Initial Results on Availability of Terrorism Insurance in
Specific Geographic Markets (11-JUL-08, GAO-08-919R).
The terrorist attacks of September 11, 2001, on the World Trade
Center in New York City and the Pentagon in Arlington, Virginia,
are estimated to have resulted in insured losses amounting to
$32.5 billion. Subsequent to the attacks, insurers largely
stopped offering terrorism insurance coverage to commercial
property owners, which raised significant concerns about
potential negative economic consequences. To help restore
confidence and stability in property insurance markets, Congress
enacted and the President signed the Terrorism Risk Insurance Act
of 2002 (TRIA). Under TRIA, the federal government assumed
significant responsibility for the potential insured financial
losses associated with future terrorist attacks. While TRIA,
which was reauthorized in 2005 and again in 2007, has been
credited with stabilizing markets for commercial property
insurance, some building owners, Members of Congress, and other
industry participants remain concerned that there may still be
gaps in coverage. In particular, they have expressed concerns
about the ability of policyholders located in large urban areas
that are viewed as being at high risk of attack to obtain
terrorism insurance coverage. Under the 2007 statute that
reauthorized TRIA coverage, GAO was required to conduct a study
to determine if specific markets in the United States have any
unique constraints on the amount of terrorism insurance available
and to evaluate options to enhance coverage. This law required
GAO to submit a report to the Committee on Banking, Housing, and
Urban Affairs of the Senate and the Committee on Financial
Services of the House of Representatives no later than June 23,
2008. The purpose of this report is to document our compliance
with this reporting requirement.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-08-919R
ACCNO: A82808
TITLE: Initial Results on Availability of Terrorism Insurance in
Specific Geographic Markets
DATE: 07/11/2008
SUBJECT: Brokerage industry
Deductibles and Coinsurance
Federal property
Federal regulations
Financial management
Funds management
Insurance
Insurance companies
Insurance cost control
Insurance losses
Insurance premiums
Insurance regulation
Liability (legal)
Prices and pricing
Property
Property damages
Property losses
Reporting requirements
Terrorism
Cost estimates
Treasury Terrorism Risk Insurance
Program
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GAO-08-919R
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GAO-08-919R:
United States Government Accountability Office:
Washington, DC 20548:
July 11, 2008:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
Subject: Initial Results on Availability of Terrorism Insurance in
Specific Geographic Markets:
The terrorist attacks of September 11, 2001, on the World Trade Center
in New York City and the Pentagon in Arlington, Virginia, are estimated
to have resulted in insured losses amounting to $32.5 billion.[Footnote
1] Subsequent to the attacks, insurers largely stopped offering
terrorism insurance coverage to commercial property owners, which
raised significant concerns about potential negative economic
consequences. To help restore confidence and stability in property
insurance markets, Congress enacted and the President signed the
Terrorism Risk Insurance Act of 2002 (TRIA).[Footnote 2] Under TRIA,
the federal government assumed significant responsibility for the
potential insured financial losses associated with future terrorist
attacks. While TRIA, which was reauthorized in 2005 and again in 2007,
has been credited with stabilizing markets for commercial property
insurance, some building owners, Members of Congress, and other
industry participants remain concerned that there may still be gaps in
coverage.[Footnote 3] In particular, they have expressed concerns about
the ability of policyholders located in large urban areas that are
viewed as being at high risk of attack to obtain terrorism insurance
coverage.
Under the 2007 statute that reauthorized TRIA coverage, GAO was
required to conduct a study to determine if specific markets in the
United States have any unique constraints on the amount of terrorism
insurance available and to evaluate options to enhance coverage. This
law required GAO to submit a report to the Committee on Banking,
Housing, and Urban Affairs of the Senate and the Committee on Financial
Services of the House of Representatives no later than June 23, 2008.
[Footnote 4] The purpose of this report is to document our compliance
with this reporting requirement. Enclosure I contains a copy of the
briefing slides we used on June 20, 2008, and June 23, 2008, to brief
committee staffs; the slides describe (1) whether the availability of
terrorism insurance for commercial properties is constrained in any
geographic markets and the impact of any constraints on pricing and
coverage amounts, (2) factors limiting insurers� willingness to provide
coverage, and (3) advantages and disadvantages of some public policy
options to increase the availability of property terrorism insurance.
[Footnote 5]
To assess whether the capacity, or willingness or ability, of the
insurance industry to provide terrorism insurance is constrained in any
geographic markets, we compiled and analyzed available data on
insurance and reinsurance industry capacity, terrorism insurance take-
up rates, and terrorism insurance pricing. We also interviewed more
than 100 industry participants with nationwide perspective and
expertise in specific geographic markets, including Atlanta, Boston,
Chicago, New York, San Francisco, and Washington, D.C. We selected
these high-, moderate-, and low-risk markets based on an industry
analyst�s ranking of cities by risk of terrorism. Among others, we
interviewed representatives of trade associations for insurers and
policyholders, policyholders in a variety of industries, national and
regional insurance and reinsurance brokers, staff at insurance and
reinsurance companies, and state regulators. To identify the factors
limiting insurers� willingness or ability to provide terrorism
insurance coverage, we interviewed representatives of national
insurance companies holding a combined 37 percent to 52 percent market
share in the states we studied as well as regional insurers. We also
spoke with risk modeling firms and a credit rating agency. To obtain
views on the advantages and disadvantages of some public policy options
that have been proposed to increase insurers� capacity to provide
terrorism coverage, we relied on our interviews with industry
participants described above. We also interviewed academics who have
written on the topic of terrorism insurance, research organizations,
and consumer interest groups.
We conducted this performance audit from January 2008 to June 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained to date provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
TRIA requires private insurers to offer terrorism coverage for
commercial property and casualty insurance, including, among others,
workers� compensation insurance. Insurers must make terrorism coverage
available to their policyholders on the same terms and conditions,
including coverage levels, as other types of insurance coverage. For
example, an insurer offering $100 million in commercial property
coverage is required to offer $100 million in coverage for property
damage from a certified terrorism event.[Footnote 6] However, insurers
could impose an additional charge for this coverage, and policyholders
have the option of not purchasing it.
Under TRIA, the federal government is required to reimburse insurers
for a portion of their losses from certified terrorist acts.
Specifically, the federal government would reimburse insurers for 85
percent of their losses after the insurers pay a deductible amounting
to 20 percent of the previous year�s direct earned premiums.[Footnote
7] The federal funding is activated when aggregate industry losses
exceed $100 million and is capped at an annual amount of $100 billion.
[Footnote 8]
Originally enacted as a 3-year program, Congress has reauthorized the
program twice and recently extended it until 2014. In December 2005,
Congress passed the Terrorism Risk Insurance Extension Act that
increased the required amount insurers would have to pay in the
aftermath of a terrorist attack. In December 2007, Congress approved
the Terrorism Risk Insurance Program Reauthorization Act and expanded
the definition of an act of terrorism to include acts carried out by
domestic actors. The act also clarified language on insurer�s
liability, stating that insurers are not responsible for losses that
exceed the federal government�s $100 billion annual liability cap.
Commercial property insurance policies can be simple or complex,
depending on the value and location of the properties being insured.
Property owners may insure properties individually or consolidate
multiple properties into a portfolio and insure them with a single
policy. Terrorism coverage may be included in a policyholder�s all risk
property insurance policy in which one or many insurers may
participate, with each insurer providing a portion of the coverage up
to the full amount of the policy. Or policyholders may obtain terrorism
coverage through a stand-alone insurance policy from a separate insurer
that may cost more than the all risk property coverage. Some
policyholders may self-insure for terrorism risk through a captive
insurer, which insures the liabilities of its owner.
Summary:
While commercial property terrorism insurance coverage appears to be
available nationwide at rates policyholders view as reasonable, certain
policyholders may face challenges in obtaining desired amounts of
coverage or obtaining coverage at prices they view as reasonable. The
policyholders experiencing these challenges were typically those that
own large, high-value properties in areas where many large buildings
are clustered, particularly in urban areas viewed as at high risk of
attack, such as Manhattan, and to a lesser extent certain areas of
other major cities, such as Chicago and San Francisco, according to
policyholders and brokers. To address challenges in obtaining terrorism
insurance coverage, policyholders we contacted reported taking a
variety of approaches. For example, some policyholders purchased
coverage from a large number of insurers in complex insurance programs,
adding to what can be a time-consuming and onerous process for
policyholders and their insurance brokers. Others purchased coverage in
a separate policy (rather than as part of an overall property insurance
package), which policyholders said may be more costly, or self-insured.
Policyholders said that, through such approaches, they have generally
been able to meet their current requirements for terrorism insurance
coverage. They also attributed their ability to obtain coverage, as did
insurers and industry analysts, to the TRIA program, with some industry
participants citing the current �soft� (or competitive) insurance
market as contributing to availability.
While TRIA limits insurers� financial exposure related to future
terrorist attacks, several insurers said they remained concerned about
the exposure they retain, and their efforts to minimize potential
losses appear to be the primary reason some policyholders face
challenges in obtaining coverage. Insurers said they seek to mitigate
potential losses from a single terrorism event by limiting the amount
of property coverage that they offer in specific areas of cities, such
as downtown locations or financial districts where many large buildings
are clustered, or in specific areas of cities considered to be at high
risk of attack, such as parts of Manhattan. These exposure limits,
referred to here as aggregation limits, generally make obtaining
coverage more difficult or costly for certain policyholders in these
areas, according to a variety of sources we contacted.
Insurance industry participants and analysts had no consensus on
whether TRIA should be modified or additional actions taken to increase
the availability of terrorism insurance coverage. Industry analysts and
participants identified the following advantages and disadvantages of
various policy proposals that have been made to increase terrorism
insurance coverage.
* One proposal involves lowering insurers� TRIA deductibles in areas
affected by a future large terrorist attack under the premise that
further relieving insurers of the financial consequences of such
attacks would make them more willing to offer terrorism insurance
coverage. [Footnote 9] Some insurers and industry participants we
contacted said that this proposal could make insurers more willing to
offer coverage in areas affected by an attack or series of attacks.
However, others said that the proposal�s effects may be limited. While
the proposal would substantially reduce the TRIA deductible, officials
we contacted said that it may not make insurers willing to offer more
terrorism insurance coverage in the wake of a future terrorist attack
that caused substantial insured losses. This proposal could also
increase federal exposure to losses caused by terrorism.
* Some industry participants believe that another option, allowing
insurers to establish tax-deductible reserves for terrorist attacks,
could increase insurers� ability to provide terrorism insurance
coverage. However, others said that establishing the appropriate size
of such reserves would be difficult.[Footnote 10] We have also
previously reported that industry analysts have argued that federal tax
revenues would decrease under this proposal. In addition, we reported
that other analysts said this proposal might not increase capacity
because primary insurers might use the reserves as a substitute for
reinsurance (insurance for insurers) since reinsurance premiums are
already tax deductible.[Footnote 11]
* Finally, some industry analysts and participants said that changing
the federal tax code to encourage the issuance of catastrophe bonds
within the United States could allow capital from the securities
markets to help cover the potential costs of terrorist attacks.
[Footnote 12] However, others said that developing such bonds for
terrorism would be extremely difficult and that investors may have very
limited interest in them. In addition, as we previously reported, the
federal government could lose tax revenue under such a proposal.
We provided a draft of the enclosed briefing to the Treasury Department
and the National Association of Insurance Commissioners. We received
technical comments from the Treasury Department that were incorporated
where appropriate.
We are sending copies of this report to interested committees and
parties. We also make copies available to others upon request. In
addition, the report will be available at no charge on GAO�s Web site
at [hyperlink, http://www.gao.gov].
As agreed with your staff, we plan to publish a more detailed report on
this topic later this year. If you or your staffs have any questions
about this report, please contact me at (202) 512-8678 or
[email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. Major contributors to this report were Wes Phillips, Assistant
Director; Jill Naamane; Kathryn Supinski; Shamiah Woods; and Ethan
Wozniak.
Signed by:
Yvonne D. Jones:
Director, Financial Markets and Community Investment:
Enclosure:
Enclosure I: Briefing to House Financial Services and Senate Banking,
Housing, and Urban Affairs Committees:
Initial Results on Terrorism Insurance Availability in Specific
Geographic Markets:
Briefing to the House Financial Services Committee:
June 20, 2008:
Briefing to the Senate Banking, Housing,and Urban Affairs Committee:
June 23, 2008:
Overview:
* Objectives;
* Summary of Findings;
* Background;
* Scope and Methodology;
* Discussion of Findings.
Objectives:
* Discuss whether the availability of terrorism insurance for
commercial properties is constrained in any geographic markets and the
impact of any such constraints on coverage amounts and pricing.
* Discuss the factors limiting insurers� willingness to provide
terrorism insurance for commercial properties.
* Describe the advantages and disadvantages of some public policy
options that have been proposed to increase the availability of
property terrorism insurance.
Summary of Findings:
While terrorism insurance coverage currently appears to be widely
available to commercial policyholders on a nationwide basis at rates
policyholders viewed as favorable, some policyholders in urban areas
(particularly Manhattan) experience challenges obtaining desired
amounts of coverage or obtaining coverage at prices viewed as
reasonable.
* To address these challenges, these policyholders, many of whom own
large high-value buildings that are clustered in downtown locations or
financial districts, reported having to obtain coverage through a
greater number of insurers in what may already be complex insurance
programs, purchasing coverage in special insurance markets, or self-
insuring.
* Through such approaches, policyholders have generally been able to
meet their current terrorism insurance requirements, according to such
policyholders and insurance brokers.
* Many industry participants and analysts cited the federal Terrorism
Risk Insurance Act of 2002 (TRIA) program and the current �soft�(or
competitive) insurance market as the main reasons that terrorism
coverage is generally available, even to policyholders in high-risk
areas.
While TRIA limits insurers� potential losses in the event of a future
terrorist attack, insurers� efforts to manage the risks that they do
face appeared to be the primary reasons certain policyholders might
experience challenges in obtaining coverage.
* To mitigate their potential losses, many insurers set limits on the
amount of coverage that they will provide to policyholders in confined
geographic areas within a city, making obtaining coverage more
difficult or costly for certain policyholders.
There was no consensus among insurance industry participants and
analysts on whether TRIA should be modified or additional actions taken
to increase the availability of terrorism insurance. We cite several
advantages and disadvantages of the various proposals that have been
made to do so in recent years.
* For example, some industry participants told us that lowering
insurers� TRIA deductibles in areas affected by a large terrorist
attack might help increase insurers� willingness to offer coverage, but
others disagreed and thought that any increased willingness would be
limited.
* This proposal could also increase the federal government�s exposure
to terrorism losses.
Background:
Congress passed TRIA after commercial property insurance coverage for
terrorism events became unavailable due to the terrorist attacks of
September 11, 2001.
Under TRIA, when aggregate insured losses exceed $100 million, the
federal government would reimburse commercial property/casualty
insurers for 85 percent of their losses, up to $100 billion annually,
after the insurers pay a deductible.
TRIA requires insurers to offer coverage for terrorist events on the
same terms and conditions, including coverage levels, of other types of
non-terrorism coverage, but policyholders may choose to reject it.
The federal government may later recover its payments through
assessments on policyholders.
On December 26, 2007, TRIA was reauthorized until 2014.
* The reauthorization adds domestic terrorism to the program and
clarifies that insurers are not responsible for losses exceeding$100
billion.
Commercial property terrorism insurance programs can be simple or
complex, depending on the value and location of the properties being
insured.
* Policyholders may insure properties individually or insure multiple
properties from various locations within a portfolio.
* One primary insurer may provide all the coverage or many primary
insurers may participate in a layered program, with each insurer
providing a portion of the coverage up to the full amount of the
policy.
* Reinsurers may assume some of the risk that primary insurers incur in
providing property insurance, including terrorism coverage, in exchange
for premiums.
* Terrorism coverage may be included in a policyholder�s standard
property insurance policy or provided through a stand-alone terrorism
insurance policy.
Scope and Methodology:
Scope:
* Commercial property/casualty insurance in national and selected
geographic markets (Atlanta, Boston, Chicago, New York, San Francisco,
and Washington, D.C.)
Methodology:
* Reviewed relevant literature.
* Compiled and analyzed available data on insurance and reinsurance
industry capacity, terrorism insurance take-up rates, and terrorism
insurance pricing.
* Interviewed industry participants with national market perspectives.
* Interviewed industry participants with specific market perspectives.
We conducted this performance audit from January 2008 to June 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained to date provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Interviews of participants with a national perspective included:
* insurance/reinsurance industry trade associations;
* policyholder groups;
* national insurance and reinsurance brokers;
* national insurance and reinsurance companies;
* policyholders with nationwide property portfolios;
* risk modeling firms;
* rating agency;
* academics/research organizations, and;
* consumer interest groups.
Interviews of parties with specific market perspectives included:
* state regulators;
* regional/local insurance brokers;
* regional/local insurance companies, and;
* local policyholders.
We selected geographic markets to study based on an industry analyst�s
ranking of cities by risk of terrorism. We selected a range of cities
the organization considers to be at high, moderate, and low risk of
attack.
* High-risk cities: Chicago, New York, San Francisco, and Washington,
D.C.
* Moderate-risk city: Boston.
* Low-risk city: Atlanta.
We also obtained perspectives on the availability and affordability of
terrorism insurance in other areas considered to be at low risk of a
terrorist attack from parties with a national market perspective.
Interview statistics as of June 6, 2008:
* Conducted interviews with more than 100 organizations.
* Interviewed 8 large insurance companies that hold combined commercial
property/casualty market shares of between 37 percent and 52 percent in
the states we studied.
* Interviewed one of the largest worldwide reinsurers and 5 of the 15
largest Bermuda reinsurers as ranked by capital.
* Interviewed policyholders representing the real estate,
transportation, financial services, health, hospitality, and
entertainment industries, including those representing:
- more than 200 properties in New York;
- more than 100 properties in Washington, D.C.;
- at least 30 properties each in Chicago and San Francisco;
- about 30 properties in Boston and 60 in Atlanta, and;
- numerous properties across the United States including other major
cities such as Los Angeles and Houston.
Terrorism insurance widely available, but some policyholders experience
challenges:
According to a variety of sources we contacted, property terrorism
coverage currently seems to be widely available nationwide at rates
viewed as affordable.
* According to a large national broker, prices for terrorism insurance
have been generally stable since 2003(fig. 1 on next page).
* According to a large national broker, the overall percentage of
companies purchasing coverage has remained steady at around 60 percent
since 2005 (fig. 2 on next page), with more than 80 percent of the real
estate sector purchasing coverage in 2007.
- This broker also reported that the Northeast has the largest
percentage of companies (around 70 percent in 2007) that purchase
property terrorism coverage.
Figure 1: Median Terrorism Insurance Premiums as a Percentage of U.S.
Commercial Property Premiums:
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Year: 2003;
Percentage of U.S. Commercial Property Premiums: 3.98%.
Year: 2004;
Percentage of U.S. Commercial Property Premiums: 4.70%.
Year: 2005;
Percentage of U.S. Commercial Property Premiums: 4.17%.
Year: 2006;
Percentage of U.S. Commercial Property Premiums: 4.21%.
Year: 2007;
Percentage of U.S. Commercial Property Premiums: 3.85%.
Source: GAO analysis of data from Marsh & McLannan Companies.
[End of figure]
Figure 2: Percentage of Companies Purchasing Property Terrorism
Insurance in the United States:
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Year: 2003;
Percentage of Companies Purchasing Insurance: 27%.
Year: 2004;
Percentage of Companies Purchasing Insurance: 49%.
Year: 2005;
Percentage of Companies Purchasing Insurance: 58%.
Year: 2006;
Percentage of Companies Purchasing Insurance: 59%.
Year: 2007;
Percentage of Companies Purchasing Insurance: 59%.
Source: GAO analysis of data from Marsh & McLannan Companies.
[End of figure]
However, many industry participants reported that some policyholders
located in urban areas viewed as being at higher risk of terrorist
attack, particularly in Manhattan, experienced challenges obtaining
desired amounts of coverage at prices they viewed as reasonable. Large
national brokers also mentioned policyholders experiencing challenges
to a lesser extent in certain areas of other major cities such as
Chicago and San Francisco.
Policyholders who own large high-value properties (e.g., large office
buildings and hotels) in areas where many large buildings are
clustered, generally in downtown locations or financial districts, or
policyholders with properties in proximity to high-risk properties were
more likely to experience these challenges, according to policyholders
and brokers.
Many industry participants reported that premiums were higher in cities
considered to be high-risk. For example, according to one large
insurance broker, terrorism insurance premiums in New York can be twice
as high as prices for similar buildings in other cities considered to
be at high-risk of a terrorist attack, and over five times higher than
prices in lower-risk cities.
According to insurance brokers and policyholders, policyholders have
generally been able to respond to such challenges and meet current
terrorism insurance requirements by taking several steps, including:
* obtaining coverage from a greater number of insurers in what may
already have been a complex insurance program, which can be a time-
consuming and onerous process for policyholders and their insurance
brokers;
* purchasing terrorism coverage in a separate policy from an insurer
offering standalone terrorism coverage, which may be more costly; or;
* placing a portion or all of their terrorism coverage in a captive
insurer (captives are typically established by large corporations to
self insure various risks) and gaining direct access to the reinsurance
market and coverage through TRIA.
Insurers, policyholders, and industry analysts cited the TRIA program
as a key reason that terrorism coverage is generally available, even
for policyholders that own or manage high-profile properties in urban
areas viewed as at high risk of attack.
Some industry participants also cited the current �soft,� or
competitive, insurance market as generally contributing to terrorism
insurance availability. In a soft market, insurance is widely available
and sold at a lower cost, making it easier for buyers to obtain
insurance.
However, some interviewees cautioned that another terrorist attack or
change in the insurance business cycle could reduce the current supply
of terrorism insurance coverage.
Insurers� efforts to mitigate potential losses contribute to terrorism
coverage challenges:
While TRIA limits insurers� potential losses from future terrorist
attacks, several companies we contacted remain significantly concerned
that such an event could still cause them substantial losses. The steps
that insurers have taken to mitigate such losses appear to be the
primary reason some policyholders face challenges obtaining the desired
amount of coverage or coverage at a price viewed as reasonable.
Insurers said that they seek to mitigate potential losses from a single
terrorism event by limiting the amount of property coverage that they
offer in confined geographic areas within a city. These exposure
limits, referred to here as aggregation limits, generally make
obtaining coverage more difficult or costly for certain policyholders,
according to a variety of sources we contacted.
Insurers monitor the amount of coverage that they provide in confined
geographic areas within cities on an ongoing basis to help ensure that
they do not exceed their aggregation limits.
To manage their aggregation limits and make underwriting decisions,
several industry participants we interviewed said insurers often use
some variation of the following strategies.
* Estimate their potential losses from terrorist attacks in particular
areas, under varying scenarios, by using models available from risk
modeling firms. Insurers do not typically use models to estimate the
probability of an attack. Models take into account the number and size
of buildings in the insurers� portfolio, the proximity of nearby
buildings, and the effects of attack scenarios in the area (e.g., a 5
or 10 ton truck bomb).
* Consider the extent to which one such event could trigger losses
among multiple lines of insurance involving the insured property,
business interruption, or individuals in the buildings.
* Impose internal limits on the amount of coverage they will offer
within the defined areas based on these attack scenarios (fig. 3).
* For example, an insurer may decline to provide coverage for this new
property since adding the property to the portfolio would exceed the
insurer�s internal limit on exposures within the defined area.
Figure 3: An insurer�s underwriting decision based on aggregation of
risk:
[See PDF for image]
This figure is an illustration of an area within a 500-foot radius of a
new property to be insured, and depicts the following information:
* Value of properties already insured (within a 500-foot radius of a
new property to be insured): $225 million;
* Value of new property to be insured: $50 million;
* Insurer's risk limit: $250 million; insurance offered for total value
of $250 million; Insurance denied for value over $250 million.
Source: GAO.
{End of figure]
Other factors industry participants reported as influencing insurers�
willingness to offer coverage include:
* rating agencies� views on the amount of capital allocated to
terrorism risk and location of risks;
* availability of reinsurance; and;
* state rate regulation and the extent of market pressure to keep rates
competitive.
Based on our interviews to date, the recent changes in TRIA do not seem
to have affected the availability or affordability of terrorism
insurance. Policyholders we contacted that have recently renewed
policies said their insurers did not revise coverage amounts or
premiums as a result of these changes.
The provision in TRIA requiring insurers to offer terrorism coverage at
terms and conditions that do not differ materially from other coverage
does not apply to reinsurers, so these companies have discretion in
deciding how much terrorism coverage to offer to primary companies.
Reinsurance companies reported similar factors to those described by
primary insurers as affecting their willingness to offer coverage, such
as:
* efforts to manage their aggregation levels;
* rating agencies� views on the company�s risk exposures, and;
* the amount of premium that can be collected to compensate for
covering various terrorism risks.
Advantages and disadvantages of options to increase capacity:
We did not find a consensus among industry participants on whether TRIA
should be modified or additional actions taken to increase the
availability of terrorism insurance coverage. We found that various
policy proposals that have been made to increase terrorism insurance
coverage have both advantages and disadvantages.
This section discusses some of the advantages and disadvantages
industry participants and analysts identified as associated with:
* lowering insurers� TRIA deductibles in areas affected by a large
terrorist event;
* allowing insurers to establish tax-deductible reserves for future
terrorist events; and;
* facilitating the use of catastrophe bonds for terrorism risk, through
changes in the federal tax code.
Lower insurers� TRIA deductibles in areas affected by a future large
terrorist attack.
* Some insurers and industry analysts said this option would allow them
to offer additional terrorism insurance coverage or increase their
willingness to continue to offer coverage if there was another
terrorist attack or series of attacks.
* However, other industry participants and analysts said that the
impact of this proposal on terrorism insurance markets following
another terrorist attack likely would be limited. Several industry
participants said that while this proposal lowers the TRIA deductible
substantially, it may not make insurers willing to offer more terrorism
insurance coverage in the wake of a future attack that results in
substantial insured losses.
* This proposal could also increase the federal exposure to terrorism
losses.
Allow insurers to establish tax-deductible reserves for future
terrorism losses:
* Some industry participants we interviewed said this proposal may
allow insurers, over time, to increase their ability to provide
terrorism insurance coverage. In addition, they said if insurers were
able to establish reserves, a large terrorist attack could cause less
of a strain or shock to industry surplus, or capital.
* However, others noted that it is difficult to determine the
appropriate amount to retain in reserve because the frequency of
terrorist attacks is difficult to estimate. One participant also noted
that maintaining a large amount of funds in reserve for a terrorist
attack could limit insurers� ability to provide coverage for other
types of perils,such as hurricanes.
* In addition, we previously reported that industry analysts believe
(1) federal tax revenues would decrease under this proposal, and
(2)overall terrorism insurance capacity might not increase because
insurers might use the reserves as a substitute for reinsurance that
may have been previously purchased to manage the risks of potential
terrorist attacks (reinsurance premiums are tax deductible).
Facilitate the onshore issuance and use of catastrophe bonds for
terrorism through changes to the federal tax code:
* Some industry participants noted that this proposal could add
capacity to the market because it would expand the pool of capital
available to cover terrorism risk and insurers might be willing to
write more coverage if they were able to transfer the risk to
investors.
* However, others said that investors currently have a very limited
appetite for terrorism risk. They also said that it would be very
difficult to price and structure a catastrophe bond for terrorism
because the frequency of such events is difficult, and perhaps,
impossible to estimate with any reliability.
* In addition, the federal government could lose tax revenue and the
proposed changes to the tax code might create pressure from other
industries for similar tax treatment.
[End of enclosure]
[End of correspondence]
Footnotes:
[1] The Department of the Treasury, Board of Governors of the Federal
Reserve System, U.S. Securities and Exchange Commission, Commodity
Futures Trading Commission, Terrorism Risk Insurance: Report of the
President�s Working Group on Financial Markets (Washington, D.C.,
September 2006), 8.
[2] Pub. L. No. 107-297, 116 Stat. 2322 (Nov. 26, 2002).
[3] See Terrorism Risk Insurance Extension Act of 2005, Pub. L. No. 109-
144, 119 Stat. 2660 (Dec. 22, 2005), and Terrorism Risk Insurance
Program Reauthorization Act of 2007, Pub. L. No. 110-160, 121 Stat.
1839 (Dec. 26, 2007).
[4] 15 U.S.C. � 6701 note (Terrorism Insurance Program � 108(g)(3)).
[5] The enclosed version of the slides contains some editing changes
that we made following the committee briefings.
[6] TRIA generally defines �act of terrorism� as any act that is
certified as terrorism by the Secretary of Treasury, in concurrence
with the Secretary of State and the Attorney General of the United
States, and that is done in an effort to coerce, influence, or affect
the conduct of the United States government or its civilian population.
15 U.S.C. � 6701 note (Terrorism Insurance Program � 102 (1)).
[7] 15 U.S.C. � 6701 note (Terrorism Insurance Program �� 102(7)(F) and
103(e)(1)(A)).
[8] 15 U.S.C. � 6701 note (Terrorism Insurance Program � 103(e)).
[9] See S. 2621, 110th Cong. � 2 (2008) and H.R. 4721, 110th Cong. � 2
(2007), two legislative proposals to reset the TRIA deductible after a
large terrorist event where aggregate industry insured losses exceed $1
billion.
[10] Current tax laws and accounting principles discourage U.S.
property and casualty insurers from accumulating long-term assets
specifically for payment of future losses by taxing these assets.
Because the size and timing of disasters that have not taken place is
uncertain, assets set aside for catastrophe losses, together with any
interest accrued, are taxed as corporate income in the year in which
they are set aside.
[11] See GAO, Catastrophe Risk: U.S. and European Approaches to Insure
Natural Catastrophe and Terrorism Risks, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-05-199] (Washington, D.C.: Feb.
28, 2005).
[12] Catastrophe bonds have generally been issued to cover natural
events, such as earthquakes or hurricanes, rather than terrorist
attacks. A catastrophe bond offering is typically made through an
investment entity that may be sponsored by an insurance or reinsurance
company. The investment entity issues bonds or debt securities for
purchase by investors. These investment entities are typically
established offshore, and therefore, are not subject to federal
taxation. One proposal has suggested that making onshore investment
entities tax exempt could increase the use of such bonds. For
additional information about catastrophe bonds and related tax issues,
see GAO, Catastrophe Insurance Risks: The Role of Risk-Linked
Securities and Factors Affecting Their Use, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-02-941] (Washington, D.C.: Sept.
24, 2002); GAO, Catastrophe Insurance Risks: Status of Efforts to
Securitize Natural Catastrophe and Terrorism Risk, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-03-1033] (Washington, D.C.: Sept.
24, 2003); and [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-
199].
[End of section]
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