Uncle Sam’s Promise

The economic impact of COVID-19, the disease associated with the new coronavirus, has put the Terrorism Risk Insurance Act (TRIA) in the spotlight.

The law was passed after property and casualty insurance markets sharply pulled back risk-bearing capacity in the aftermath of the terrorist attacks of Sept. 11, 2001. The innovative federal backstop to absorb catastrophic insurance claims gave carriers the confidence they needed to return to the market and protect American businesses from the financial impact of another terrorist attack.

Now Congress is discussing a TRIA-like backstop to provide similar assurances in the event of another pandemic.

Robert Hartwig, chief economist at the Insurance Information Institute during the 9/11 crisis, recalls the days leading up to the passage of TRIA, a process that could prove helpful as Congress and the industry confer on a public-private pandemic risk-transfer solution. Back then, Hartwig predicted to The Wall Street Journal that the global insurance industry would absorb the costs of the tragic terrorist attacks in New York City and Arlington, Virginia.

“It was my professional, on-the-spot assessment, provided while events were still unfolding before my eyes,” says Hartwig, whose office in Lower Manhattan was a few blocks from Ground Zero. These days, Hartwig is a finance professor at the University of South Carolina and director of the school’s Risk and Uncertainty Management Center. In the stark aftermath of the terrorist attacks, he recalls, there was “some chatter” that exclusions in property and casualty insurance policies would shield the industry from having to absorb the losses, which he disputed.

Ultimately, insurers paid out nearly $40 billion and made a decision to specifically exclude terrorism as a covered risk in all future policies, resulting in the development of a stand-alone market for terrorism insurance backstopped by the federal government’s Terrorism Risk Insurance Program. Congress reauthorized the program in November 2019, extending it for another eight years.

Unlike many other government-funded insurance pools across the world, TRIA has no capital put aside for its purpose, which is to provide a form of reinsurance to insurance carriers in the stand-alone terrorism insurance market. Rather, it is a pledge by Uncle Sam that, if a terrorism act, certified as such by the U.S. Department of Treasury, produces losses exceeding specified amounts, the federal government will absorb these costs.

Without TRIA, it is unlikely that U.S. insurers would entertain the assumption of catastrophic terrorism losses. As Hartwig recalls, “For nearly two years after 9/11, I worked essentially on nothing other than the original TRIA legislation, joining a pan-industry effort to educate federal legislators and various federal agencies on the need for some form of a federal backstop to restore stability and capacity to the insurance markets. Over the years, it has done just that.”

Nearly every large global corporation today buys terrorism insurance and related policies like political risk insurance, political violence insurance and active assailant insurance. However, many midsize companies and especially small businesses forego investing in these policies, finding little need to transfer risks viewed as improbable. One can understand their reluctance; since the 2002 passage of the original TRIA law, the federal government has yet to certify a terrorist event on U.S. shores.

Not even the Boston Marathon bombing in 2013 that killed three people and maimed several hundred others fit the government’s technical definition of terrorism in the TRIA legislation, even though the two brothers who perpetrated the attack said they were motivated by their extremist Islamic beliefs. For the many businesses physically damaged and disrupted by the bombing, this turned out to be good news, since their all-risk property insurance policies that excluded acts of terrorism covered the related losses.

Another possibility for the disinclination of some companies to buy terrorism insurance is the apparent pause in headline-grabbing attacks on U.S. soil since the Boston Marathon bombing. Do not be fooled: acts of terrorism have not gone away. The U.S. Government Accountability Office (GAO) has tabulated at least 85 violent extremist acts resulting in at least one person’s death since 9/11—73% of them attributable to far right-wing groups and 27% to Islamist extremists. The government also foiled many planned terrorist attacks. “While we have not seen a big dramatic incident like 9/11, people discount the success of the FBI and Homeland Security in frustrating bad actors intent on attacking churches, synagogues and so on,” says Tarique Nageer, a terrorism placement advisory leader at Marsh.

Outside the United States, a disconcerting number of terrorist attacks occurred in Afghanistan, Mumbai, Kenya, Sudan and Mali in 2019, resulting in hundreds of fatalities. By any estimation, terrorism is here to stay. This bleak prospect should compel all businesses—not just large global corporations—to buy terrorism insurance and other violence-oriented insurance policies. Yet many companies pass on the opportunity. That’s just one challenge for brokers doing their best to serve clients.

The Small-Commercial Challenge

In addition to educating small businesses on the need to invest in terrorism insurance, brokers must contend with the difficulties of putting together a comprehensive global terrorism insurance program for midsize and larger businesses. While crafting a global program is much less of an issue for the world’s largest brokerages, many midsize firms lack the data analytics and risk-modeling resources to do the same. Even large brokerages are stymied by the hodgepodge of definitions of insurable exposures in the world’s government-funded terrorism risk insurance pools.

These anomalies are spelled out in the annual Terrorism Pool Index published by Willis Towers Watson and the International Forum of Terrorism Risk Re/Insurance Pools (IFTRIP). An organization representing the government terrorism pools, IFTRIP was formed in 2016 to provide more uniform approaches to securing terrorism insurance on a blanket global basis.

Council members have voiced concerns over both the tepid demand for terrorism insurance among small companies and the problems with piecing together a comprehensive global terrorism insurance program. In many ways, it’s an old tune, with Council surveys going back several years indicating similar problems.

Such issues are not confined to the United States. “Prior to 1993, terrorism-related losses were automatically covered gratis in every commercial insurance policy in the U.K.,” says Steve Coates, chief underwriting officer at Pool Re, Britain’s government-backed terrorism reinsurer. “Following several fairly large violent events, a separate [terrorism insurance] market was developed. Penetration among companies with large real estate holdings is high, but for small and medium-sized businesses it remains pretty low, with less than 5% buying the cover.”

As in America, Coates says, smaller companies are restrained by questions over need and cost. The hardening of the commercial property insurance market has resulted in sharply higher premiums in some cases, making buyers wary of tacking on an additional expense for a potential loss they envision as a long shot, even though the cost is relatively inexpensive. “Considering that a catastrophic terrorism event can completely destroy your business,” Coates says, “the premium is fairly cheap.”

Even if a physical facility escapes damage, arterial roads may be ruined, hindering access to the business by employees and consumers, resulting in a severe drop in income. Although both property damage and business disruption losses are covered in commercial all-risk property insurance policies, losses caused by terrorism events are excluded, meaning the business is on the hook for the expense.

This devastating possibility would seem to serve as an incentive to buy terrorism insurance. The deterrent in the United States is that, since 9/11, the country has not experienced an event certified by the U.S. Treasury Department as an act of terrorism, a certification required to trigger TRIA coverage of losses.

The Treasury, for example, did not certify the Boston Marathon bombing as a terrorist act, even though the TRIA law in effect at the time stated the event must be “considered dangerous to human life, property or infrastructure” and be committed by an individual or individuals “to coerce U.S. civilians” or “affect the conduct of the U.S. government by coercion.”

Wendy Peters, executive vice president and global terrorism practice leader at Willis Towers Watson, believes the government’s decision took into account that the businesses most severely disrupted by the bombing did not have terrorism insurance. “Most of them were mom-and-pop shops and restaurants that would have gone out of business, since their insurance policies excluded coverage for terrorism,” she says.

In effect, the government gave a free pass to the small businesses so they could transfer the costs of rebuilding to their commercial property insurers. This act of generosity, however, may encourage other small businesses to expect the same response.

Still, Hartwig says, the federal backstop has served a vital purpose, instilling confidence in the private insurance markets to underwrite terrorism coverage for virtually all risks, including workers compensation. “By being there to enter the market in the event of a truly catastrophic event along the lines of 9/11, the government is able to cap insurers’ losses,” he says.

Piecing It Together

Large global corporations, of course, have broader worries than domestic terrorist attacks in their home base, as they operate across dozens of potentially vulnerable countries. Nageer says more than 65% of Marsh’s large corporate clients buy terrorism coverage, a number that has remained steady for the past seven or eight years. He notes the buying patterns reflect risk profiles on an industry sector and geographical basis. “A large media company in New York easily comprehends that it may be a target,” he says, “which motivates interest in the coverage.”

Assuming the country-by-country exposures are significant, brokers must assemble comprehensive insurance protections with no gaps in coverage worldwide. That’s not easy. “The challenges are the different definitions of what is and isn’t an act of terrorism and the financial thresholds of loss triggering the policy,” Pool Re’s Coates says. “It’s difficult to piece together the puzzle.”

Other industry participants agree. Richard Halstead, an underwriter for war, terrorism and political violence at Hiscox, says brokers looking to secure terrorism insurance for a policyholder with a global presence must address a range of different perils in different countries. “An insured in Hong Kong right now has a major riot issue,” Halstead says, “whereas a company in New York has more of a terrorism threat and a company operating in Burkina Faso must deal with the risk of a coup.”

Terrorism insurance is off the table in some countries. “It’s virtually impossible for us and other large brokers to secure coverage for countries sanctioned by the U.S. government,” Peters says.

Since geopolitics is an unpredictable chess game, it is important that companies buy terrorism coverage and political risk insurance before a region becomes problematic and, therefore, more costly to insure. “The perfect example here is Hong Kong,” Peters says. “Clients operating there that did not see a need to buy political violence insurance are now concerned over physical damage, as well as a significant business interruption.”

While cobbling together terrorism insurance on a blanket coverage basis is a challenge, it is not insurmountable. “There’s ample capacity in the insurance and reinsurance markets,” Hartwig says. “With the exception of a few turbulent hot spots in the Middle East and Africa and countries affected by U.S. sanctions, the insurance is available in private markets reinsured on a catastrophic basis by TRIA and other government pools.”

Halstead agrees, but he suggests a broker’s experience and expertise are crucial factors in securing comprehensive global protection with few if any gaps in coverage. “If you choose the right broker to place your program, there needn’t be any overwhelming challenges,” he says.

Peters affirms that broker experience is fundamental to serving client needs. “Risk managers are uncomfortable with this risk,” she says. “They don’t understand it and don’t know the right insurance markets. Even risk managers at Fortune 100 companies are unsure what they’re buying and how to buy it. A complicated risk like terrorism requires the help of a sophisticated broker. I say this from the perspective of having a very large book of terrorism insureds.”

Like Marsh, Willis Towers Watson can put together comprehensive terrorism insurance coverage across more than 200 countries and address gaps in risk through political risk insurance, political violence insurance and other policies. “There are gray areas—whether an incident is an act of terrorism or an act of war or civil insurrection,” Peters says. “There are also regulatory compliance issues. In certain jurisdictions, for instance, you have to buy terrorism insurance from locally admitted programs and pay the premiums locally. You need to understand these nuances in putting together the program. Smaller brokers may not have the global scope or knowledge to do it.”

Choice of carrier is equally important. Not all insurers have suitable reinsurance relationships and agreements to spread terrorist risks. “If you purchase a program from an insurer with an appetite for global terrorism exposures and the experience to adjust a claim in [the risky] territories, the wordings to cover all of the contingencies should be in place, solving most of your problems,” Halstead says.

In the United States, Nageer says, the insurance markets with an appetite for terrorism risks include AXA XL, AIG, Chubb and Allianz. “Typically, we will structure the program for a large client in a tower, pulling different limits, from $50 million to as much as $500 million, from five or 10 insurance markets willing to write the business on a quota share basis,” he says. “If the client is looking to cover $2 billion in risk worldwide, we will find a carrier to handle the primary layer and then top it with other layers of excess insurance to reach that level. We can also set up a captive for a client to access TRIA through a captive, assisting more cost-effective limits.”

A Less Complicated Tomorrow

To make the tasks of all brokers more efficient going forward, Pool Re wants to modernize the definition of terrorism in the United Kingdom through an act of Parliament. The goal is to broaden the purview of the pool to absorb incidents perpetrated by domestic terrorists and even cyber terrorists. “We’re having parallel discussions with other government-funded pools in IFTRIP to similarly evolve our value propositions,” Coates says.

If the pools can agree on more uniform terminology, that’s good news for every broker and carrier looking to transfer clients’ catastrophic terrorism risks. Equally good news is the recent extension of TRIA. “It was one of the few bipartisan pieces of legislation to get through Congress last year, which tells you just how important it is,” Hartwig says. “Having witnessed what happened to the Twin Towers, it’s comforting to know, if another horrific terrorist attack occurs on U.S. soil, the private sector through the global insurance industry will absorb the losses.”

His comment resonates at a time when the property and casualty insurance industry confronts potential government demands in states like Massachusetts, New Jersey and Ohio to absorb not only current pandemic-caused business interruption losses—despite insurance policy contracts that specifically exclude such losses—but future claims as well. In other words, unless the federal government is willing to backstop the brunt of catastrophic pandemic losses, it is unlikely the industry will sit down at the table and discuss its risk-bearing participation.