The Federal Role in Terrorism Insurance

Concerned that the unavailability of terrorism insurance would impede economic recovery and hinder growth after the 9/11 attacks, Congress passed the Terrorism Risk Insurance Act of 2002 (TRIA). TRIA will sunset at the end of 2007 unless Congress takes further action. This book examines the implications of allowing TRIA to expire and of enhancements aimed at improving the availability and affordability of insurance for nuclear, biological, chemical, and radiological (NBCR) attacks. The analysis takes a systematic approach to addressing the deep uncertainties that underlie the market for terrorism insurance and is the first study of TRIA to consider not just taxpayer payments through the program but also the cost of government compensation and assistance following a terrorist attack when analyzing the program’s effect on government spending. The authors conclude that taxpayer cost is lower with TRIA than without TRIA across a broad range of assumptions about attack frequency and the proportion of uninsured losses that are compensated postattack. The analysis also cautions policymakers to be careful when modifying the program to better address NBCR attacks: Simply expanding the program to require insurers to offer NBCR coverage may not achieve the desired outcomes. The authors identify program changes that will produce positive results for both NBCR and conventional attacks that are robust to key underlying uncertainties.