The business of terrorism: the Terrorism Risk Insurance Act of 2002.

• Author: Jarret, Joseph G.

Since the terrorist attacks of September 11, 2001, the economy has been harmed by the withdrawal of many insurance companies from the marketplace for terrorism risk insurance. As a result, on November 26, 2002, President Bush signed into law the Terrorism Risk Insurance Act of 2002 (TRIA). (1) The act is intended to create a terrorism insurance market that will serve the needs of the insured while managing the risk to the insurance industry.

An analysis conducted by various major insurance providers revealed that the recent withdrawal of certain insurance carriers from the marketplace was caused in large part by the uncertainty arising from the industry's risk exposure to future terrorist attacks. Such uncertainty has led to the cancellation of construction projects, increased premiums, and substantial risk shifting among insured and their insurers. (2)

Purpose of TRIA

With the threat of future terrorist attacks looming, the federal government sought to reduce the economic risks and consequences associated with terrorism by restoring insurance capacity to the marketplace. Thus, Congress passed an unprecedented bill that provides for the federal government and the insurance industry to share the risk of loss from future terrorist attacks. (3) In a nutshell, the bill spells out the deductible and coinsurance features under which insurers will share losses with the federal government. Further, it provides a federal backstop for certain acts of terrorism through a temporary federal program whereby the federal government will share the risk of loss from future terrorist attacks with the insurance industry. Importantly, this system of shared public and private compensation is limited to insured commercial property and casualty losses arising from acts of terrorism under the act. Consequently, private policies, such as home or auto, are excluded. (4)

The overall intent of the act is to promote new construction and spur economic activity while creating a terrorism insurance market on which the industry could build, thus benefitting both the insured and the insurer. The program will be administered by the U.S. Department of Treasury and will sunset on December 31, 2005.

Compliance

In an effort to assist insurers in complying with TRIA, the National Association of Insurance Commissioners has adopted two model disclosure forms. (5) The model disclosure forms are designed to assist insurers in meeting their obligations under the act as well as to...