National Security Perspectives on Terrorism Risk Insurance in the United States

by Henry H. Willis, Omar Al-Shahery

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Research Questions

  1. How has terrorism risk changed since 2001, and does it still warrant industry attention?
  2. Can we model terrorism risk adequately to know how to administer terrorism insurance in a private marketplace?
  3. Does access to terrorism risk insurance in and of itself make the nation more safe and secure?

Abstract

Congress enacted the Terrorism Risk Insurance Act (TRIA) in 2002, in response to terrorism insurance becoming unavailable or, when offered, extremely costly in the wake of the 9/11 attacks. The law provides a government reinsurance backstop in the case of a terrorist attack by providing mechanisms for avoiding an immediate drawdown of capital for insured losses or possibly covering the most extreme losses. Extended first in 2005 and again in 2007, TRIA is set to expire at the end of 2014, and Congress is again reconsidering the appropriate government role in terrorism insurance markets.

This policy brief examines the potential national security implications of allowing TRIA to expire. Examining the history of terrorism in the United States since the passage of TRIA and reviewing counterterrorism studies, the authors find that terrorism remains a real national security threat, but one that is very difficult for insurers to model the risk of. They also find that terrorism risk insurance can contribute to making communities more resilient to terrorism events, so, to the extent that terrorism insurance is more available with TRIA than without it, renewing the legislation would contribute to improved national security.

Key Findings

Terrorism Remains a Real, Albeit Ambiguous, National Security Threat

  • The most likely attack scenarios involve arson, conventional explosives, or firearms. Al Qaeda and other groups may aspire to conduct more destructive attacks using unconventional weapons, but so far lack the combined intent and capability to do so.
  • However, analysis of past and current trends does not resolve the uncertainty surrounding the future risk of terrorism.

Terrorism Risk Models Are Limited in the Types of Risk They Can Estimate

  • Terrorism risk models based on historical events or theories of terrorist decisionmaking are limited: They cannot extrapolate to estimate the likelihood of future attacks from terrorist threats beyond those that have been already recognized.
  • The $27.5 billion threshold for aggregate insured losses in TRIA ensures that the insurance industry, rather than the taxpayer, is ultimately responsible for paying for incidents that are within the realm of the industry's modeling capability.

Terrorism Insurance Can Contribute to Making Communities More Resilient to Terrorism Events

  • Access to appropriately priced terrorism insurance can promote economic growth, making resources available to address national security threats or other social problems.
  • Terrorism insurance can improve both the pace and effectiveness of recovery efforts, since such efforts will be more rapid and efficient when it is clear how much compensation will be available and how it will be distributed.
  • To the extent that terrorism insurance is more available with TRIA than without it, renewing the legislation would contribute to improved national security.

The research described in this report was conducted within the Center for Catastrophic Risk Management and Compensation, a part of RAND Justice, Infrastructure, and Environment, a division of the RAND Corporation.

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