Distribution of Losses from Large Terrorist Attacks Under the Terrorism Risk Insurance Act

Following the 9/11 attacks and the substantial losses incurred, insurers questioned their ability to pay claims in future attacks and began to exclude terrorism coverage from commercial insurance policies. The fear that a lack of insurance coverage would threaten economic stability and growth, urban development, and jobs led the federal government to adopt the Terrorism Risk Insurance Act (TRIA) of 2002. The pending expiration of TRIA requires that policymakers assess the effectiveness of TRIA and decide whether to extend, modify, or terminate it. A central issue for this assessment is how TRIA will redistribute losses among the different parties under different circumstances. To provide an accurate basis on which to determine the effects of TRIA, the authors simulate the expected losses and the distribution of losses among stakeholder groups for each of three attack modes: an aircraft impact on a major office building, an indoor anthrax attack on a major office building, and an outdoor anthrax attack in a major urban area. The study's results show that the ultimate distribution of losses under TRIA depends on the attack mode and cumulative annual losses. The authors also estimate the loss distribution that would result when different provisions of TRIA are changed. Based on this analysis, overall, the role of taxpayers is expected to be minimal in all but very rare cases, such as serial large attacks on major buildings, highly effective large outdoor anthrax releases, or nuclear detonations. In addition, while TRIA helps reduce uninsured terrorism losses by making coverage available and by limiting target insurers' exposure, the analysis in this study shows that, even with TRIA in place, a high fraction of losses would go uninsured in each of the attack scenarios examined.