TRIA
The Terrorism Risk Insurance Act (TRIA) is a United States federal law enacted in 2002 in response to the inability of insurance businesses to underwrite risks for terrorism following the September 11, 2001 attacks. TRIA was designed to provide a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. The act was intended as a temporary measure to stabilize the insurance market and ensure that commercial properties, especially in high-risk areas, could still obtain insurance coverage against terrorist attacks.
Under TRIA, the federal government acts as a reinsurer, meaning it provides financial backing to insurance companies to cover catastrophic losses due to terrorism, under certain conditions. This backing is only triggered if the total damage from a terrorist attack exceeds a certain threshold, after which the government and insurers share the costs according to a formula defined by the act. The act has been renewed and updated several times since its original passage, with adjustments to the program's specifics such as the trigger levels, co-pay percentages, and the cap on the federal contribution.
The purpose of TRIA is to ensure the continued availability of terrorism risk insurance by capping the potential financial exposure of insurers, thus encouraging them to offer coverage for terrorism risk. This is seen as critical for economic stability and for the viability of commercial investments, especially in industries and areas that are considered at high risk for terrorism.
Premiums for terrorism risk insurance under the Terrorism Risk Insurance Act (TRIA) are determined by individual insurers based on their assessment of the risk of terrorism and the potential cost of claims. Since TRIA is essentially a federal backstop rather than a direct insurance policy, it doesn't prescribe specific premium rates for terrorism risk insurance. Instead, insurers calculate premiums for terrorism risk coverage as they would for other types of insurance, taking into account various factors including:
Location of the Insured Property: Properties located in areas perceived to be at higher risk of terrorist attacks, such as major cities or near critical infrastructure, may have higher premiums due to the increased risk.
Type of Business or Property: Certain types of properties or businesses may be considered more likely targets of terrorism and thus may face higher premiums. For example, landmarks, transportation hubs, large public venues, and high-rise buildings might be assessed as higher risks.
Building Characteristics: The construction materials, age, and safety features of a building can also influence the cost of terrorism risk insurance. More robust and secure buildings might be seen as less risky.
Insurance Capacity: The availability of insurance capacity in the market to cover terrorism risks can also affect premiums. If insurers have limited capacity, premiums may be higher.
Historical Claims: If the insurer has experienced terrorism-related claims in the past, this may influence their perception of the risk and the pricing of their terrorism risk insurance.
Government Program Conditions: The specifics of the TRIA program, including the deductible levels, co-payments, and the cap on the federal backstop, can influence how insurers price this coverage. Insurers need to retain a portion of the risk and cover initial losses up to a certain point before the TRIA backstop is triggered, which can affect pricing strategies.
Premium calculations for terrorism risk are complex and can vary significantly between insurers. Insurers use actuarial models to estimate the likelihood and potential cost of terrorism events, but given the unpredictable nature of terrorism, these models involve a high degree of uncertainty. As a result, terrorism risk premiums can vary widely across the industry, reflecting differences in risk assessment methodologies, insurer appetites, and the characteristics of the insured properties and businesses.