Issues and Options for Government Intervention in the Market for Terrorism Insurance

Following the 9/11 terrorist attacks, the federal government adopted the Terrorism Risk Insurance Act (TRIA), which requires insurers to make terrorism coverage available to commercial policyholders. In exchange, the federal government will reimburse insurers for a portion of insured losses above a particular threshold. TRIA's impending "sunset"-on December 31, 2005-presents an opportune time to evaluate what role the U.S. government should play in the terrorism insurance market and what approach should be taken to manage risks and to provide compensation for personal injury and property and financial losses due to acts of terrorism. This paper has a dual purpose: to help frame the central issues that should be considered in the debate over whether to extend, modify, or end TRIA, and to explore the broader issue of the appropriate role of disaster insurance within a system for managing risks created by the possibility of terrorist attacks and compensating losses caused by terrorist attacks. The paper also discusses options that policymakers might consider in addressing these issues and goals against which various options may be evaluated.