Terrorism Insurance:

Treasury Needs to Collect and Analyze Data to Better Understand Fiscal Exposure and Clarify Guidance

GAO-14-445: Published: May 22, 2014. Publicly Released: Jun 11, 2014.

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What GAO Found

Comprehensive data on the terrorism insurance market are not readily available and Department of the Treasury (Treasury) analysis to better understand federal fiscal exposure under various scenarios of terrorist attacks has been limited. Treasury compiled some market data from industry sources, but the data are not comprehensive. Federal internal control standards state that agencies should obtain needed data and analyze risks, and industry best practices indicate that analysis of the location and amount of coverage helps understand financial risks. However, without more data and analysis, Treasury lacks the information needed to help ensure the goals of the Terrorism Risk Insurance Act (TRIA) of ensuring the availability and affordability of terrorism risk insurance and addressing market disruptions are being met and to better understand potential federal spending under different scenarios.

Available data show that terrorism insurance premiums and other market indicators are stable. For example, estimated terrorism insurance premiums have been relatively constant since 2010 (see figure). Insurers told GAO that, in 2012, terrorism insurance premiums made up on average less than 2 percent of commercial property and casualty premiums. According to industry participants, prices for terrorism coverage have declined, the percentage of businesses buying coverage seems to have leveled recently, and insurers' ability to provide it has remained constant.

Estimated Terrorism Insurance Premiums by Total and Selected Insurance Lines, 2004-2012

Estimated Terrorism Insurance Premiums by Total and Selected Insurance Lines, 2004-2012

Insurers and other industry participants cited concerns about the availability and price of terrorism coverage if TRIA expired or was changed substantially, but some changes could reduce federal fiscal exposure. Some insurers GAO contacted said they would stop covering terrorism if TRIA expired. Changes such as increasing the deductible or threshold for required recoupment of the government's share of losses through surcharges on all commercial policyholders could reduce federal fiscal exposure. Most insurers GAO contacted expressed concerns about solvency and ability to provide coverage if their deductible or share of losses increased. Insurers were less concerned about increases to the thresholds for government coverage to begin or to the required recoupment of the government's share of losses.

Why GAO Did This Study

Congress passed TRIA in 2002 to help ensure the availability and affordability of terrorism insurance for commercial property and casualty policyholders after the September 11, 2001, terrorist attacks. TRIA was amended and extended twice and currently will expire at the end of 2014. Under TRIA, Treasury administers a program in which the federal government and private sector share losses on commercial property and casualty policies resulting from a terrorist attack. Because the federal government will cover a portion of insured losses, the program creates fiscal exposures for the government. GAO was asked to review TRIA.

This report evaluates (1) the extent of available data on terrorism insurance and Treasury's efforts in determining federal exposure, (2) changes in the terrorism insurance market since 2002, and (3) potential impacts of selected changes to TRIA. To address these objectives, GAO analyzed insurance data, information from 15 insurers selected primarily based on size of insurer, interviewed Treasury staff and industry participants, updated prior work, and developed examples to illustrate potential fiscal exposure under TRIA.

What GAO Recommends

Treasury should collect and analyze data on the terrorism insurance market to assess the market, estimate fiscal exposure under different scenarios, and analyze the impacts of changing program parameters. Treasury agreed with these recommendations.

For more information, contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov.

Recommendations for Executive Action

  1. Status: Open

    Comments: The Terrorism Risk Insurance Program Reauthorization Act of 2015 required Treasury to collect certain data on terrorism insurance. In March 2016, Treasury released a data collection template seeking 2015 data from insurers in four general areas: pricing, take-up rates, exposure, and reinsurance. In order to provide a transition period for responding insurers, Treasury determined that the 2016 data collection would be voluntary. Treasury is evaluating the results of this voluntary collection to identify needed adjustments for future data collections. In April 2016, Treasury issued a notice of proposed rulemaking on annual data collections, which would begin in March 2017. Written comments on the proposed rulemaking were due May 31, 2016. We will continue to monitor Treasury?s progress in finalizing a data collection rule.

    Recommendation: The Secretary of the Treasury should collect the data needed to analyze the terrorism insurance market. Types of data may include terrorism coverage by line of insurance and terrorism insurance premiums earned. In taking this action, Treasury should determine whether any additional authority is needed and, if so, work with Congress to ensure it has the authority needed to carry out this action.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: In June 2016, Treasury released a report on the effectiveness of the Terrorism Risk Insurance Program. In this report, Treasury analyzed data the agency collected from insurers on pricing, take-up rates, exposure, and reinsurance. For example, the report includes analyses of differences in terrorism insurance pricing and take-up rates by geography. In addition, the report includes analyses of the exposure of insurers and the program to hypothetical terrorist event scenarios. Treasury has published a notice of proposed rulemaking that would require insurers to submit annual data on terrorism insurance beginning in calendar year 2017. As Treasury continues to collect data, it will continue to evaluate issues of availability, affordability, and impacts of the program on insurers of different sizes, and to analyze any identifiable trends in the data.

    Recommendation: The Secretary of the Treasury should periodically assess data collected related to terrorism insurance, including analyzing differences in terrorism insurance by company size, geography, or industry sector; conducting hypothetical illustrative examples to help estimate the potential magnitude of fiscal exposure; and analyzing how changing program parameters may impact the market and fiscal exposure.

    Agency Affected: Department of the Treasury

  3. Status: Open

    Comments: Treasury officials stated that they would consider addressing certain issues regarding cyber terrorism risk under the program in the context of issuing reports or rules required in the Terrorism Risk Insurance Program Reauthorization Act of 2015. We will continue to follow up with Treasury on the extent to which it has gathered information on insurance for cyber terrorism during its outreach to insurance industry participants.

    Recommendation: The Secretary of the Treasury should gather additional information needed from the insurance industry related to how cyber terrorism is defined and used in policies, and clarify whether losses that may result from cyber terrorism are covered under TRIA--clarification could be made through an interpretative letter or revisions to program regulations, some combination or any other vehicle that Treasury deems appropriate.

    Agency Affected: Department of the Treasury

 

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