Hepler Broom, LLC

Risky Business: The Terrorism Risk Insurance Act

February 13, 2015

The backbone of insurance is risk.  It is assessing risk, allocating risk, pricing risk, and insuring risk.  The insurance industry is – in a word – one of risk.

To help calculate risk, the industry has built sophisticated models and algorithms, designed to measure the likelihood of certain events and scenarios.  These predictive models quantify the odds of your car getting wrecked, your home being damaged, or – as Nationwide so morbidly reminded us – the odds that your child might die from a preventable accident.

The insurance industry, of course, insures risks beyond the home- auto- life triumvirate.  There are models to predict the risk of a lawsuit, the risk of a business interruption, and the risk of a monumental natural disaster.  There are even models to predict the risk of an athlete being injured or the odds that the endorsed company behind that athlete might suffer from his or her fall from grace.

But one area of risk defies quantification and modeling:  terrorism.  The ability to predict the next attack, its date, its location, its potential damage, and the like, is beyond any computer’s or individual’s capacity.  To be trite, there is no accounting for the unpredictable.

And that is where the government has stepped in.  In 2002, President Bush signed the Terrorism Risk Insurance Act (“TRIA”) to help provide a federal backstop to reinsurers, who had been unable to accurately model or price terrorism exposure.  In its current form, TRIA helps reinsurers and insurers cover losses in excess of $100 million caused by a terrorist attack.

To amount to an “act of terrorism” within the meaning of TRIA, the Secretary of the Treasury, working with the Secretary of State and the Attorney General, must first certify that the act was, in fact, an act of terrorism.  This is, of course, entirely circular.  Fortunately, the definition also describes an act of terrorism as a violent act that causes damage within the United States (or to United State property abroad) that was committed in an effort to coerce the civil population or to influence the policies or conduct of the United States government.

Under TRIA’s definition, there are no small acts of terrorism.  TRIA specifically states that if the total property and casualty damage is less than $5 million, there was no terrorist act.  And this makes sense.  TRIA is designed to insure against big risks; really big risks; Super Bowl size risks.  Indeed, according to the Baltimore Sun, both the National Football League and Major League Baseball lobbied for the reauthorization of TRIA this year.  There were even vague rumors that the big game could be cancelled if TRIA was not in place.  Large real estate conglomerates and utility companies also expressed concerns about a possible lapse in TRIA.

In other words, TRIA was up for reauthorization this year.  And while it was ultimately signed into law on January 12, 2015, following overwhelming bipartisan support (becoming the New Congress’s first law), from January 1, 2015 until its renewal, there was no backstop in place.  For nearly two weeks in January, TRIA’s coverage had lapsed.  Did this make a difference?  Not ultimately.  But it certainly could have.  During that brief twelve-day window in January, armed gunmen attacked the Paris office of Charlie Hebdo, killing twelve people and injuring several others.

TRIA is not without its critics.  A paper by Robert Rhee, for the Cato Institute, criticized the government’s involvement in the insurance industry, arguing that the private market was equipped to underwrite the risk.  Other critics have noted that TRIA was intended as a temporary program and that this latest reauthorization only further delays the impetus for forging a permanent solution.

As it stands, Congress’s current reauthorization keeps the federal backstop in place for another six years.  What is the risk that Congress fails to approve the next reauthorization?  I don’t know, but maybe someone has a model for that already.