New RAND Study Finds Expiration of Terrorism Risk Insurance Act Could Prove Costly for Workers’ Compensation Markets, Businesses and States

For Release
May 7, 2014

Policy debates over extending the Terrorism Risk Insurance Act have focused mainly on property insurance, yet certain institutional features of workers’ compensation markets could cause the act’s expiration to have very different consequences in worker’s compensation than in property and other insurance lines.

Compared to other insurance lines covered by the act, workers’ compensation offers insurers less flexibility to control terrorism exposure through modifications in coverage. Workers’ compensation policies – which are rigidly defined by state statute - cannot exclude terrorism, impose policy limits or exclude losses from nuclear, biological, chemical or radiological attacks.

If reinsurers are unwilling to provide much more coverage for both conventional and nuclear, biological, chemical or radiological attacks, insurers might respond to the December 2014 expiration of the act by declining to provide workers’ compensation coverage to employers who present a high geographic concentration of potential losses.

Without the act in place, employers perceived to be at high risk for terrorism might have to obtain coverage in markets of last resort (residual markets) which could charge higher premiums. The higher cost of coverage, in turn, would tend to reduce labor incomes and economic growth even if there is never another attack, although these effects are likely to be small.

The expiration of the act and growth in the residual market might also mean that workers’ compensation losses from a catastrophic terrorist attack would largely be financed by businesses and taxpayers throughout the state where an attack takes place, adding to the challenge of rebuilding in that state. The federal Terrorism Risk Insurance Act, on the other hand, would spread those losses across the country.

The study, “The Impact of Eliminating the Terrorism Risk Insurance Act on Workers’ Compensation Insurance Markets,” can be found here. For more information, or to schedule an interview with the authors, contact Lisa Sodders, RAND’s Office of Media Relations, (310) 393-0411, ext. 7139, or lsodders@rand.org.

###