How the Terrorism Risk Insurance Act Affects Commercial Property Insurance

Posted by: Agent Hub

Within the last decade, the insurance industry has had to adjust itself in light of major catastrophes. Although most of these stem from natural disasters like floods, tornadoes and hurricanes, one human-caused tragedy in September 2001 created a big shift for insurers and reinsurers. The terrorist attacks that occurred on Sept. 11 caused losses totaling over $31 billion, over half of which were paid for by reinsurers, and completely reshaped risk assessment processes and programs for insurers.   

Impacts of Sept. 11 on the Insurance Industry

Before the events of Sept. 11, terrorism coverage was essentially provided to commercial insurance customers free of charge since the likelihood of property damage from terrorist attacks were considered remote. After the attacks, things changed. There was suddenly a need for risk assessment in this area of insurance. Many reinsurers became less likely to reinsure policies in major cities that were now seen as more vulnerable to terrorist attacks. Primary insurers even requested permission from state departments to remove terrorism coverage from commercial insurance policies. However, unlike most risks measured by the insurance industry, terrorism doesn’t share certain measurable characteristics like probability, frequency, and the exposure to the risk of loss.

The Need for Terrorism Coverage

In order to help provide temporary terrorism coverage and lessen the economic impacts of major terrorist attacks, Congress passed the Terrorism Risk Insurance Act, or TRIA. The program created by the act lets the government and the insurance industry share losses according to a preset formula should a terrorist attack occur in the future. Passed into law in 2002, and renewed three more times in 2005, 2007 and 2015, the newest version of the law is now called the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) and extends the program through 2020.

How TRIA Functions

Under TRIA, an act of terrorism has to be officially certified by the federal government, must exceed $5 million in aggregate losses, and have caused more than $100 million in damages. If such an event were to happen, terrorism insurance would cover damaged or destroyed commercial property, including building structures, inventory, equipment, and furnishings. Essentially, TRIA assures the support and resources necessary to rebuild companies that are victims of a terrorist attack and requires all property and casualty insurers in the U.S. to have terrorism coverage available.  

Without TRIA, many people have predicted terrorism coverage premiums would have been far more costly and policies much harder to obtain. There is also a general agreement that the act and the federal reinsurance plan have enabled the commercial insurance market to function in the years since the attacks, since it helps in measuring potential losses and has assisted in the development of reinsurance for types of risk the private sector should begin to manage themselves.