ThE INS AND
OUTS OF TRIA
Phillip Pettersen looks at the pros and cons of extending the
Terrorism Risk Insurance Act.
After the events of September 11, 2001 and before the enactment of what has happened to date by examining how the US Government
the Terrorism Risk Insurance Act of 2002 (TRIA) on November 26, has discharged its role as reinsurer of last resort for terrorist events
2002, the insurance and reinsurance markets were in a quandary about after 9/11.
how best to respond to future events of a similar nature.
The actions of the market post-9/11 must be seen in the light of
Predictably, the market responded by altering coverage provisions, the following key factors:
where it was allowed to do so, to exclude loss due to terrorism. As a
• Price: The premium to be charged for a risk or known peril is,
result, until TRIA was established, the only way to obtain terrorism
simplistically, a factor of the frequency and severity of loss, which is
coverage was by purchasing a stand-alone terrorism policy or by
usually determined over time. After 9/11, the market was clearly in
extending property programmes, which are available in some States.
new territory, one in which a deterministic approach to frequency
TRIA is due to sunset at the end of 2007, and the question now is
and severity clearly did not apply.
whether it should be continued or whether the commercial markets
should offer broad terrorism coverage. • Actuarial science was unable to help due to the high degree of
uncertainty that had to be built into stochastic models, which led
It’s easy to argue that a government’s role is to provide support when
to the forecasting of inequitable and unsustainable premium loads.
a country’s commercial infrastructure—including, in this case, both
the capital markets and re/insurance markets—is unable to respond • The major modelling companies and broking houses had not built
due to a lack of adequate capital in the face of an extreme event. But terrorism-specific models before and, therefore, needed time to
what factors should determine where the loss should lie? Should the build and refine such models.
Government respond to events that are brought about by humankind?
Many markets were ill-prepared to consider offering the coverage
Should events that occur naturally be serviced by the commercial
for events they thought were uninsurable. This led the markets
markets? And will the commercial sector ever have enough capital to
and their customers to turn to the Federal Government for help.
respond to a nuclear or biological extreme event?
Inevitably and rightly, the Federal Government was asked to intervene
In order to understand the TRIA Extension Bill currently making to allow the market to regroup and rethink its strategy in dealing
its way through the House of Representatives, it helps to recap with terrorism.
Bermuda Re/insurance . September 2007 39
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68