  malls, and residential buildings, told us they could obtain as much  terrorism coverage as they sought to obtain. Some policyholders and  regional brokers also said that terrorism insurance premiums continue to  decline while the quality of coverage improves. For example, a  representative from a commercial real estate company that owns large  office towers, a luxury resort, and an industrial property in major U.S.  cities said the company recently increased its terrorism coverage by more  than 50 percent and decreased its premium by more than 20 percent. In at  least one state, an insurer and state regulator told us terrorism coverage  may be provided at no additional cost to policyholders, especially those  with properties perceived to be at low risk of a terrorist attack.
Insurers, policyholders, and other industry participants cited the TRIA  program and the current soft, or competitive, market as the key reasons  that terrorism coverage generally has been available nationwide. Without  the federal backstop for potential insurance losses related to terrorism,  industry participants said that coverage availability could decline  substantially. For example, some insurers told us the amount of terrorism  coverage they provide would decline—by more than 95 percent for one  insurer—without the TRIA provision that provides reimbursement for  insured losses that exceed the amount of an insurer’s TRIA deductible. In  a soft market, insurance is widely available and sold at a lower cost,  making it easier for buyers to obtain insurance. According to insurance  industry participants, recent strong profits, increases in investment  income, and a lack of large losses from major catastrophes have  contributed to insurers’ ability to increase their capital levels in recent  years. According to some brokers, high levels of capital have increased  insurers’ capacity and willingness to provide terrorism insurance  coverage.
However, some interviewees cautioned that another terrorist attack or  “hardening” of the general terrorism insurance market could reduce the  current supply of terrorism insurance coverage and increase pricing. In the  past, insurers frequently have responded to catastrophic events by cutting  back coverage significantly or substantially increasing premiums for  policyholders. For example, such reactions took place in the Florida  market after Hurricane Andrew in 1992, in California after the Northridge  earthquake of 1994, and more widely following the September 11 attacks.  A broker with a large national firm told us that the insurance industry has  remained highly sensitive to the potential financial consequences of  another terrorist attack since September 11. According to one industry  analyst, even a modest terrorist attack in the future could cause significant  fear and concern in the market and lead to increases in prices and  restrictions on availability. Moreover, some industry analysts said that  insurers could suffer significant losses for a variety of other reasons, such  as the costs of a large hurricane or earthquake or declines in the values of  their investment portfolios, which might make them less willing to offer  terrorism coverage under current terms and pricing.
section_title: Some Policyholders in Major Cities Have Faced Initial Challenges in Obtaining Desired Terrorism Coverage at Rates Viewed as Favorable
paragraphs: While terrorism insurance coverage generally is available nationwide,  many industry participants reported that some policyholders in major  cities viewed as being at higher risk of terrorist attack, particularly in  Manhattan, may initially experience challenges in obtaining desired  amounts of coverage. Specifically, industry participants said that owners  of large, high-value properties in financial districts or downtown locations,  or near government offices or transit hubs, may face initial challenges in  obtaining coverage in their all-risk property policies. For example, a  policyholder with large office and retail properties in New York, San  Francisco, and Chicago told us only a few insurers were willing to offer it  coverage that it considered expensive and that provided only half of the  $1.5 billion in coverage sought. In spite of these initial challenges, this  policyholder was able to obtain the needed coverage by taking other  approaches that will be discussed later in this report.
Brokers and policyholders mentioned these difficulties have been more  severe in certain locations in Manhattan than anywhere else. In particular,  they said the area surrounding Times Square—or midtown—and lower  Manhattan, which contained the World Trade Center, presents difficulties  because of the dense concentration of buildings, perceived risk of a future  terrorist attack, and the overlapping insurance needs of building owners  and tenants. For example, one broker active in the New York market told  us of an approximately 15-block stretch of midtown Manhattan with a high  concentration of property values in which each property is valued at $1  billion or more, creating strong demand by building owners for limited and  expensive coverage. Another broker told us the availability of terrorism  coverage is most constrained in the area surrounding the World Trade  Center site in lower Manhattan. The brokers said retail clients that would  like to establish themselves in this area worry about not enough coverage  being available for terrorism, flood, and fire damage.
Representatives from large national brokers, as well as insurance  companies and other industry participants, said that certain policyholders  in Chicago and San Francisco also may face initial challenges in obtaining  terrorism insurance coverage, although to a lesser extent than in  Manhattan. As is the case in Manhattan, these policyholders typically own  large buildings in proximity to other buildings and generally are located in  financial districts or downtown locations. While owners of large buildings  in such locations may face challenges in obtaining coverage, a broker told  us that even a small building might be difficult to insure for terrorism risk  if it were located near larger properties in high-risk areas.
Many industry participants reported that premiums were higher in cities  considered to face greater financial risks from the likelihood of terrorist  attacks occurring there, adding to the challenge of obtaining terrorism  coverage. For example, according to one large insurance broker, terrorism  insurance premiums in New York City can be twice as high as prices for  similar buildings in other cities considered to be at high risk of a terrorist  attack, and more than five times higher than prices in lower-risk cities. The  premium amount dedicated to insuring properties in certain locations  against terrorism risks may, on a relative basis, significantly exceed the  amount necessary to cover such risks in other geographic areas. For  example, a broker in the San Francisco Bay area told us average terrorism  pricing for owners of certain buildings there can be from 20 to 30 percent  of the all-risk property premium, whereas the national median was around  4 percent in 2007.
While some policyholders in high-risk cities face challenges, we note that  this is not necessarily the case in all such cities. In particular,  policyholders we contacted with properties in Washington D.C. said while  it may have been difficult or more expensive to obtain terrorism coverage  immediately following September 11, coverage is now readily available  and affordable. For example, policyholders we interviewed that own  properties in the city said they were able to include full terrorism coverage  in their all-risk property policies even though they own or manage  commercial and residential properties in proximity to potential targets  such as the White House, the Capitol, subway stops, or foreign embassies.  Industry participants said that policyholders generally experience fewer  challenges in Washington, D.C. because the buildings are not as high or as  densely concentrated as in downtown areas of other high-risk cities.
section_title: To Obtain Full Terrorism Coverage, Policyholders May Add Additional Carriers to Existing Insurance Programs, Purchase Terrorism-only Policies, or Self-Insure
paragraphs: Policyholders that have experienced initial difficulty obtaining terrorism  coverage in their primary all-risk property policies generally have been  able to meet current terrorism insurance requirements by one of several  approaches or a combination thereof, according to industry participants.  For example, some policyholders and brokers reported obtaining coverage  from a greater number of insurers in what may already have been a  complex insurance program. As discussed earlier, policies with high  insured values can require multiple insurers to provide portions of  coverage up to the full amount of the policy.  However, a few  policyholders told us more insurers are now required to assemble  terrorism coverage because insurers are taking smaller amounts of risk  (that is, offering smaller amounts of coverage), requiring a greater number  of insurers to fill out an insurance program and adding to what can be a  time-consuming and complicated process for policyholders and their  insurance brokers. Some policyholders said more than 20 insurers may  participate in a single insurance program. One policyholder told us more  than 40 insurers participate in its property insurance policy. Layering an  insurance program has costs, especially for large and complex programs.  A representative of a large hotel chain told us that layering insurance is  “painful” because of the effort involved in convincing insurers to become  comfortable with a risk.
Moreover, several brokers and policyholders reported purchasing property  terrorism insurance in a stand-alone policy to cover portions or all of the  required coverage. For example, the owner of multiple large office  buildings in Manhattan’s midtown and downtown financial districts told us  the company purchased all of its terrorism coverage as a stand-alone  insurance policy because it could obtain just half of the $800 million in  coverage sought. Another policyholder that owns a nationwide chain of  hotels, with properties in Manhattan, Chicago, and San Francisco, decided  to purchase all of its terrorism coverage in a stand-alone policy to avoid  the high and inconsistent cost of embedding terrorism coverage in its all- risk policy. A representative of this policyholder noted that cost was a  particular issue following the 2005 hurricane season when property  insurance prices generally increased. Some policyholders told us stand- alone terrorism coverage was more expensive than obtaining coverage as  part of an all-risk property policy. However, data from a national broker  show that the difference in pricing between stand-alone coverage and  coverage included in an all-risk policy was small for most of 2007, with the  median price for stand-alone coverage at 5 percent of the overall property  premium compared to around 4 percent for coverage in the all-risk  program.
Finally, according to brokers and policyholders some policyholders have  used self-insurance as a means to assemble coverage. That is, they placed  all or a portion of their terrorism coverage in a captive insurance  company, which insures the risks of the owner. For the purpose of  insuring property terrorism risk, a captive insurer would generally be a  wholly owned insurance company within the corporate structure of the  property owner. The typical owners of captives used for insuring terrorism  risk are large corporations that own large or well-known buildings in  major urban areas and have not been able to obtain coverage through  other means. For example, a policyholder we contacted sought to obtain  $1.2 billion in property coverage for multiple buildings in Manhattan,  including terrorism coverage, which would cover the total replacement  cost of the largest building in its portfolio. However, a representative of  this policyholder told us the company could obtain just $500 million of all- risk property insurance that included terrorism coverage, leaving a gap of  $700 million in coverage for terrorism risk. The policyholder considered  filling the gap by obtaining terrorism coverage in the form of a more  expensive stand-alone insurance policy, but decided instead to establish a  captive insurance company to supplement the coverage provided in the  all-risk policy and make up the $700 million difference. Another  policyholder with a lender requirement to purchase about $1.6 billion in  coverage on a single building in midtown Manhattan was unable to obtain  sufficient terrorism coverage in an all-risk policy in 2008. This policyholder  purchased an all-risk policy that excluded terrorism risk and assembled  property coverage for terrorism risk in the form of a $250 million stand- alone policy and about $1.3 billion in a newly formed captive insurance  company. Although these examples show policyholders may create  captive insurance companies for the sole purpose of insuring terrorism  risk, this approach may not be typical of the way in which captives are  used. Representatives of two large insurance brokers said most  companies simply add terrorism risk to captives that already have been  established to cover other insurance risks, such as environmental and  product-recall risks.
section_title: Insurer and Reinsurer Efforts to Mitigate Their Risks Appeared to Be Why Certain Policyholders Faced Initial Challenges in Obtaining Terrorism Insurance Coverage
paragraphs: While TRIA limits insurers’ potential losses from a terrorist attack, the  efforts of insurers’ to manage the remaining risks they faced appeared to  be the primary reasons for certain policyholders experiencing initial  challenges in obtaining desired amounts of coverage at prices they viewed  as reasonable. To mitigate their risks, many insurers set limits on the  amount of coverage that they would provide to policyholders in confined  geographic areas within a city, such as downtown locations or financial  districts where many large buildings are clustered, or in specific areas of  cities considered to be at high risk of attack. According to a variety of  sources we contacted, these limits generally make obtaining coverage  more difficult or costly for certain policyholders in these areas. Further,  industry participants and analysts said that the availability of reinsurance  and the views of credit rating agencies also may limit the supply and  increase the price of terrorism insurance coverage in certain high-risk  cities.
subsections: section_title: Insurers’ Concerns about Amounts of Future Terrorism Losses Influence Their Willingness to Provide Coverage, Affecting Availability and Price in Certain Cities
paragraphs: Representatives from several insurance companies we contacted said that  despite the TRIA financial backstop, they remain significantly concerned  that a future terrorist attack would result in substantial losses. In the event  of another terrorist attack, industry participants said that certain large  insurers may face TRIA deductibles that would result in losses of billions  of dollars. For example, one of the largest insurers providing commercial  property coverage would face a $5 billion TRIA deductible based on 2007  data. The representative of one large insurer said that the company’s TRIA  deductible was three times the net losses the company suffered due to the  September 11 attacks. Furthermore, even a terrorist attack that caused  losses below the $100 million TRIA program trigger could cause  substantial losses to a small insurer. For example, the company surplus  might be exhausted from paying the entire loss, according to the  representative of a small insurer.
Insurers said that they seek to mitigate potential losses from a single  terrorism attack by limiting the amount of property coverage that they  offer in confined geographic areas within cities. For example, some  insurers told us that they would not insure certain types of properties,  buildings over a certain size, or buildings near others that might be  considered terrorist targets. In addition, several large insurers and brokers  told us that insurers limit the terrorism insurance they provide in these  areas to amounts well below their TRIA deductible.
To help insurers determine how much risk, or coverage, they can write in  any given location, several industry participants we interviewed said  insurers often use computer models to estimate the effect, or severity, of  terrorist attacks on their existing book of business. Using models available  from risk-modeling firms, insurers can map the locations of properties  they cover as well as other types of coverage they provide in the area such  as building contents, business interruption, or workers’ compensation.  Therefore, insurers can consider the extent to which one terrorist attack  could trigger losses among multiple lines of insurance. The models also  can map the locations of nearby properties considered to be potential  terrorist targets. With these mapped locations, an insurer is then able to  identify areas where it has the greatest aggregated exposure within a city.  The modeling program places a circle around a specific location, such as a  building in the insurer’s book or a potential terrorist target, and aggregates  the amount of exposure an insurer has within this defined area. These  models take into account the severity of various attack scenarios on  properties in the area (for example, a 5- or 10-ton truck bomb) and allow  users to quantify potential losses under different attack scenarios.
Insurers we interviewed noted that they are not as comfortable with the  estimates of the probability, or frequency, of an attack, from these models  and, therefore, make more limited use of this information. While insurers  and risk-modeling firms have access to large historical databases and  scientific studies of the frequency and severity of natural catastrophes,  such as hurricanes, the data on terrorist attacks are limited. Furthermore,  according to industry analysts, the tactics, strength, and effectiveness of  terrorist groups can be very unpredictable, so predicting the frequency of  such attacks is very difficult and perhaps impossible. For example,  terrorists might respond to increased security measures in one area by  shifting attention to more vulnerable targets in another. Without more  information, industry analysts note that it is difficult for modeling firms to  make projections about the capability and opportunities of terrorists to  undertake future attacks.
While insurers find estimates of the probability of a terrorist attack of  limited use, they often use the estimates of the severity of potential attacks  in determining the amount of coverage they are willing to provide.  Considering potential attack scenarios and estimated losses from the  models, insurers impose internal limits, referred to here as aggregation  limits, on the amount of all types of coverage they will offer in defined  areas. Depending on the amount of capital and risk tolerance of the  company, insurers determine the amount of coverage they are willing to  provide in defined geographic areas within a city, such as in 250-foot, 500- foot, or quarter-mile circles around certain landmarks or areas where the  insurer has high concentrations of risk. Insurers then monitor the amount  of coverage that they provide in these areas on an ongoing basis to ensure  that they do not exceed their aggregation limits. As shown in figure 3, an  insurer might decline to provide any coverage for a new property since  adding the property to the book of business would exceed the insurer’s  aggregation limit on exposures within the defined area. Alternatively, an  insurer might charge a higher price or offer a lower coverage limit if  adding the property would exceed the aggregation limit.
The amount of coverage insurers are willing to provide in these defined  areas may change frequently as new clients or properties are added to or  removed from their books of business. An insurer may have available  capacity in a specific area one month, but be near its limit the next. For  example, one policyholder noted that her real estate investment company  contacts its insurer before considering acquiring a new property to  determine if the insurer has capacity where the new property is located.  Although the insurance company may decide it can provide property  insurance for the building at the time of the request, the policyholder said  that when the acquisition is completed several months later, the insurance  company may no longer have the capacity available to insure the building.  In that case, the policyholder said that the company might have to  purchase a stand-alone terrorism policy for that particular building, which  the policyholder reported as being more expensive than simply adding it to  the existing portfolio. As a result, the policyholder said it might no longer  be profitable for the company to acquire the new building. In some cases,  this policyholder said the company has canceled or deferred an acquisition  until it simultaneously disposed of a building in the same area to be sure  that the insurer would have capacity available for the new building.  However, several other policyholders we interviewed said that any  concern about the availability of insurance has not affected their  companies’ acquisitions or development projects.
section_title: Availability of Reinsurance Also Can Affect Insurers’ Willingness to Provide Terrorism Coverage
paragraphs: Insurers and other industry analysts cited the limited availability of  reinsurance as another factor influencing insurers’ willingness to provide  terrorism coverage in certain areas. Reinsurance plays a crucial role in  insurance markets by permitting primary insurers to transfer some of the  risks that they incur in offering coverage. In so doing, reinsurance may  allow primary insurers to offer additional coverage than otherwise would  be the case while mitigating potential losses.
Insurers and other industry participants we contacted said that  reinsurance for terrorism risk, which largely was unavailable after  September 11, continues to be expensive and available in limited amounts.  In a 2004 report, we found that reinsurers had reentered the terrorism  insurance market cautiously, but that the amount of coverage offered to  primary insurers was limited and the premium rates were viewed as high.  In conducting our current work, reinsurers and industry analysts said that  reinsurance capacity for terrorism has continued to increase for a variety  of reasons including an influx of new capital into the industry, the absence  of another terrorist attack, and improvements in insurers’ ability to  underwrite the risk. However, insurance brokers and large insurers with  significant exposures in urban areas told us that terrorism often still is  excluded in reinsurance contracts and that insurers have been able to  purchase only limited amounts of very expensive coverage. A recent  Congressional Budget Office report similarly found that the ability of  primary insurers to transfer terrorism risk to reinsurers is limited.
As has been the case with primary insurers, the efforts of reinsurers to  manage their aggregation levels appear to be why the coverage that they  offer for terrorism is limited. The provision in TRIA requiring insurers to  offer terrorism coverage at terms and conditions that do not differ  materially from other coverage does not apply to reinsurance transactions,  so these companies have discretion in deciding how much terrorism  coverage to offer to primary companies. Reinsurance company  representatives told us that the location of the insured risks is an  important factor that influences whether they will offer reinsurance and at  what price. For example, one reinsurance company representative said  that the company was less willing to write contracts covering properties in  cities viewed to be at high risk of terrorist attack. Others said that while  their companies still would be willing to reinsure an insurer’s book of  business with concentrations of risk in multiple high-risk cities, they might  offer more expensive coverage to compensate for the increased risk and  the increased capital they need to maintain to back up the risk.
section_title: Views of Rating Agencies Also May Influence the Availability of Terrorism Insurance for Some Policyholders in Areas Viewed as at High Risk of Attack
paragraphs: Insurers and reinsurers cited the views of rating agencies on the amount of  capital insurers allocate to terrorism risk and the location of risks they  insure as other factors influencing their willingness to provide terrorism  coverage. Rating agencies assess the financial strength of companies and  the credit quality of their obligations. Maintaining a high rating can be very  important for an insurance company’s business because a firm with a low  rating may, among other things, pay a higher interest rate on its debt. In  addition, several policyholders and lenders told us many lenders that  require their mortgagees to carry terrorism coverage also require that they  use only highly rated insurers. A variety of industry participants and  analysts told us that rating agencies’ views can be very influential on the  amount of capacity insurers decide to allocate to terrorism risk, affecting  how much coverage they provide to policyholders. For example, one  reinsurance industry analyst noted that the amount of capital rating  agencies required insurers to maintain to support terrorism risk was  significant. The representative said that these requirements may  encourage insurers not to offer this type of business because it is difficult  to maintain large amounts of capital and earn an adequate return on the  money.
In conducting their assessments, representatives of the rating agencies we  interviewed said they look closely at insurers’ terrorism exposures. They  request specific information about the types of policies insurers write, the  risks in their books of business, the steps insurers take to manage their  risks, and whether they have concentrations of risk in any areas, including  large urban areas or cities considered to be high risk. With workers’- compensation insurers, the rating agencies request information about the  number of employees at different locations across the different insureds.  As a result of discussions with the rating agency about the company’s  rating, rating agency representatives said that some companies have  purchased additional reinsurance or divested risk.
section_title: Various Proposals to Increase the Availability and Affordability of Terrorism Insurance Coverage Have Both Advantages and Disadvantages
paragraphs: Insurance industry participants and analysts did not express consensus on  whether TRIA should be modified or additional actions taken to increase  the availability of terrorism insurance coverage. They cited a variety of  advantages and disadvantages associated with five proposals that have  been offered in legislation, discussed in our prior reports, or suggested by  industry participants to increase the availability and perhaps limit the cost  of terrorism insurance. These proposals include lowering insurers’ TRIA  deductibles following large terrorist attacks, permitting insurers to  establish tax-deductible reserves for future terrorism losses, forming a  group of insurance companies to pool assets for terrorism losses,  facilitating the issuance of onshore catastrophe bonds through changes in  the tax code, and limiting certain state regulations and requirements. We  note that improvements in terrorism insurance coverage and pricing that  might result from the adoption of some of these proposals (such as tax- deductible reserves, insurance pools, and catastrophe bonds) likely would  take place over the longer term and that such proposals could increase the  federal government’s exposure to terrorist-related losses or otherwise  reduce federal revenues.
subsections: section_title: Option 1: Lowering Insurers’ TRIA Deductibles following Large Terrorist Attacks
paragraphs: One recent legislative proposal to increase the availability of terrorism  insurance coverage involved lowering the TRIA deductible for insurers  from future terrorist attacks after they experience losses. Under this  proposal, if there were a terrorist attack that resulted in more than $1  billion in damages, the insurer deductible under TRIA immediately would  be reduced to 5 percent (from 20 percent) for those insurers suffering  losses in the attack. Table 1 below shows the potential effect on the  deductibles of five large insurers under this proposal.
Because this proposal was designed to significantly reduce potential  industry losses, some insurers and industry participants we contacted said  that it might make them more willing to offer coverage in areas affected by  a future attack. As a result, supporters of the proposal argue that it would  stabilize insurance markets in affected areas and facilitate rebuilding and  recovery efforts. Moreover, the representative of one large insurer said  that if the deductible was lowered to 5 percent, the insurer immediately  would be willing to write more terrorism coverage, especially in  downtown areas of larger cities. Since the insurer would be able to access  the federal reimbursement at a lower level, the insurer’s potential losses  on its current book of business would be lower, thus freeing up additional  capacity for terrorism coverage without having to purchase reinsurance  from the private market to cover the additional risk.
While other insurers and industry participants we contacted were not  necessarily opposed to this proposal, they remarked that its effects might  be limited. As discussed previously, some large insurers already try to limit  potential losses associated with a future terrorist attack to levels well  below their current TRIA deductible of 20 percent of direct premiums.  Therefore, it is not clear what effect lowering the TRIA deductible would  have for such insurers in terms of the terrorism coverage that they are  willing to offer. Second, as also discussed earlier, there may be significant  market disruptions associated with another terrorist attack, which could  limit coverage availability even if the federal government did assume  greater liability for associated losses. For example, reinsurers, which are  not subject to TRIA’s requirements to make terrorism coverage available,  again might limit the coverage they were willing to provide in the wake of  another attack, which might limit the amount of coverage that primary  insurers could offer. In addition, as happened following Hurricane Katrina,  ratings agencies might increase the capital requirements or other  standards insurers must follow to maintain and improve their ratings,  potentially further limiting insurers’ willingness to continue providing  terrorism coverage in certain areas. Further, we note that lowering the  TRIA deductible would increase the federal government’s potential  liability for terrorism-related losses.
section_title: Option 2: Permitting Insurers to Establish Tax- Deductible Reserves for Future Terrorism Losses
paragraphs: Another option would permit insurers to establish tax-deductible reserves,  over a period of years, to cover the potential losses associated with future  terrorist attacks. Under current federal tax law, insurers can take a  deduction for losses that already have occurred and for setting aside  reserves for fair and reasonable estimates of the amount the insurer will  be required to pay on future losses. However, reserves for uncertain future  losses are not currently tax deductible. Because the size and timing of  terrorist attacks are uncertain, any reserves set aside for potential  terrorism losses would be taxed as corporate income in the year in which  they were set aside.
We have reported previously that amending the tax code and permitting  insurers to establish tax-deductible reserves could provide insurers with  financial incentives to increase their capital and thereby expand their  capacity to cover catastrophic risks, such as terrorism. We also reported  that supporters of this proposal argued that establishing such reserves  would lower the costs associated with providing coverage and encourage  insurers to charge lower premiums, which could increase coverage among  policyholders. In addition, industry participants we interviewed said if  insurers were able to establish tax-deductible reserves, a large terrorist  attack could cause less of a strain or shock to industry surplus, or capital,  which could help prevent insurer insolvencies in the wake of an attack.
However, several important challenges and tradeoffs may be associated  with this option. For example, some industry participants we contacted  said it would be difficult for insurers to determine the amount of funds to  contribute to such a reserve each year because of the significant  challenges associated with estimating the frequency of potential terrorist  attacks. Without a reliable method for conducting such estimates, insurers  would lack an analytical basis for reserving funds to cover potential  losses.
Furthermore, we have reported that overall terrorism insurance capacity  might not increase because insurers might use the reserves as a substitute  for reinsurance that may have been purchased previously to manage the  risks of potential terrorist attacks (reinsurance premiums are already tax- deductible). Because reserving also would convey tax advantages, some  insurers might feel that they could limit the expense of purchasing  reinsurance. To the extent that insurers reduced their reinsurance  coverage in favor of tax-deductible reserves, the industry’s overall capacity  would not necessarily increase. Insurers also might use the reserves to  shield a portion of their existing capital (or retained earnings) from the  corporate income tax or inappropriately use tax-deductible reserves to  manage their financial statements by increasing the reserves during good  economic times and decreasing them in bad times. Finally, we note that  this proposal likely would reduce federal tax revenues.
section_title: Option 3: Forming a Group of Insurance Companies to Pool Assets for Terrorism Risks
paragraphs: Another proposal involves establishing a group of insurance companies to  pool their assets, which may allow them to provide a greater amount of  terrorism insurance coverage than could be provided by individual  companies acting independently of one another. Insurance pools typically  are formed to cover large risks, such as hurricanes, which traditional  insurance markets do not address readily. For example, a pool could be  created at the national level or state level; it could involve mandatory or  voluntary participation from insurers; it could be prefunded or postfunded;  and if losses exceed the reserves of the pool, the government could  provide a financial guarantee or the pool could draw on some other  method such as issuing bonds or borrowing funds to make up any  shortfall. Table 2 shows that insurance pools have been established in  Florida to cover hurricane risks and in the United Kingdom for terrorism  risks.
In addition to these programs, one large insurance broker, in consultation  with several industry groups, has developed a proposal to form a $40  billion national reinsurance pool for commercial property terrorism risk.  Under this proposal, all insurance policies would cover losses from acts of  terrorism and insurers would continue to charge policyholders their own  rates for terrorism coverage in accordance with state laws. Insurers would  purchase reinsurance coverage from the pool, which would determine its  reinsurance premium rate based on analysis of a range of potential losses  in urban, suburban, and rural areas. The claim reserves of the pool would  be tax-exempt, allowing it to accumulate reserves tax-free from which to  pay future losses. In the event of a certified terrorist attack, the insurance  industry would pay 5 percent of losses and the pool would pay 95 percent  of losses up to $40 billion. In the event the pool did not have the resources  to pay its share of losses, the pool would be funded through the issuance  of bonds. The federal government would be responsible for losses in  excess of $40 billion up to $100 billion. According to the plan, losses above  $100 billion would be reviewed by Congress.
Some industry participants we contacted expressed general support of an  insurer pool to enhance the availability of terrorism insurance coverage.  For example, they said a pool could allow insurers to transfer a significant  portion of their terrorism-related risk to an outside entity over time, and  they could use the accumulated surplus in the pool to provide higher  amounts of coverage in the future. Industry participants also noted that a  national pool would spread out terrorism risk across a wider base of  policyholders of varying risk levels than individual insurers could do alone  and would allow insurers to better manage their total accumulations of  terrorism risk.
However, several challenges and disadvantages also may be associated  with this option. For example, as is the case with tax-deductible reserves,  it may be difficult to develop a reliable basis for determining the  appropriate size of the pool because of the inherent challenges in  estimating the frequency of terrorist attacks. Moreover, other information  suggests that insurance pools would not necessarily increase the  industry’s capacity or ability to offer additional terrorism insurance  coverage. According to a study by a global consulting firm on a proposed  workers’-compensation pool for terrorism risk and other industry  participants, a reinsurance pool might not create new industry capacity or  bring in additional capital to support writing more business. The study  notes that if the industry as a whole does not have enough capital to  manage terrorism risk, then neither can an industry pool that simply  combines existing industry capital in a new structure. Furthermore, we  note that if premiums paid to the pool were tax deductible as are  traditional reinsurance premiums, insurers simply might substitute pool  reinsurance for traditional reinsurance, as might be the case with tax- deductible reserves for individual insurers. Finally, if the pool was a tax- exempt entity, tax-deductible reserves for an insurance pool could reduce  federal revenues.
section_title: Option 4: Facilitating the Issuance of Onshore Catastrophe Bonds through Revisions to the Federal Tax Code
paragraphs: Another proposal is that the federal government establish certain tax  advantages for catastrophe bonds, which supporters argue could facilitate  their use for covering terrorist attacks. Catastrophe bonds generally have  been issued to cover natural events, such as earthquakes or hurricanes,  rather than terrorist attacks and historically have been created in offshore  jurisdictions where they are not subject to income or other tax. Under this  proposal, tax treatment of catastrophe bonds would be similar to the  treatment received by certain issuers of asset-backed securities, which  generally are not subject to tax on the income from underlying assets that  is passed on to investors. We previously reported that the total costs of  issuing catastrophe bonds—including transaction costs such as legal  fees—significantly exceed the costs of traditional reinsurance, which may  have limited the expansion of the market. Facilitating the creation of  onshore transactions by changing the tax code to encourage issuance of  catastrophe bonds within the United States could reduce transaction  costs.
Some insurance industry participants we contacted said that catastrophe  bonds, by tapping into the securities markets, offered the opportunity to  expand the pool of capital available to cover terrorism risk. They also said  that amending the tax code to facilitate the bonds’ issuance in the United  States could be beneficial in achieving that goal. However, many industry  participants said, consistent with findings in our previous reports, that the  development of catastrophe bonds for terrorism risks involves significant  challenges. These challenges may greatly exceed any benefit that would be  derived from amending the tax code. As with other options discussed  previously, the industry participants said that because of the difficulties  associated with estimating the frequency of terrorist attacks, it would be  very difficult to structure a catastrophe bond for terrorism that would be  acceptable to investors. Data are available on the historical frequency and  severity of natural events, such as hurricanes and earthquakes, which  helps investors assess the risks that they face in purchasing catastrophe  bonds for such risks. Without similar data for terrorist attacks, it is  unlikely that a viable market for catastrophe bonds will be established  regardless of revisions to the tax code that are designed to help ensure  such an outcome. We also have previously reported that the federal  government could lose tax revenue under this option and that the  proposed changes to the tax code might create pressure from other  industries for similar tax treatment.
section_title: Option 5: Revising Certain State Regulations and Insurance Coverage Requirements
paragraphs: Some industry participants have suggested that states could take certain  actions to revise their insurance statutes or regulations to increase insurer  capacity for terrorism risk, including amending rate regulation policies  and laws on coverage requirements. While, according to information from  NAIC, most state insurance regulators do not review rates for large  commercial property/casualty insurance contracts, several insurance  company representatives said that their ability to charge risk-based prices  for terrorism coverage was constrained by insurance statutes and  regulations in certain states and the prices these states approved did not  reflect the risk to which the insurers were exposed. Additionally, a few  industry participants said that terrorism insurance availability may be  limited in states that have adopted the Standard Fire Policy (SFP). Under  the SFP, property insurers are required to cover losses from fire regardless  of the cause of the fire, including a terrorist attack, even if the  policyholder declined terrorism coverage. Consequently, the industry  participants said that the SFP influences the amount of property insurance  that insurers provide, including terrorism insurance, and the premiums  that they charge in states that have adopted it. Therefore, some insurers  have suggested that states amend their SFP statutes so that insurers would  not be responsible for fire losses resulting from terrorism.
While most states do not regulate prices for commercial property risks,  where prices are regulated the state regulators are unlikely to disapprove  insurers’ rate requests because insurers are in a better position to judge  the necessity of the price than the regulator, as long as the request is  generally in line with current market prices, according to a representative  from NAIC. In addition, other available information suggests that state  actions on rate regulation or coverage requirements may have a limited  effect on the availability of terrorism insurance coverage. As discussed in  this report, some policyholders, particularly in Manhattan, may face initial  challenges in obtaining terrorism coverage at prices viewed as reasonable.  However, according to state regulatory officials, New York is one of the  states that generally does not regulate premium rates for large commercial  properties, so state regulation does not appear to be a significant factor in  the city where insurance challenges appear to be most pronounced. On  the other hand, unlike several other states, New York and California have  not revised the SFP to limit insurer liability resulting from the fires  associated with terrorist attacks, according to information from industry  analysts. While the SFP may therefore have an influence on the availability  of terrorism insurance in such locations as Manhattan and San Francisco,  it is difficult if not impossible to determine the influence as compared to  other factors in these cities, particularly the potential losses associated  with attacks on high-value buildings that may be in proximity to one  another.
section_title: Agency Comments
paragraphs: We provided a draft of this report to Department of the Treasury and NAIC  for their review and comment.  In oral comments, Treasury and NAIC  officials said that the report was informative and useful.  They also  provided technical comments that were incorporated where appropriate.
We are sending copies of this report to the Department of the Treasury,  NAIC, and other interested committees and parties. We will also make  copies available to others upon request. In addition, the report will be  available at no charge on GAO’s Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or jonesy@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to describe (1) whether the availability of terrorism  insurance for commercial properties is constrained in any geographic  markets and the effect of any constraints on pricing and coverage  amounts, (2) factors limiting insurers’ willingness to provide coverage, and  (3) advantages and disadvantages of some public policy options to  increase the availability of property terrorism insurance.
To assess whether the availability of terrorism insurance for commercial  properties is constrained in any geographic markets and the effect of any  constraints on pricing and coverage amounts, we reviewed relevant  literature and compiled and analyzed available data on insurance and  reinsurance industry capacity, terrorism insurance take-up rates, and  terrorism insurance pricing. We also interviewed representatives of more  than 100 organizations with knowledge of the nationwide terrorism  insurance market and with expertise in specific geographic markets.  Entities with a national perspective included insurer and policyholder  trade associations, individual policyholders, national insurance and  reinsurance brokers, and insurance and reinsurance companies. We  obtained information on specific geographic markets from state  regulators, regional insurance brokers and insurance companies, and local  property owners. The geographic markets we studied represent locations  considered to be at high, moderate, and low risk of exposure to terrorist  attacks—Atlanta, Boston, Chicago, New York, San Francisco, and  Washington, D.C. We selected these markets based on rankings of  locations by risk of terrorism exposure that accounts for the risk of  terrorist attacks and the potential for associated losses from the Insurance  Services Office, an insurance industry analytics firm. We spoke with  representatives of policyholders that own hundreds of properties  nationwide, including    more than 200 properties in New York City,    more than 100 properties in Washington, D.C.,    at least 30 properties each in Chicago and San Francisco,    about 30 properties in Boston and 60 in Atlanta, and    numerous properties across the United States including major cities such  as Los Angeles and Houston.
These properties included large office towers in major U.S. cities,  properties in proximity to high-profile federal buildings, hotels, industrial  buildings, hospitals, sports stadiums, and residential properties in  locations throughout the United States. The policyholders also  represented a variety of industries that included real estate,  transportation, financial services, health, hospitality, and entertainment. In  addition to one-on-one interviews, we also conducted group discussions  with representatives of 14 policyholders at the annual Risk and Insurance  Management Society conference in San Diego, California, in April 2008.  Although we selected industry participants to provide broad  representation of market conditions geographically and by industry, their  responses may not necessarily be representative of the universe of  insurers, insurance brokers, policyholders, and regulators. As a result, we  could not generalize the results of our analysis to the entire national  market for commercial property terrorism insurance. We determined that  the selection of these sites and participants was appropriate for our  objectives and that this selection would allow coverage of geographic  areas, key markets, major insurers and policyholders, and other  organizations related to terrorism insurance so as to generate valid and  reliable evidence to support our work.
To identify the factors limiting insurers’ willingness to provide terrorism  insurance coverage, we selected large, national insurance companies to  interview based on their market share in the states we studied. These  national insurance companies held from 37 to 52 percent of the market  share in the states we studied, according to information provided by the  Insurance Information Institute. In addition, we interviewed  representatives of regional insurance companies in our selected markets.  We also spoke to representatives of seven reinsurance companies,  including two of the largest worldwide reinsurance companies, risk  modeling firms, state regulators, and two credit rating agencies. Although  we selected insurers to provide broad representation of size and  geographic scope, we could not generalize the results of our analysis to  the entire population of commercial property insurers.
To explore the advantages and disadvantages of some public policy  options to increase the availability of property terrorism insurance, we  relied on our interviews with the industry participants described above.  We also interviewed academics who have written on the topic of terrorism  insurance, and representatives of research organizations and consumer  interest groups. We selected the option that would reduce insurers’ TRIA  deductibles in areas affected by a future large terrorist attack from two  recent legislative proposals. We selected the other options—allowing  insurers to establish tax-deductible reserves, forming a group of insurance  companies to pool assets, and facilitating the use of catastrophe bonds  through changes in the tax code and amending state regulations or  statutes—from literature we reviewed, our prior reports, and interviews  we conducted with industry participants. The selected options were  representative of the range of possible options. We did not attempt to  evaluate the prospective effect of these options and, therefore, did not  come to any conclusions about the advisability of implementing these  options.
We conducted this audit in Atlanta, Georgia; Boston, Massachusetts;  Chicago, Illinois; New York, New York; San Diego, California; San  Francisco, California; and Washington, D.C., from January 2008 to  September 2008, in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: Wesley M. Phillips, Assistant Director; Farah Angersola; Joseph A.  Applebaum; Rudy Chatlos; Andrea Clark; Katherine Bittinger Eikel; Barry  Kirby; Rich LaMore; Marc Molino; Jill M. Naamane; Linda Rego; Barbara  Roesmann; Kathryn Supinski; Thomas Taydus; and Shamiah Woods made  key contributions to this report.