A Successful (Yet Somewhat Untested) Case of Disaster Financing: Terrorism Insurance Under TRIA, 2002–2020

Resources for the Future Discussion Paper 17-06

33 Pages Posted: 11 Apr 2017

See all articles by Erwann Michel-Kerjan

Erwann Michel-Kerjan

University of Pennsylvania - The Wharton School - Center for Risk Management

Howard Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department; National Bureau of Economic Research (NBER)

Date Written: February 15, 2017

Abstract

The Terrorism Risk Insurance Act (TRIA), passed at the end of 2002, established a public-private partnership between the US federal government, private insurers, and all commercial enterprises operating on US soil. Renewed and modified by the US Congress and the president in January 2015 until December 2020, the TRIA program requires insurers to offer terrorism insurance to their commercial policyholders while providing insurers with free up-front financial protection up to $100 billion against terrorist attacks in the United States. With the federal government providing a financial safety net, the private insurance sector can offer coverage against an uncertain risk that would otherwise be largely considered uninsurable, thus making terrorism insurance widely available and affordable. Overall premiums have been at about 2 to 6 percent of property premiums over the past four years, with the most significant increase recently for financial institutions (from 4 percent in 2012 to 9 percent in 2015). A significant portion of insurance policies, 23 percent according to a recent study by the US Treasury, which are typically those covering smaller firms, include terrorism coverage at no disclosed additional cost. TRIA is a successful case of public-private disaster risk financing that has received bipartisan political support. Yet it remains untested for large losses and it is unclear how the market and policymakers will react should another large-scale insured loss occur. TRIA also raises concerns about the indemnification of individual victims of a terrorist attack (in addition to workers’ compensation).

Note: processed-martha 4/11/17

Keywords: terrorism, insurance, national security, public-private partnerships, TRIA

Suggested Citation

Michel-Kerjan, Erwann and Kunreuther, Howard C., A Successful (Yet Somewhat Untested) Case of Disaster Financing: Terrorism Insurance Under TRIA, 2002–2020 (February 15, 2017). Resources for the Future Discussion Paper 17-06. Available at SSRN: https://ssrn.com/abstract=2951178 or http://dx.doi.org/10.2139/ssrn.2951178

Erwann Michel-Kerjan (Contact Author)

University of Pennsylvania - The Wharton School - Center for Risk Management ( email )

Jon M Huntsman Hall, Suite 500
3730 Walnut Street
Philadelphia, PA 19104-6365
United States

Howard C. Kunreuther

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
558 & 559 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States
212-854-0423 (Phone)
215-573-2130 (Fax)

National Bureau of Economic Research (NBER)

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