U.S. Terrorism Insurance System Falling Short; Improvement Needed to Protect Nation's Economy

For Release

June 20, 2005

The terrorism insurance system in the United States is failing to provide businesses with adequate financial protection, leaving the nation vulnerable to economic disruption if there is a major terrorist attack, according to a RAND Corporation study issued today.

The report by the RAND Center for Terrorist Risk Management Policy (CTRMP) says the terrorism insurance system is not robust enough to respond to a rapidly evolving terrorist threat against U.S. businesses.

“America’s economy does not have adequate financial protection from terrorist attacks,” said Peter Chalk, a RAND terrorism expert and lead author of the report. “Protecting businesses against the economic impact of a terrorist attack should be part of a robust homeland security effort.” Other authors of the study are Bruce Hoffman, Robert Reville and Anna-Britt Kasupski of RAND.

The study points out that terrorism insurance does not cover losses caused by attacks from domestic terrorist groups. In addition, it says most insurance polices now exclude coverage for attacks involving chemical, biological, radiological and nuclear (CBRN) weapons.

On top of this, many of the nation’s businesses are not buying terrorism insurance that became available after the Sept. 11, 2001 terrorists attacks, increasing the economic damage that would be caused by a new terrorist strike on the United States, the study finds.

The report recommends that the U.S. Congress consider proposals to increase the number of businesses buying terrorism insurance by lowering its price. It says this could be done without increasing costs to taxpayers by changing the terms of federal reinsurance.

The report also says Congress should consider:

  • Expanding and improving the financial protections offered by Terrorism Risk Insurance Act (TRIA), instead of allowing the law to expire as scheduled in December.
  • Requiring that terrorism insurance cover acts by domestic groups and attacks involving CBRN. Researchers acknowledged that the latter poses a challenge that may be most appropriately covered through a direct government insurance program.
  • Creating a national board of governors that can assess the performance of TRIA or its successor.

The Sept. 11 terrorist attacks caused substantial losses for the insurance industry, with current estimates topping $32 billion in payments. As a result, insurance companies began excluding terrorism coverage from policies shortly after the attacks.

In response, Congress enacted TRIA in 2002, which requires insurers to offer commercial terrorism policies and provides federal aid as a backstop to cover losses on the scale of Sept. 11. The move was seen as a step to give insurance companies time to assess their exposure to terrorism losses, and to consider how to price and underwrite terrorism insurance policies.

Comparing the continuing threat of terrorist attacks to the insurance coverage provided under TRIA, researchers conclude that more needs to be done to extend financial safeguards against terrorist attacks. Because TRIA expires at the end of December, the current terrorism insurance system will be dissolved unless Congress extends or revises provisions of the law.

The RAND study notes that a number of trends in terrorism have increased the risk to the private sector since Sept. 11. These include an increased focus on “soft” business and commercial targets, both as a result of heightened security at government and military facilities and due to the degradation of al Qaeda’s operational capacity to execute long-range strategic strikes.

In addition, the report points out that al Qaeda has shown increased interest in launching attacks designed to cause mass disruption and economic harm, magnifying the importance of private sector targets. One scenario with the potential for devastating uninsured losses that was highlighted in the report was an attack with a so-called “dirty-bomb”—an explosive device that disburses radioactive material.

The RAND report warns that the United States still faces a potent threat from al Qaeda, despite significant efforts that have been made since the 2001 terrorist attacks to disrupt and weaken the group. In addition, some U.S. extremist groups continue to pose threats.

Copies of “Trends in Terrorism: Threats to the United States and the Future of the Terrorism Risk Insurance Act” (ISBN: 0-8330-3822-2) can be ordered from RAND’s Distribution Services (order@rand.org or call toll-free in the U.S. 1-877-584-8642).

The RAND Center for Terrorism Risk Management Policy provides research to inform public and private decision makers on economic security issues created by the threat of terrorism. The center is a partnership of the RAND Institute for Civil Justice, the RAND Infrastructure, Safety and Environment unit, and Risk Management Solutions, the world’s leading provider of models and services for catastrophe risk management.

About RAND

RAND is a research organization that develops solutions to public policy challenges to help make communities throughout the world safer and more secure, healthier and more prosperous.