Actuaries Look at TRIA

July 14, 2004

With the uncertainty of the occurrence and magnitude of another terrorist attack on American soil, the Extreme Events Committee of the American Academy of Actuaries has released a monograph examining the impact of terrorism on property and casualty insurers.

This analysis will reportedly be helpful in evaluating the merits of legislation to extend the Terrorism Risk Insurance Act of 2002 (TRIA), which recently was introduced in the U.S. House of Representatives.

The Terrorism Risk Insurance Act of 2002, implemented by the U.S.
Department of the Treasury, is a federal program providing reinsurance to property and casualty insurers in the event of terrorism from a foreign source. The act helps commercial property owners obtain affordable terrorism insurance by requiring insurers to offer terrorism insurance while providing reinsurance to cover much of the large terrorism losses. Insurance availability is reportedly essential for construction, business expansion, and economic growth. The program will end on Dec. 31, 2005.

The Academy’s Extreme Events Committee monograph analyzes four major points about the need for a federal backstop program: the difficulty of quantifying the losses from an extreme terrorist attack, making it difficult to understand and pool the risk, 2) the perceived concentration of terrorism targets in major urban areas, making it difficult for an insurer to diversify the risk, 3) the threat of insurer insolvency(ies) from an extreme terrorist attack, and 4) the legal, regulatory, financial, and actuarial hurdles the industry will have to overcome in finding a new way to manage the risk.

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