Terrorism Risk Insurance: Comparison of Selected Programs in the United States and Foreign Countries
Published: 2016-04-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: A number of countries have established national terrorism risk insurance programs to respond to market shortages for such insurance resulting from attacks either in their own or other countries. Many programs were created following the events of September 11, 2001, but some existed earlier. In 2002, the Terrorism Risk Insurance Act established a program to ensure the availability of terrorism risk insurance in the United States.
The Terrorism Risk Insurance Program Reauthorization Act of 2015 includes a provision for GAO to review how other countries have structured and funded their terrorism risk insurance programs. This report compares the structures of and the role of government in selected foreign terrorism insurance programs and examines the loss-sharing arrangements between the government and private sector. Of the 16 programs identified through a literature review, GAO selected 6 representing a range of structures to examine in-depth—programs in Australia, Austria, India, Spain, the United Kingdom, and the United States. For the six programs, GAO reviewed program financial statements, annual reports, and documentation from the Organisation for Economic Co-operation and Development and interviewed officials from terrorism insurance programs, agencies, reinsurance companies, and trade associations.
GAO makes no recommendations in this report. GAO provided a draft to Treasury and the five selected programs for their review and received technical comments, which were incorporated as appropriate.
section_title: What GAO Found
paragraphs: The structures of the 16 terrorism insurance programs GAO reviewed generally fell into three broad categories. Programs in the first category have a multilayered structure, with insurers, reinsurers (which offer insurance for insurers), and governments providing coverage. Several programs, including those in Australia and the United Kingdom (UK), use this approach. In the second category, which includes Spain and Israel, government entities provide all the coverage for terrorism risk, and insurers and reinsurers do not take on any risk. The third category includes programs, such as those in Austria and India, in which insurers and reinsurers are entirely responsible for providing coverage and the government has no financial role. In comparison, the U.S. program involves coverage from the government and insurers, but it differs from many programs as its program does not include the purchase of reinsurance.
Among the six programs GAO reviewed in-depth, the loss-sharing arrangements among program participants vary, but program reserves and the private sector likely would be able to cover losses from most conventional terrorist events before public funds are needed, according to program officials. However, in the event of a very large terrorist attack, governments that have a role would potentially be responsible for a substantial proportion of losses. As shown in the figure, programs in which the government provides a layer of financial support have greater total amounts of coverage compared to those with only private sector participation. Additionally, private sector coverage is larger under programs in countries with larger economies, as measured by gross domestic product. In the event of a large terrorist attack, insurers in the United States could pay more than the total coverage provided by the other five countries' national programs. Most of the selected programs collect premiums up front to cover losses and program costs; the United States, in contrast, collects reimbursement for actual losses and associated expenses after an event occurs.
Note: In the UK, the government share is an unlimited line of credit to the private program that is expected to be repaid. Spain's funds include program reserves for terrorism and other catastrophic events and an unlimited government backstop. The unlimited government shares are portrayed as matching the program funds, but the actual size could differ depending on the type and size of terrorist attack. Austria's program is entirely private.

section_title: Letter
paragraphs: A number of countries have established terrorism risk insurance  programs to respond to the severe market shortage for such insurance  following attacks in either their own or other countries. For example, after  September 11, 2001, many insurers started excluding coverage for  terrorism risk. Congress enacted the Terrorism Risk Insurance Act of  2002 (TRIA) to help ensure the continued availability and affordability of  commercial property and casualty insurance for terrorism risk and to  address concerns that the lack of terrorism risk insurance could have  significant effects on the U.S. economy. In a few countries with histories  of political violence, programs covering terrorism risk were in existence  before the September 11, 2001, attacks. Many other countries  established terrorism risk insurance programs following the events of  September 11, 2001. In these countries, governments and national  insurance associations recognized the significance of ensuring the  availability of insurance for terrorism risk. As a result, they developed  national terrorism risk insurance programs to continue economic activity  after a potential terrorist attack and avoid insurance-market failure, which  is when the insurance industry will not provide coverage for risks that are  considered too expensive to insure or uninsurable.
In 2015, Congress reauthorized TRIA with the Terrorism Risk Insurance  Program Reauthorization Act of 2015. This act includes a provision for  us to examine how terrorism risk insurance programs have been  structured and funded. For terrorism risk insurance programs in the  United States and selected foreign countries, this report (1) compares the  organizational structures and the role of government and (2) examines  the loss-sharing arrangement between the government and private sector  and the methods by which the programs are funded.
To compare the structure and the role of government in terrorism risk  insurance programs, we analyzed 16 national terrorism risk insurance  programs, including the U.S. program, which we identified through a  literature search and interviews. Using these programs, we developed  generalized descriptions of features that a national terrorism risk  insurance program may have and categorized the programs based on  these generalized descriptions. We compared the features of the U.S.  program to these categories. We conducted a content analysis, reviewing  reports and profiles of terrorism risk insurance programs from the  Organisation for Economic Co-operation and Development (OECD),  industry reports on terrorism risk insurance, and documents available on  national terrorism risk insurance program websites, such as annual  reports, and program descriptions.
To examine the loss-sharing arrangements, we further assessed features  of and compared the national terrorism risk insurance programs in  Australia, Austria, India, Spain, the United Kingdom, and the United  States. We selected the 6 programs in these countries from among the 16  programs we reviewed to represent different types of programs, including  (1) at least one program that did not include any government financial  support as part of the insurance coverage, (2) at least one program in a  country that was not a member of OECD, and (3) at least one program  that was developed prior to 2001. In comparing the 5 foreign terrorism  risk insurance programs with the U.S. program, we took into  consideration the economic output of the different countries. In addition,  we interviewed officials from Australia’s Government Treasury and the  Australian Reinsurance Pool Corporation (ARPC); Austria’s  Österreichischer Versicherungspool zur Deckung von Terrorrisiken;  Spain’s Consorcio De Compensación De Seguros (Consorcio); and, in  the United Kingdom, HM Treasury, the Bank of England’s Prudential  Regulation Authority, and the Pool Reinsurance Company Limited (Pool  Re). We obtained written responses from officials from the Indian Market  Terrorism Risk Insurance Pool. Unless otherwise noted, we converted  financial data into U.S. dollars for the year specified using purchasing  power parity data and converted U.S. dollars into 2014 constant dollars  using gross domestic product data when appropriate. We did not  conduct an independent legal analysis to verify the information provided  about the laws, regulations, or policies of the foreign countries selected  for this study. To analyze the administrative costs of the foreign terrorism  risk insurance programs and how such costs were incorporated into  program fees or premiums we reviewed the programs audited financial  statements, where available. See appendix I for more information on our  scope and methodology. Appendix II contains more information on the 16  programs covered in our study.
We conducted this performance audit from January 2015 to April 2016 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
subsections: section_title: Overview of National Terrorism Risk Insurance
paragraphs: The terrorist attacks of September 11, 2001, drastically changed the way  the insurance industry viewed the risk of terrorism. Before September 11,  2001, insurers generally did not exclude or separately charge for  coverage of terrorism risks for commercial property and casualty policies.  After September 11, 2001, however, insurers and reinsurers started  excluding the coverage because they determined that the risk of loss from  a catastrophic terrorist event was unacceptably high. Insurers charge  policyholders premiums to cover the expected losses an insurer may pay  on claims, as well as expenses for providing insurance, such as  administrative costs, and for the cost of capital to cover unexpectedly high  losses and otherwise support the solvency of the insurance company.  Insurance companies need to be able to predict with some reliability the  frequency and severity of insured losses to establish their exposure—that  is, level of risk—and price their premiums accordingly. As we have  reported previously, measuring and predicting losses associated with  terrorism risks can be particularly challenging for reasons including lack of  experience with similar attacks, difficulty in predicting terrorists’ intentions,  and the potentially catastrophic losses that could result. Reinsurers  follow an approach similar to that of insurers for pricing risk exposures  and charging premiums based on that risk and, therefore, face similar  challenges in pricing terrorism risks.
One way national terrorism risk insurance programs address these  challenges and encourage insurers to continue offering terrorism risk  insurance is by sharing some of the risks through an insurance pool or  reinsurance arrangements. An insurance pool is an organization of  insurers or reinsurers through which members underwrite particular types  of risk, such as terrorism risk, with premiums, losses, and expenses  shared in an agreed manner. Pools also may purchase reinsurance to  further offset their risk. Reinsurers typically assume part of the risk and  part of the premiums originally taken by the insurer or pool. In some  programs, which are market-based, the insurance pool, rather than  directly offering reinsurance to its members, allows members to jointly  purchase reinsurance. This approach allows the members to collectively  purchase reinsurance at more favorable terms than if the individual  insurers were purchasing reinsurance directly from the reinsurer. Through  insurance pools and reinsurance arrangements, the potential risks and  costs of claims related to terrorism are spread across multiple  participants.
Other ways these programs address the challenges of covering potential  terrorism losses are through cost-sharing features and funding methods,  some of which are generally used in the insurance industry, including the  following:
Deductibles. In general, a deductible is the amount of losses paid  by the policyholder (whether the insured of a direct insurer, or an  insurer that is covered under a policy of reinsurance) before the  insurer or reinsurer begins to pay any of the remaining loss. It may  be a specified dollar amount or a percentage of claim amounts.
Coshares. A coshare is a set percentage of loss that the  policyholder must continue to cover even after the deductible has  been met. In the case of national terrorism risk insurance  programs, it may be the insurers participating in the programs that  pay the deductibles and coshares before coverage from other  participants, such as reinsurers or the government, is triggered.
Government backstop. Many foreign governments offer financial  support, sometimes referred to as a “government backstop,” to  their national terrorism risk insurance programs or individual  insurers to cover a certain threshold of claims.
Combination funding. Programs also may use a combination of  funding methods. For example, programs may charge a premium  to participating insurers in exchange for some of the risk for  paying potential losses.
Pre-event funding. Charging premiums for coverage is a form of  pre-event funding because payment is received before an event  occurs.
Post-event funding. Another approach to financing insurance  coverage is through post-event funding, which involves collecting  reimbursement for actual losses and associated expenses after an  event has occurred.
The events covered by terrorism risk insurance programs vary depending  on perceived risks in different countries. Some countries that have  experienced domestic turmoil have terrorism risk insurance programs that  include coverage for public disorder and riots along with terrorism,  whereas other programs cover only large-scale terrorist events. In  addition, terrorism risk insurance programs differ on coverage for the  types of weapons used in terrorist attacks. Because the losses from a  terrorist attack using an unconventional weapon are particularly difficult to  predict and price, some terrorism risk insurance programs only provide  coverage for terrorist attacks using conventional weapons.  Unconventional weapons generally include nuclear, biological, chemical,  or radiological (NBCR) weapons, as well as cyberterrorism.  Cyberterrorism is a growing area of concern in terms of terrorism risk  insurance programs because our infrastructure, such as the control  systems for public utilities, are increasingly interconnected, and a  cyberterrorism event could cause minor to severe business disruption and  physical damage to property.
Many countries do not have national terrorism risk insurance programs for  various reasons. In 2005, OECD reviewed national terrorism risk  insurance programs and reported several examples of countries that have  not implemented such programs. For example, OECD found that in  Greek and Scandinavian markets, insurers had not excluded terrorism  coverage, making government involvement to support terrorism risk  insurance unnecessary. OECD also reported in 2005 that the insurance  industries in Italy and Japan had proposed national terrorism risk  insurance programs after 2001. However, according to the report, these  proposals were not implemented due to lack of political will in Italy and  only limited support from corporate customers as well as no strong public  demand for terrorism risk insurance in Japan. In addition, in several  countries where national terrorism risk insurance programs were  developed and administered by the local insurance industry, such as  Switzerland, governments did not want to interfere in local markets. In  countries where no national terrorism risk insurance program exists, such  as Canada and Mexico, individual organizations may still obtain coverage  for terrorism risk from global insurers and reinsurers.
section_title: The U.S. Program
paragraphs: Congress enacted TRIA in 2002 in response to widespread uncertainty in  the terrorism risk insurance market. TRIA requires that insurers make  terrorism coverage available to commercial property and casualty  insurance policyholders or those seeking to obtain such a policy. TRIA  was enacted as a temporary program that would terminate at the end of  2005 to allow for a transitional period for the private markets to stabilize  and build capacity to absorb any future losses related to terrorism.  However, the program has been extended and modified three times.  Through its most recent reauthorization in 2015, Congress extended the  program to 2020.
TRIA is implemented by the U.S. Department of the Treasury (Treasury)  as the Terrorism Risk Insurance Program. Under this program, losses are  shared between the U.S. government and insurance companies, with  Treasury reimbursing insurers for a share of losses associated with  certain certified acts of foreign or domestic terrorism (see fig. 1). The  2015 reauthorization of TRIA includes changes to the program that  gradually shift a greater share of losses from the federal government to  insurance companies; this share is to increase annually for 5 years. In  order for government coverage to be available, aggregate industry  insured losses from certified acts must exceed a certain amount, known  as a “program trigger.” For calendar year 2016, this amount was $120  million. If insured losses for a certified act exceed the program trigger,  an individual insurer that experiences losses in excess of a deductible (20  percent of its previous year’s direct earned premiums in TRIA-eligible  lines) may be eligible for reimbursement under the program. After the  insurer has satisfied its deductible, the federal government would  reimburse the insurer for a certain percentage of its losses (84 percent for  calendar year 2016) above the deductible, and the insurer would be  responsible for the remaining portion (16 percent for calendar year 2016),  with a gradual decrease in the federal government share until it reaches  80 percent, in 2020. Annual coverage for losses is limited, and  aggregate industry insured losses in excess of $100 billion are not  covered by private insurers or the federal government. The program also  includes a provision for mandatory recoupment of the federal share of  losses in some instances. Under this provision, when insurers’  uncompensated insured losses are less than a certain amount (up to  $31.5 billion for 2016), Treasury must impose policyholder premium  surcharges on commercial property and casualty insurance policies until  total industry payments reach 140 percent of any mandatory recoupment  amount. When the amount of federal assistance exceeds any  mandatory recoupment amount, TRIA allows for discretionary  recoupment. Specifically, Treasury may recoup additional amounts based  on the ultimate cost to taxpayers after mandatory recoupment, the  economic conditions in the marketplace, the affordability of commercial  insurance for small and medium-sized businesses, and any other factors  Treasury considered appropriate.
section_title: Several Program Structures Involve Both Government and the Private Sector, Including the U.S. Program
paragraphs: The structures of the 16 terrorism risk insurance programs we reviewed  involve governments and private insurers in providing terrorism risk  coverage and program administration in different ways. Seven of the 16  programs we reviewed have a multilayered structure in which insurers  and governments provide coverage for terrorism risk, and in some cases  the government administers the programs. In 2 other programs,  government entities provide all coverage of terrorism risk and administer  the programs. For another 6 programs, the governments do not have a  primary financial role. The U.S. program shares both similarities and  differences with the 7 multilayered programs.
subsections: section_title: In Several Programs, Structures Have Multiple Layers of Coverage from Insurers, Program Reserves, Reinsurers, and Governments
paragraphs: Of the 16 terrorism insurance programs we reviewed, 7 are structured  with multiple layers of coverage and a government backstop: the  programs in Australia, Belgium, Denmark, France, the Netherlands,  Germany, and the United Kingdom. With the exception of the program  in the United Kingdom, which was established in 1993, these programs  were established after the September 11, 2001, terrorist attacks to  encourage private sector involvement in the market for terrorism risk  insurance. They generally also provide coverage for catastrophic terrorist  events such as, NBCR attacks (see app. II for more information). For  example, the national terrorism risk insurance program in Denmark, which  was introduced in 2010, focuses only on NBCR attacks in response to a  market failure for reinsurance of NBCR risks in Denmark.
Although certain program features may differ, the multilayered program  structure in the countries in this category were composed of two to six  layers of coverage provided by insurance companies, program reserves,  reinsurers, and governments (fig. 2):  Insurance industry deductible. Insurance companies cover the first  layer of losses up to a specified amount.
Program reserves. Programs collect premiums from insurers and  may use some of the pooled funds, or reserves, to pay for a layer of  losses.
Reinsurance. Programs often use collected premiums to purchase  reinsurance from the international market to cover another layer of  losses.
Government backstop. Governments are liable for a final layer of  losses, possibly subject to a maximum coverage cap, if other  participants have met their payment requirements and excess claims  remain.
Each participant generally (insurance industry, program reserves, private  reinsurance, and the government) pays for a certain share of claims  throughout the multilayered process. If claim amounts exceed a layer’s  designated payment limit, the next layer of participants becomes liable for  excess costs. As we discuss in greater detail later in this report, multiple  layers of coverage spreads risk among program participants.
Under a multilayered structure, insurance companies are generally  responsible for the first layer of insurance protection—the insurance  industry deductible—and may be required to cover a certain amount of  losses before other participants provide the additional layers of insurance  protection. Depending on the program, the insurance industry deductible  amounts may be calculated per individual insurer or as an industry  aggregate amount. For example, individual insurance companies that  participate in the Australian terrorism risk insurance program are required  to pay deductibles ranging from $65,000 (A$100,000) to a maximum of  $6.5 million (A$10 million). The individual insurance industry deductibles  are charged up to a maximum industry aggregate of $65.1 million (A$100  million) per event. In the United Kingdom’s program, the industry-wide  deductible limits are $141 million (£100 million) per event and $282  million (£200 million) for the annual aggregate.
The middle layers of coverage are typically composed of program  reserves, private reinsurance, or a combination of the two. Generally,  insurance companies that participate in these programs pay a premium to  a pool, which may be used to purchase reinsurance. Programs may pay  for losses above the industry deductible using some of these program  reserves, private sector reinsurance, or both. For example, Australia’s  program has middle layers that include a combination of program  reserves and private reinsurance. The program reserves are used to  pay a deductible before the private sector reinsurance, then reinsurance  covers a layer of losses, and any remaining program reserves cover an  additional layer of losses before the government backstop would be  triggered. Similarly, the middle layers of the United Kingdom’s program  pay for losses using reserve funds and private reinsurance. All seven of  the multilayered programs have purchased private reinsurance. In  programs in Belgium, France, Germany, and the Netherlands, the middle  layers primarily rely on privately purchased reinsurance. Reinsurance in  these instances shifts risk from the program to the private reinsurance  market. According to a few program officials and industry representatives,  reinsurance also provides a layer of coverage before the government  backstop through the layer of coverage it provides.
The final layer of coverage in the generalized multilayered structure is the  government backstop, which serves as financial assistance when other  layers have been exhausted. The amount of the government backstop for  national terrorism risk insurance programs varies among these seven  programs. For example, Denmark’s government backstop is about $2  billion (15 billion Danish Krone), whereas the Netherlands’ government  backstop is about $61 million (€50 million). According to an OECD report,  a maximum cap on government support for terrorism risk insurance  programs limits the government’s financial responsibility if a catastrophic  terrorist event occurs. However, the report indicated that it may also  leave policyholders with uncompensated losses in the case of a  catastrophic terrorist event, and it could potentially lead to the  government paying for coverage through other means, such as disaster  assistance grants or loans. Of the seven multilayered programs we  reviewed, only France has an unlimited backstop that is not repaid.  Although the United Kingdom’s program has an unlimited line of credit  from the government, the program is required to pay back the  government for any funds that it borrows through future premiums from  participating insurers. In the event the government backstop is used in  Australia and Denmark, the programs can recoup government losses  after an event occurs by raising program premiums or levying taxes on  policyholders, if needed.
Among programs with a multilayered structure, governments have varying  levels of administrative involvement. For example, a government agency  administers Denmark’s program. In Australia, a government corporation  administers the country’s program and reports to a Minister, which is  currently the Assistant Treasurer. The program receives direction from  the Minister for setting premiums and the Minister appoints board  members. In contrast, private organizations administer the programs in  Belgium, Germany, France, the Netherlands, and the United Kingdom.  These organizations collect premiums from and provide coverage to  member insurers with generally limited administrative involvement from  their governments. However, in most of these countries, the government  established legislation or coordinated with private industry to establish the  program. For example, Belgium’s program was established by law and is  administered by a nonprofit association of insurance companies. The  French program was started as a public-private partnership between the  French insurance industry and the government. The program consists of  two organizations: a private association of insurers that administers the  pool and a government-owned insurance company that provides the  unlimited government backstop.
section_title: In Some Programs, Only Government Entities Provide Coverage for Terrorism Risk
paragraphs: Two terrorism risk insurance programs we reviewed, those in Spain and  Israel, are structured so that government entities provide all the coverage  for terrorism risk and also provide program administration. In these cases,  government entities, not private insurance companies, establish  premiums, manage claims, and provide all of the coverage for terrorism  risk. The programs in both countries were established prior to the  September 11, 2001, terrorist attacks in response to civil strife or a history  of political violence. While the multilayered programs previously  discussed are typically structured to cover catastrophic losses, the  programs in Spain and Israel are structured to cover events that could  result in both larger and smaller amounts of losses, including NBCR  events.
In Spain, the organization that administers the program is a government  entity. This organization collects funds from insurers that issue base  policies for ordinary risks, maintains a reserve, and manages claims from  policyholders. Insurers issue policies that include two kinds of coverage,  ordinary risks and extraordinary risks, which includes terrorism and  natural catastrophes. The insurer collects the premiums for both types of  coverage and transfers the extraordinary risk premiums to the program on  a monthly basis. Insurers manage premiums and claims related to  ordinary risks. The program holds the extraordinary risk premiums in a  reserve account from which it pays claims. The program maintains its  own reserve funds and assets, which are held as dedicated funds to pay  insurance claims and are independent from the Spanish government’s  public budget. Insurers do not pay a deductible in the event of a terrorist  attack, but covered policyholders may have to pay a deductible.  Reinsurers do not provide a layer of coverage in the program. The  government provides the only layers of coverage for terrorism risk  through the program reserve and an unlimited government backstop, if  needed.
In Israel, a government agency administers payment of claims for terrorist  events. Israel established a compensation fund that is administered by a  government agency, the Ministry of Finance, through the Israel Tax  Authority. After a terrorist event, property owners file claims and  government-provided appraisers assess the property damage to establish  compensation amounts. The government is responsible for all of the  financial risk of this program and provides unlimited financial assistance.  Financial compensation for direct damages to commercial property is  unlimited. Unlike other programs we reviewed, the program is funded  through property and other taxes rather than premiums.
section_title: Insurers and Reinsurers Provide All the Coverage for Terrorism Risk in Some Programs
paragraphs: In some programs we reviewed the insurance industry provides all the  coverage for terrorism risk, and the government provides no financial  backstop to the program. In most of these programs, the government also  has little administrative role. Programs in this category include those in  Austria, Bahrain, India, Russia, South Africa, and Switzerland. Most of  these programs were established following the September 11, 2001,  terrorist attacks and cover property damage but exclude coverage of  NBCR events. However, the programs in Bahrain and South Africa were  established earlier and, like the programs in Spain and Israel, which were  also established prior to September 11, 2001, they may include coverage  of damage from events, such as war or riots.
Some of these programs have layers of coverage from insurers, program  reserves, and reinsurance, while others are primarily reinsurance  arrangements where program members collectively purchase private  reinsurance for sharing losses from a terrorist attack. For example, in  India insurers pay premiums to be members of the program and are  responsible for a deductible amount to cover the first layer of losses. The  program collects premiums, manages program reserves, and purchases  reinsurance. Similarly, the program in South Africa also includes layers of  coverage from insurers, program reserves, and reinsurance. In these  programs the government provides no financial backstop, but  government-owned organizations administer both programs, and in India  the government approves the premium rates proposed by the program  administrator. In other programs, such as those in Austria, Bahrain,  Russia, and Switzerland, insurance companies have established  reinsurance arrangements with each other to cover losses, and their  governments have no financial or administrative roles. For example, the  Austrian program is run by an insurance association. Member insurance  companies maintain individual reserves to cover their program  deductibles, and they collectively purchase reinsurance above the  deductible amount. Similarly, the Russian program is run by an  association of insurers and uses a reinsurance arrangement in which  member insurance companies each pay a share to purchase reinsurance  coverage. The governments provide neither financial nor administrative  support to these programs.
section_title: The U.S. Program Has Layers of Coverage from Insurers and the Government, but Its Structure Does Not Include Reserves and Reinsurance
paragraphs: Like many of the foreign programs we reviewed, the structure of the U.S.  terrorism risk insurance program includes multiple layers of coverage,  with insurers and the government providing layers of coverage. If a  sufficiently costly attack were to occur, insurers would pay losses to  policyholders, and a portion of the losses paid above the insurer’s  deductible would be reimbursable by the government. Similar to other  programs, the final layer of the U.S. program is a government backstop,  although as noted later, backstop payments are made in conjunction with  the coshares of participating insurers. Like the programs in Australia,  Belgium, Denmark, Germany, and the Netherlands, the U.S. program  also has a cap on the government backstop. The program caps the  combined liability for insurers and the government at $100 billion per  year.
However, the structure of the U.S. program differs from those of other  multilayered programs—for example, those in Australia and the United  Kingdom—because it does not have middle layers of program reserves  from which to pay claims or purchase reinsurance. Instead, the next layer  of coverage after insurer deductibles in the U.S. program consists of  coshared payments between the government and insurers. Although  reinsurance is not a formal layer of coverage in the U.S. program,  individual insurers may purchase reinsurance to help cover the cost of  their deductibles or coshares. Another difference is that the U.S program  does not collect up-front premiums from insurers. Instead, the  government layer of coverage is funded through a recoupment process  after an event occurs by levying surcharges on all commercially insured  policyholders after a terrorist event. Unlike the programs in Australia,  Denmark, and the United Kingdom, which have funding mechanisms both  before and after an event has occurred, recoupment after an event occurs  is the primary funding mechanism for the government layer in the U.S.  program.
section_title: Under Most Arrangements Private Sector and Program Funds Would Cover Initial Losses, and Most Programs Fund Losses and Costs Up Front
paragraphs: For the six programs we reviewed in-depth, the private sector and  program reserves would cover initial losses and governments are often  responsible for a potentially large share of losses in more extreme events.  In addition, most of these programs fund losses and costs up front,  although the United States, in contrast, uses a post-event funding  mechanism for the government layer. Table 1 shows the six programs  and some of their attributes.
subsections: section_title: Government Participation, Economy Size, and Other Factors Are Related to the Amount and Range of Program Coverage Provided
paragraphs: Terrorism risk insurance programs with government participation and in  countries with larger economies generally provided more coverage for  losses. Specifically, among the programs we selected, those with a  government backstop (the programs in Australia, the United Kingdom, the  United States, and Spain) provided more coverage for losses than  programs without government backstops, as shown in figure 3. For  example, the Indian government does not financially back its terrorism  risk insurance program, and the coverage provided for losses is small  compared to programs with government backstops. Additionally, private  sector coverage is generally larger for those programs in countries with  larger economies, as measured by GDP. For example, the GDP in the  United States is the largest compared to that of the other five countries  we reviewed, and the coverage provided by the private sector in the  United States is also larger. In the event of a terrorist attack, insurers in  the United States could pay more than the total coverage provided by the  other five countries’ national programs. Programs in India and Austria that  have no government backstop provide less coverage for losses than the  other four programs. For example, India’s program limits the maximum  claim payout per location to $584,000 (INR 10,000 million), and Austria  limits the total annual payout to $240 million (€200 million). A program  representative from Austria told us that market demand also affected the  program’s coverage amount and that although more reinsurance may be  available to increase the coverage, the current program size meets the  demand in the market.
Other secondary factors could be related to the amount of program  coverage but to a lesser extent than government participation and  economy size. Some of these factors include the range of losses covered  and whether the program includes mandatory or voluntary participation.  For example, the program in Spain covers all catastrophic events,  including flooding and earthquakes, and as a result the amount of  coverage provided under Spain’s program is relatively large for its GDP.  In contrast, all the other selected programs cover only terrorism risk. In  addition, insurers participating in programs where coverage is mandatory  have a wider base of policyholders from which to collect premiums  compared to programs where some policyholders may not purchase the  insurance, which can affect the amount of program coverage. For  example, in Australia, terrorism risk coverage is mandatory, and  premiums are collected from all policyholders. Terrorism coverage is  voluntary for policyholders in the United Kingdom, so premiums collected  from member insurers by the program originate from a smaller, less  diversified group of policyholders. However, we found that government  participation and economy size may have a greater relationship to the  amount of program coverage than these secondary factors because at  least one voluntary program had larger coverage than a mandatory  program. For example, the United Kingdom’s program is voluntary, and  its program coverage is much larger than that of Australia’s mandatory  program. The United Kingdom’s GDP is about twice that of Australia, and  the United Kingdom’s program before its government-backed line of credit  takes effect provides more coverage than Australia’s entire terrorism risk  insurance program, including its government backstop.
section_title: Most Programs Spread Losses across Participants, but Governments Are Responsible for a Potentially Large Proportion of Losses
paragraphs: In the six programs we selected for in-depth review, the risk of losses is  spread across different types of participants (see fig. 4). The participants  involved and their share of losses vary across programs, but according to  program officials, private sector participants and program reserves likely  would cover commercial and property losses from most conventional  terrorist events. As we discuss later, four foreign terrorism risk programs  were able to cover the losses resulting from recent terrorist attacks  without using government funds.
We found that depending on the type of terrorism risk, insurance program  losses were shared with different numbers and types of participants.
Multilayer programs with government role. The programs with  multiple layers and government backstops, such as those in the  United Kingdom and Australia, spread the risk of losses among the  most participants. In these programs, primary insurers, private  reinsurers, program reserves, and government funding could be used  to pay for losses. Under the U.S. program, the government, insurers,  and policyholders share in the risk of losses.
Programs with no financial government role. Although the  governments would not share the losses under the programs in  Austria and India, these programs spread losses among different  private sector participants, with both primary insurers that are  members of the programs and private reinsurers sharing in the losses.
Program in which government retains all risk. Spain’s program  does not spread the risk among private sector and government  participants, but the risk is diversified among policyholders. The risk is  diversified in that it covers individual and business policyholders  against both natural catastrophe and terrorism risks. The catastrophe  coverage protects the same property or persons to the same level as  risks covered in the underlying base policy. The program does not  purchase private reinsurance, although it has the authority to do so,  and all losses would be paid from the program’s reserves or the  government backstop, if needed.
Program reserves and reinsurance play an important role in loss-sharing  in most of the programs we reviewed. Of the six programs, we reviewed  four—Australia, India, Spain, and the United Kingdom—that have  reserves. The program reserves in India and the United Kingdom (which  have private program reserves) are larger and thus have a more  significant role in loss-sharing than the reserves of the Australian program  (which has a government program reserve). In addition, four programs  (Australia, Austria, India, and the United Kingdom) purchase private  reinsurance. Reinsurance also is a significant part of some of the  programs, as shown previously in table 1. For example, the reinsurance  in India’s program represents 36 percent of its total coverage. According  to program officials and insurance industry stakeholders, reinsurance  increases program capacity, spreads risk among other participants, and  helps protect the government from losses. For example, officials of the  United Kingdom’s program said they purchased reinsurance to privatize  some of their insurance risk. Insurance brokers said that programs  purchase reinsurance to increase the total pool capacity. Program  officials also said that purchasing reinsurance can protect the  governments involved by adding another layer of coverage before the  government backstop. For example, Australian program officials said  purchasing reinsurance expanded the capacity of the program and  provided the government additional protection from exposure to terrorism  risk. An Australian Treasury report also noted that purchasing reinsurance  through the pool was a cost-effective way to access international  reinsurance markets for terrorism risk. In contrast, as previously  mentioned, reinsurance is not part of the structure of the U.S. program,  but insurers may individually purchase reinsurance to help cover their  deductibles and coshares.
When the government has a financial role, it is generally responsible for a  potentially large proportion of losses and would be involved only in the  event of a catastrophic terrorist attack. In the event of a large terrorist  attack that exhausted coverage from the other participants, the  governments of Australia, Spain, the United Kingdom, and the United  States would be responsible for a potentially significant proportion of  losses. For example, an NBCR terrorist attack could result in losses that  exhausted program resources. Programs that explicitly cover NBCR  terrorist attacks—which include to different extents the programs in the  United Kingdom, Spain, and Australia—could have a greater chance of  losses reaching the level where the government backstop begins paying  losses than programs that do not explicitly cover this risk. Although both  Spain and the United Kingdom have unlimited government backstops, in  Spain the government would be responsible for the potentially greater  proportion of losses because the government retains all the financial risk  for terrorism. The financial losses would be paid from the government  program reserves, which are independent from the public budget, and an  unlimited government backstop if the program were ever to exhaust its  reserves. In the United Kingdom, although the government backstop is  also unlimited, the program has private reserves and has a line of credit  that is expected to be repaid. In Australia and the United States, the  government also is responsible for a potentially large share of losses, but  the government’s exposure is capped under these programs. Although  the U.S. government’s exposure is large, it is not unlimited as in the  programs in Spain and the United Kingdom. The U.S. government’s  potential share of property and casualty losses from a catastrophic  terrorist attack is nearly 10 times that of the Australian government’s  exposure, including both the government program reserve and the  government backstop. The government’s exposure in the Australian  program is smaller than in the other programs because the government  backstop is limited.
section_title: Programs Have Increased the Private Sector’s Share of Losses but Have Not Expanded Coverage to Include Cyberterrorism
paragraphs: Generally, changes to the U.S. program and three other selected  programs over time have decreased governments’ potential share of  losses and increased the private sector’s potential share. For example,  the programs in Australia and the United Kingdom did not purchase  reinsurance when they were first established in 2003 and 1993,  respectively. Both programs have since increased capacity by purchasing  private reinsurance, which increases the event size at which a  government backstop—or in the case of the United Kingdom program, a  line of credit—and a portion of reserves (private or government) would be  necessary. Since 2009, the Australian program has purchased private  reinsurance through an international insurance broker with the annual  premium income it receives from its members. Around 60 reinsurers  participate in providing the reinsurance layer of coverage for the program.  The Australian program officials said that purchasing reinsurance not only  provides further protection to the government, it helps bring reinsurers  back into the market as many stopped offering coverage for terrorism risk  following September 11, 2001. In 2015, the United Kingdom’s program  purchased reinsurance for the first time to increase the capacity of its pool  and entered into an agreement with various reinsurers for $2.5 billion  (£1.8 billion) in additional reinsurance capacity. Representatives of global  reinsurers told us that they preferred providing reinsurance to national  programs rather than covering terrorism risk in individual insurers’  portfolios or reinsuring individual properties. They said that providing  reinsurance to national programs helps reinsurers better diversify their  risk geographically and limits their potential losses. In addition, one  reinsurer said that program officials often have expertise in terrorism risk  insurance and high-quality data on the program’s exposure.
Changes to the Austrian and U.S. programs also have involved shifting  more of the risk of losses to primary insurers by increasing parameters  such as deductibles or coshare amounts. For example, according to the  Austrian representative, the Austrian program increased its insurers’  deductible from $60 million to $90 million (€50 million to €75 million) in  January 2013, according to an insurance company representative of the  program. The representative told us this action decreased the amount of  reinsurance the pool needed to purchase, which decreased the cost to  the pool members but required the insurers to hold larger reserve  accounts at their institutions. The members have until 2018 to increase  their reserve accounts. In the United States, the 2015 reauthorization of  the program included changes to several provisions—including increasing  insurers’ coshare amount, the trigger for government involvement, and  the mandatory recoupment amount—all of which decrease the  government’s share of losses and increase the private sector’s share.
While four of the six programs we reviewed have made changes to  increase the private sector’s share of losses, none of the six have made  changes to expand their coverage to include cyberterrorism.  Cyberterrorism is an increasing concern for businesses and governments,  according to recent United Kingdom and U.S. government reports. For  example, according to a United Kingdom government report, physical  damage due to cyberattacks is a growing concern, both in terms of  severity and frequency, due to the increasing interconnectedness  between cyberspace and the physical world. In addition, we have  previously found that pervasive and sustained cyberattacks against the  United States could have potentially devastating impacts. Although  insurance coverage for cyber risk is an emerging market, our review did  not identify any terrorism risk insurance programs that explicitly covered  cyberattacks. However, officials we spoke with from programs in  Australia, the United Kingdom, and Spain suggested that covering losses  from cyberattacks should be studied. In the United States, TRIA does not  specifically address losses from cyberterrorism attacks. In a May 2014  report on terrorism risk insurance, we recommended that Treasury gather  information from the insurance industry related to how cyberterrorism is  defined and used in policies and clarify whether losses that may result  from cyberterrorism are covered under TRIA. In its comments on that  report Treasury stated that TRIA does not preclude federal payments for  a cyberterrorism event. Treasury also stated that while the agency  planned to continue to monitor this issue as it develops and collects  applicable market data as necessary, an advance determination of when  a cyber event is an act of terrorism was not needed. In 2015, Treasury  officials told us that they would, as appropriate, consider addressing  certain issues related to cyberterrorism risk under the terrorism risk  insurance program in the context of other studies and rules required in  the 2015 reauthorization of the program.
section_title: All Five Foreign Programs Collect Funds Up Front to Cover Losses, in Contrast to the U.S. Program, Which Uses Post-Event Funding
paragraphs: All five of the foreign programs we reviewed in-depth—those in Australia,  Austria, the United Kingdom, India, and Spain—collect funds up front  from insurers or policyholders to cover their share of losses. Primary  insurers pay a portion of premiums collected from policyholders to the  national programs. These up-front funds may be used to pay for  reinsurance, build reserves, or pay government backstop fees, depending  on the program. The flow of collected funds for the programs in Australia  and the United Kingdom is illustrated in figure 5. As discussed in the next  section, the premium income also covers administration costs of the  programs. Officials from Australia and the United Kingdom stated that  they use modeling of event sizes and scenarios to understand the  respective program’s potential losses and to help determine the  appropriate level of premiums and reserves. In determining premium  amounts, they also consider whether enough funds are collected to cover  costs and pay government fees. In addition, both programs receive  income from investments of reserve funds, which can be used to pay for  administrative costs. In Austria, the program does not collect premiums  from insurers, but insurers collectively purchase reinsurance using  premiums collected from policyholders, which is considered up-front  funding.
The programs in the United Kingdom and Australia charge insurance  companies premiums that are based on perceived risk for terrorism in  different locations. In both programs, insurers pay higher premiums to the  programs for reinsurance coverage on properties in higher-risk locations,  such as central business districts in large cities where a single event  could produce very large losses. In the United Kingdom, the program  determines premiums as a percentage of coverage and by geographic  location. Specifically, an insurer pays a higher premium to the pool for  reinsuring a property located in the central business district of London  compared to a property located in the central business districts in other  United Kingdom cities or in rural areas. The premium charged by the  Australian program to member insurers is determined by the Australian  Treasury and is set by geographical location based on population density.  The Australian program bases member insurer premiums on a  percentage of the collected premiums from policyholders. As a result,  Australian program officials stated that their annual premium stream  fluctuates with terrorism insurance rates, which complicates program  management.
In contrast to Australia and the United Kingdom, the up-front funding used  in the programs in Spain, India, and Austria is not based on perceived risk  for terrorism in different locations. In these programs, the up-front funds  are collected using flat rates based on coverage amount or market share,  which do not vary by location.
Spain’s program charges policyholders a surcharge, which is based  on the coverage amount in the base insurance policy. The  surcharge—which varies for residential, commercial, and personal  lines—covers all extraordinary risks, including terrorism and natural  catastrophes. Insurers in Spain pay the program the surcharge that  they collect from policyholders.
In India, the premium is based on the coverage amount. According to  program officials, the underwriting committee of the program proposes  premiums and reviews them every 3 or 4 years, and the government  regulator approves them.
Up-front funds related to Austria’s program are based on market  share. Participating insurers are responsible for a proportionate share  of the reinsurance premium based on each company’s share of the  terrorism risk insurance market.
In Australia and the United Kingdom, both programs pay a fee to their  respective treasuries for the promise of payment or a line of credit if the  pools’ funds are depleted. From its inception to 2013, Australia’s program  did not make any payments to the government so that its pool could build  its reserves. In 2012, the Australian Treasury recommended that the pool  pay a dividend to the government over a 4-year period because the  reserves had grown to an adequate level, according to an Australian  Treasury official. In 2014, the pool paid the Australian Treasury $97.7  million (A$150 million) for the government backstop and expects to make  annual payments to the Treasury until 2017-2018. Program officials said  the fee amount was determined through an actuarial process. The United  Kingdom’s program was established in 1993, it was expected that the  program would be required to pay a percentage of its premiums to the  United Kingdom’s Treasury once the program had built its reserves to a  certain amount. In 2015, this percentage was increased to 50 percent of  annual gross premiums plus 25 percent of any annual surplus, according  to the agreement between the program and the Treasury. A United  Kingdom official said the fee is for the guaranteed loan agreement.  According to a United Kingdom Treasury official, the increase was  intended to reflect the potential cost of capital to the government for  backing this liability, and the current reserves were at a sufficient level to  cover losses. The revenue that the programs in the United Kingdom and  Australia provide to their respective national treasuries is placed in  general revenue accounts. The other four programs (Austria, India,  Spain, and the United States) do not pay fees to their treasuries for their  coverage.
In contrast, the U.S. program generally uses a post-event funding  mechanism. In the United States, primary insurers collect up-front  premiums from policyholders, but the policies explicitly state that these  premiums do not cover the government’s share of the losses. The  government would collect premiums from primary insurers through  surcharges paid by policyholders after an event occurs to cover its share  of losses, subject to the recoupment provisions discussed earlier.
Academic literature we reviewed and program and industry  representatives we interviewed indicated a variety of views on the  benefits and challenges of pre-event funding for catastrophic events. One  of the benefits cited for collecting funds before an event occurs is that it  helps limit taxpayer exposure as the funds accumulate over time because  accumulating funds from the private sector keeps insurers involved in  sharing some of the risk and provides a level of certainty about their  ability to cover potential losses. One program representative also noted  that pre-event funding facilitates a program’s ability to purchase private  reinsurance. One study also noted that pre-event funding helps keep  premiums affordable. For example, an independent or government  organization administering the program has lower capital costs compared  to private reinsurers, which would typically incorporate these costs into  their premiums. Further, programs can use pre-event funding  mechanisms to offer premium discounts, which also can help keep  premiums affordable. For example, under the United Kingdom’s program,  businesses can receive a 2.5 percent premium discount for instituting risk  mitigation procedures, such as adding concrete barriers around buildings.
However, an academic study, an insurance industry representative, and  our previous reports on terrorism insurance acknowledged some  challenges associated with pre-event funding for terrorism risk. For  example, because of the difficulty in estimating the frequency and severity  of terrorist events, the appropriate amount to collect before an event  occurs and the appropriate amount to keep in reserve can be challenging  to determine. It could take many years to accumulate sufficient funds to  cover potential losses, and once funds are built up, there may be  pressure to use them for other purposes. For example, as previously  discussed, the governments in Australia and the United Kingdom recently  determined that the programs in their countries had built up sufficient  levels of reserves and increased the fee that the respective programs pay  to their national treasuries for the coverage of a government backstop.  Another challenge cited by an insurance industry representative, in an  academic study, and in our 2014 report is developing adequate controls  and monitoring over the management of the funds. For example, as  discussed in more detail later, an administrative structure is needed to  manage investments and accounting. Finally, our 2008 report on  terrorism insurance and an industry association representative noted that  pre-event funding could divert financial resources away from other  purposes, such as insurers purchasing reinsurance.
section_title: Administrative Costs Are Generally a Small Percentage of the Programs’ Income and Are Covered by Premiums
paragraphs: The programs in Australia, Spain, India, and the United Kingdom have  staff who carry out their responsibilities, such as collecting the premiums  and fees, purchasing private reinsurance, and paying claims to either pool  members or policyholders. The costs for carrying out these  responsibilities are generally a small percentage of the programs’ overall  income but are higher than those of the U.S. program. The Indian and  Austrian programs have minimal administrative costs. For example, the  Austrian program does not incur any administrative costs because it  employs no staff for administration. The program obtains reinsurance  through a major reinsurance broker, and primary insurers pay their  portion of the reinsurance premium directly to the broker. The U.S.  program also has minimal administrative costs. The program is  administered by the Secretary of the Treasury, with the assistance of the  Federal Insurance Office. With the exception of the programs in Austria  and the United States, the administrative expenses of the other programs  are generally paid with the premium income they collect. Table 2 provides  an overview of administrative expenses and activities for the six selected  terrorism risk insurance programs.
According to Australian and United Kingdom Treasury officials, their  respective treasuries incurred minor costs for administering the  government backstops. Australian Treasury officials told us that the  Treasury manages payroll, information technology, and property  maintenance, the total costs of which are equal to a part-time staff  member’s working hours, but that the program pays a fee for its services.  A Treasury official from the United Kingdom told us that one staff person  may spend only part of their time on tasks related to the program and  estimated the costs to be about $9,900 (£7,000).
section_title: In Four Selected Countries Where Terrorist Events Have Occurred, Losses to the Programs Have Not Reached Catastrophic Levels
paragraphs: Among the countries we selected for review, Spain, the United Kingdom,  India, and Australia have experienced terrorist attacks with property and  casualty financial losses within the scope of their respective terrorism risk  programs since September 11, 2001. According to program officials, the  programs in Spain, the United Kingdom, and India paid all the losses  incurred without government financial assistance, and the losses from the  January 2014 attack in Sydney, Australia, did not exceed the program’s  deductibles for the primary insurers. In the United States, no act has been  certified as an “act of terrorism” under TRIA.
Spain. Spain experienced two terrorist attacks in the 2000s: a bombing  on a Madrid commuter train in March 2004 (resulting in personal  damages), and a bombing at an airport on December 2006 (resulting in  material damages). According to Consorcio documentation, the program  paid a total of about $152 million (€98 million) to cover the claims from  both attacks. The program’s reserves were sufficient to cover all of the  losses. According to Consorcio officials, the program did not request  additional funds from the Spanish government to pay the claims. Officials  of Spain’s program told us that no substantive changes were made to the  program as a result of the two terrorist bombings.
United Kingdom. On July 7, 2005, the city center of London experienced  a series of bombings on its transport network. After the 2005 London  bombings, according to program officials, the program received notice of  claims of $25.2 million (£13.66 million) from the two member insurers.  They added that the two insurers paid $9.1 million (£4.9 million) to  policyholders, which was considered the deductible amount the two  insurers were required to pay as program members. After the insurers’  losses exceeded the deductible, the two insurers requested financial  assistance from the program for the remaining $16.2 million (£8.76  million), which the program paid with funds from its reserves, according to  a program official. According to program officials, program reserves were  sufficient to cover the rest of the members’ losses, and the program did  not need government funds to pay the claims.
India. The Indian program and the private reinsurers covered all losses  from November 26, 2008, attacks in Mumbai, India. According to an  official from India’s program, the total amount of financial losses from the  2008 Mumbai attacks was $321 million (INR 3,769 million), and the  program was responsible for paying $128 million (INR 1,500 million).  According to an official, the Indian pool and the commercial reinsurers  were able to pay the claims without requesting additional funds from the  government of India. In addition, the official told us that since the 2008  attacks, the coverage provided to insured participants increased over time  because of the high demand for insurance.
Australia. On January 15, 2015, the Australian Treasurer declared that  the attack on the Lindt Café, Martin Place, Sydney, was a terrorist attack  for the purpose of paying claims. According to the Australian program’s  2015 financial statement, the value of the claims submitted did not  exceed the individual deductibles of program members. Moreover, claims  were not expected to reach beyond the deductible; therefore, the program  incurred no claims expenses. The Australian Treasury’s 2015 Triennial  Review of the program was completed after the Lindt Café attack, but the  Treasury did not recommend any structural changes to the program as a  result of the attack. Among its recommendations, the Australian Treasury  suggested that the current administrative structure of the pool be  retained, that the program should continue to have the discretion to  purchase reinsurance, and that a fee should be paid to the Treasury for  the backstop.
section_title: Agency Comments
paragraphs: We provided a draft of this report for review and comment to the  Treasury, including the Federal Insurance Office and National Association  of Insurance Commissioners (NAIC). In addition, we provided relevant  sections to the terrorism risk insurance programs of Australia, Austria,  India, Spain, and the United Kingdom for their technical review. Treasury  and the terrorism risk insurance programs of Australia, Spain, and the  United Kingdom provided technical comments that we incorporated, as  appropriate.
We will send copies to Treasury, NAIC, and other interested parties. In  addition, the report will be available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: For terrorism risk insurance programs in the United States and selected  foreign countries, the objectives of our report were to (1) compare the  organizational structures and the role of government and (2) examine the  loss-sharing arrangement between the government and private sector  and the methods by which the programs are funded.
To address these objectives, we reviewed the Terrorism Risk Insurance  Act of 2002 (TRIA), as amended, and the Terrorism Risk Insurance  Program Reauthorization Act of 2015, as well as prior GAO reports on  this topic. We also reviewed relevant documents from the Organisation  for Economic Co-operation and Development (OECD) and its  International E-Platform on Terrorism Risk Insurance (OECD E-Platform);  relevant industry reports; and documents available on national terrorism  risk insurance program websites, such as annual reports and program  descriptions. To identify documents and reports, we relied in part on  Internet and electronic database searches on national terrorism risk  insurance programs. Further, we reviewed cited sources in the  documents we reviewed to identify additional documents for review. We  also relied on recommendations from officials and representatives we  interviewed on national terrorism risk insurance programs. To identify  documents and reports on the comparison of pre-event and post-event  funded program financing, we relied on Internet and electronic database  searches on this topic.
In addition, we conducted a number of interviews. To collect information  on TRIA, we interviewed officials from the Department of the Treasury  (Treasury), the National Association of Insurance Commissioners, the  Congressional Budget Office, and the Congressional Research Service.  To collect information on the terrorism risk insurance market in countries  with national terrorism risk insurance programs and those without, we  interviewed representatives from the OECD, several global reinsurance  and insurance firms, and industry participants, such as representatives  from insurance trade associations, a rating agency, and insurance  brokers. We selected among the largest reinsurance firms that have  experience with private reinsurance agreements involving foreign  terrorism risk insurance programs. We made the selection based on  documentation from Treasury’s Federal Insurance Office and a large  international broker that has participated in reinsurance agreements  between private reinsurers and foreign terrorism risk insurance programs.  To collect information on individual programs, we interviewed government  and national terrorism risk insurance program officials from Australia,  Austria, Spain, and the United Kingdom. More specifically, we interviewed  officials from Australia’s Government Treasury and the Australian  Reinsurance Pool Corporation (ARPC); Austria’s Österreichischer  Versicherungspool zur Deckung von Terrorrisiken; Spain’s Consorcio De  Compensacion De Seguros (Consorcio); and, the United Kingdom, HM  Treasury, the Bank of England’s Prudential Regulation Authority, and the  Pool Reinsurance Company Limited (Pool Re). In addition, we  corresponded with officials from the Indian Market Terrorism Risk  Insurance Pool to collect information on that program, and we  corresponded with representatives of other national terrorism risk  insurance programs to clarify program information collected from their  websites or other sources. We did not conduct an independent legal  analysis to verify the information provided about the laws, regulations, or  policies of the foreign countries selected for this study.
To address objective one, using information we collected from OECD and  program documents and interviews, we identified countries with national  terrorism risk insurance programs and reviewed available information on  those programs. The U.S. terrorism risk insurance program is limited to  commercial property and casualty insurance, and therefore we limited our  review to programs that provide similar coverage. In addition to the U.S.  program, we identified 15 national terrorism risk insurance programs with  sufficient information available to be included in our review. We excluded  from our review programs that did not provide commercial property and   casualty insurance coverage, those with limited or no available  information, or were undergoing restructuring.
To develop generalized descriptions of the features of terrorism risk  insurance programs, we analyzed documents on the 16 national terrorism  risk insurance programs, including the U.S. program. Specifically, one  GAO analyst independently reviewed the documents and categorized  certain features of each country’s terrorism risk insurance program,  including the extent of government involvement; program funding; and  coverage options, such as nuclear, biological, radiological, or chemical  weapons coverage. These categorizations were verified by a second  analyst, and any discrepancies were resolved by both analysts or a  moderator. The analysts used a coding structure to track their findings.  Using this information, we developed three categories of national  terrorism risk insurance program: multilayered structures with government  backstop, structures in which government provides all terrorism risk  coverage, and structures in which insurers and reinsurers provide all  terrorism risk coverage. Then we grouped the national programs into one  of the three categories and compared these categories to the program in  the United States. To assess the data reliability of the OECD’s E- Platform, specifically the country profiles on the site, we followed up with  OECD officials through e-mail correspondence on the timeliness of the  profiles. OECD officials advised us of any updates since E-Platform was  launched in 2014 and said that the information in the country profiles was  provided by the national terrorism risk insurance programs. As available,  we corroborated the information in the E-Platform’s country profiles with  national terrorism risk insurance program documentation. We determined  the data were sufficiently reliable for the purpose of categorizing and  identifying the specific features of the programs.
To address our second objective, we selected six programs for further  review. We used information collected through the content analysis— including program documentation and interviews with government and  program officials—and developed criteria to help ensure that we selected  programs representing diverse characteristics. For example, our criteria  included selecting countries representing different types of programs,  such as at least one country with a national terrorism risk insurance  program that did not include any government financial support as part of  the insurance coverage, at least one country with a national terrorism risk  insurance program that was not a member of OECD, and at least one  country with a national terrorism risk insurance program that was  developed prior to 2001. Using these characteristics, among others, we  judgmentally selected the programs in Australia, Austria, India, Spain,  and the United Kingdom. We also included the program in the United  States in the review for this objective.
We further assessed and compared the national terrorism risk insurance  programs in Australia, Austria, India, Spain, the United Kingdom, and the  United States. We reviewed the six programs in order to identify and  assess the layers of insurance coverage and which participants  (policyholders, insurers, reinsurers, and government) are responsible for  each layer, how the programs are structured, how the financing of the  programs was established, how the programs have been affected by  actual claims and administrative activities and costs. In determining the  insurance coverage and loss-sharing arrangements of the programs, we  reviewed documentation from OECD and the individual programs. In  addition, we analyzed the 2014 annual reports of ARPC, Consorcio, and  Pool Re. The reports included a description of the programs, specifically  the programs’ activities, and an audited financial statement of the  programs, which provided information on programs’ revenue and costs. A  financial statement on the Austrian terrorism risk insurance program was  not available, so we relied on other documents describing the program  and an interview with a program representative for this information. For  India’s terrorism risk insurance program, we relied on an annual report of  the organization that administers the program and written responses from  a program representative. We shared relevant sections of the draft report  with program officials in the five countries to confirm the accuracy of the  information.
In comparing the coverage of the six selected terrorism risk insurance  programs, we considered the economic output of the different countries.  In identifying the gross domestic product (GDP) for the six countries, we  used GDP data from the World Bank. For all foreign currency amounts we  present in the report, we converted them into 2014 U.S. dollars by  applying an economic variable known as the purchasing power parity rate  that we obtained from the World Bank. The purchasing power parity rate  is the rate at which the currency of one country would have to be  converted into that of another country to buy the same amount of goods  and services in each country. For values that were from a year other than  2014, we converted the value into U.S. dollars using the purchasing  power parity rate for that year, and then used U.S. GDP data to convert  the value into constant 2014 U.S. dollars. To estimate coverage in the  United States, we simulated costs to the government and private insurers  for a $100 billion loss in 2016 with the top 20 insurers experiencing  losses.
To analyze the administrative costs of the five selected foreign terrorism  risk insurance programs and how such costs were incorporated into  program fees or premiums, we reviewed the programs’ audited financial  statements, where available. Only the terrorism risk insurance programs  of Australia and the United Kingdom had financial statements from 2010  to 2014 that we could review. In addition, we reviewed the Spanish  program’s financial statement for 2014 for its administrative costs in 2013  and 2014. According to an official representing the Austrian program, the  program does not have any administrative costs. India’s program does  not maintain a financial statement on its terrorism risk insurance program  with specific administrative expenses, so these data were not available to  us. To assess the reliability of the available data on administrative costs,  we reviewed the documentation on the data and assessed them for  consistency and whether the financial statements were audited. The  financial statements of the Australian and Spanish programs were  reviewed and signed by their respective Supreme Audit Organizations.  The financial statements for the United Kingdom’s program were signed  by a public accounting firm. We determined the data were sufficiently  reliable for the purpose of reporting on these programs’ administrative  costs.
Further, we reviewed annual reports and other program documentation  and interviewed officials from the terrorism risk insurance programs of  Australia, India, Spain, and the United Kingdom to identify terrorist attacks  in their countries since 2001. Using interviews and correspondence with  program officials, we identified the amounts paid on claims resulting from  the terrorist attacks and the financial effect on the programs from the  claim payments and unanticipated outcomes or program changes since  2001, if any, related to the claim payments. We also interviewed a  representative of the Austrian terrorism risk insurance program to confirm  whether the program had paid out any claims since its creation. We  focused on claims and changes since 2001 because the attacks of  September 11, 2001, led a number of countries to develop new terrorism  risk insurance programs.
We conducted this performance audit from January 2015 to April 2016, 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: Terrorism Risk Insurance Program Features
paragraphs: The tables in this appendix list the terrorism insurance program features  that we identified across 16 reviewed programs. The tables illustrate the  variation in program features across the programs we reviewed. For  some programs, including those in Bahrain, India, and Switzerland, we  did not find information in our review to describe all program features.
Multilayered terrorism risk insurance programs with government  backstops have some similarities in structure, but features among  programs may differ. Generally, these programs have layers of insurance  coverage that include an insurance industry deductible, program  reserves, reinsurance, and a government backstop. Table 3 illustrates  some differences and similarities among eight multilayered programs with  government backstops that we reviewed.
In the national terrorism risk insurance programs in Spain and Israel,  government entities provide all the terrorism risk coverage. Even though  the programs are similar in this regard, other program features differ, as  shown in table 4.
In these programs, the government provides no financial backstop to the  terrorism risk insurance program and in most cases—with the exception  of India and South Africa—has no administrative role, as shown in table  5.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Jill Naamane (Assistant Director);  Nancy Eibeck (Analyst-in-Charge); Pamela Davidson; Raheem Hanifa;  Mark Ireland; Karen Jarzynka-Hernandez; DuEwa Kamara; John Karikari;  Colleen Moffatt Kimer; Patricia Moye; Jennifer Schwartz; Jena Sinkfield;  and Frank Todisco made key contributions to this report.