Has time run out for TRIA's renewal and how does this bode for US terrorism insurance? asks Helen Yates

The impending sunset of the US Terrorism Risk Insurance Act of 2002 (TRIA) on 31 December was meant to have pride of place on the industry's agenda for 2005. To say Katrina stole the limelight would be making light of what is the industry's costliest catastrophe in history. Nevertheless, TRIA is due to expire and if it does many believe that will signal an end to a market for terrorism cover. "There's no private market for reinsurance for terror cover," says Ernie Csiszar, president and CEO of the Property Casualty Insurers Association of America (PCI). "If there is no TRIA there will be no market."

This is a frightening prospect considering Risk Management Solutions' (RMS) most recent US Terrorism Risk Model release, which predicts that the risk of extreme events over the next five years, including attacks using chemical, biological, radiological and nuclear (CBRN) weapons, will increase. It maps the potential losses from a range of severe CBRN attacks (eg anthrax, nuclear bomb or sabotaged nuclear power station), many of which could cost in excess of $100bn in insured losses and, in a couple of cases, over $500bn. Such events would exhaust the current TRIA limit of $100bn (see table 1). "If any great debate is required as to what the terms of renewal should be we'd better have that discussion real soon because we're running out of time," warns Csiszar.

A stopgap measure

TRIA was born out of the insurance and reinsurance crisis that followed the attacks of September 11 2001. Faced with $32bn in damage claims and fearing another attack of the same magnitude, many began to exclude terrorism cover from their policies. TRIA was crafted as a short-term public private solution. Providing a federal reinsurance backstop for the insurance industry in the case of extreme losses, it was intended to give insurers time to assess their exposures and to create a viable private market for terrorism cover.

To that extent it has succeeded. Take-up of terrorism insurance has considerably increased and the overall costs for coverage have come down. Under current terms the industry retains the bulk of the risk (80%) with RMS estimating that in over 90% of attacks, insurers will pay the majority of the losses. "We keep saying it is solvency not subsidy that TRIA is providing," explains Andrew Coburn, director of terrorism research at RMS. "It's all about the policy it would protect."

The US Treasury, in its 30 June letter to Congress, called for an end to TRIA "in its current form". While this statement is open to interpretation the main concern is that if TRIA sunsets, insurers will exit the market fearing no protection from the losses that could be incurred from an extreme terror attack. Potential liquidation is cited as a genuine fear. Workers' compensation insurers and self-insured employers are unable to exclude terrorism cover and would be left with no choice but to withdraw from the business. And if insurers do exit the market, terrorism cover could once again become unattainable, ultimately damaging the wider economy. "The issue is a national one," adds Coburn. "Insurers are not going to bet their business on continuing that exposure."

Know your enemy

At the Rendez-Vous de Septembre in Monte Carlo, GE Insurance Solutions CEO Ron Pressman called for TRIA's renewal and emphasised the importance of understanding the nature of the terrorism threat. "We need to look at the root causes of terrorism," he said. "Understanding is not a search for excuses. Its mindset and motives must be understood." Coburn warns that terrorism is "a very emotional subject" and that trying to make important decisions without truly understanding the threat is going to lead to poor decision-making. He believes people need to be more analytical. "Terrorism is a political act," he explains. "People tend to think it's a random attack carried out by a madman. Nothing could be further from the truth."

Al Qaeda expert and former principal investigator of the UN Terrorism Protection Branch Rohan Gunaratna was at the Monte Carlo discussion to explain the nature of the terrorism threat. Since 9/11 and the subsequent invasion of Afghanistan the epicentre of terrorism has changed. It is no longer Afghanistan, he said, but now Iraq. The invasion of Afghanistan caused a dispersal of the Al Qaeda network and a diffusion of the threat, which in turn has led to an infiltration of many local jihad groups around the world. While previously these groups, such as Jemaah Islamiah in Indonesia, had carried out local missions, they are now increasingly targeting westerners, such as with the Bali bombings. "The local agenda has changed," Gunaratna explained. "They no longer believe in the local jihad but now believe in a global jihad."

RMS' counter-terrorism analysts most fear a scenario whereby a terrorist group acquires a CBRN weapon on the black market, from stockpiles of failed states or corrupt regimes and smuggles it into the US. Coburn highlights the risk posed by unchecked shipping containers. "It's better targeted now than it was," he says. "But it's still only 8% of containers that are checked and that means 92% goes unchecked."

By its very nature terrorism is an act of political violence, and for many this is reason enough for the US government to be involved. "A terror attack is an attack on a city, a state or a nation ... not on a business," said Joe Plumeri, chairman and CEO of Willis at the Monte Carlo gathering. Others point out that since governments can affect terrorism risk through their foreign policy and actions they should take responsibility. The invasion of Iraq "led to anger and resentment in the Muslim world. Terrorist groups exploit this," says Gunaratna.

A viable alternative?

While the US Treasury Department report is recommending the federal government assume a lesser role in insuring terrorism risks, most voices in the industry insist it won't work. "Let's not mix apples with oranges," says Csiszar. "Let's not treat terrorism as if it were just some other natural catastrophe - it's an uninsurable risk." RMS's report - A risk-based rationale for extending TRIA - concludes that terrorism has a number of characteristics that make it radically different from other perils normally covered by insurance, namely:

- Terrorism can potentially cause a much greater insured loss than other perils, and claims could potentially exceed the capital the insurance industry has available;

- Diversification of risk is problematic - terrorism risk is highest in the places where there is the greatest demand for terrorism insurance and insured value;

- State regulations impact insurer's ability to price and control their exposure;

- There are higher levels of uncertainties associated with terrorism risk than insuring other types of natural catastrophe perils; and

- Government is an active player in shaping the risk covered by insurers.

TRIA was always intended to be a temporary three-year stopgap. Even the former US Treasury Assistant Secretary for Financial Institutions Wayne Abernathy has admitted it was put together in a hurry and, as a result, certain elements of the legislation were flawed. If TRIA is renewed there are various proposals on the table as to how it can be improved. Amongst the Treasury's suggested modifications is to give a greater share of terrorism risk to the insurers. This includes raising the threshold of "certified" events; having higher retention levels; increasing the industry co-share; and reducing the number of lines covered by TRIA.

Others believe these suggestions have their pitfalls. While Csiszar is in favour of shifting some of the risks over to the private market he warns, "it's very dangerous to raise the retention level significantly higher as it will hit the SME insurers". He is arguing strenuously on behalf of the PCI for certain terms such as general liability to remain, but is still realistic. "You've heard the old saying that legislating is like sausage making - it truly is - you don't know what's going to come out in the end."

The RAND Center for Terrorism Risk Management Policy recommends making terrorism insurance mandatory for companies owning or operating systems vital to the nation's critical infrastructure, making TRIA more independent by putting in place a board of governors, and insisting that policies cover acts by domestic groups, and also acts involving CBRN weapons. Former AIG CEO Maurice "Hank" Greenberg has called for a temporary tax holiday on reserving. "If we want the insurance industry to build reserves to carry more of the risk, unspent premiums shouldn't be taxed as profit," agrees RMS' Coburn.

At the time of writing - with the deadline imminent - it still appears that these recommendations are falling on deaf ears. And as the clock ticks away it becomes a futile luxury to debate TRIA's finer points. If plans are not put in place soon for TRIA's renewal, there will be no need for a debate about the terms of its renewal because - if the worst predictions are realised - there will no longer be a market for terrorism cover in the US.

- Helen Yates is deputy editor of Global Reinsurance.