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 insurersï¿½ 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 
analystï¿½s 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 insurersï¿½ 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 insurersï¿½ 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, 
workersï¿½ 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 yearï¿½s 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 insurerï¿½s 
liability, stating that insurers are not responsible for losses that 
exceed the federal governmentï¿½s $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 policyholderï¿½s 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 ï¿½softï¿½ (or competitive) insurance 
market as contributing to availability. 

While TRIA limits insurersï¿½ 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 insurersï¿½ 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 proposalï¿½s 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 insurersï¿½ 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 GAOï¿½s 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 insurersï¿½ 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 ï¿½softï¿½(or 
competitive) insurance market as the main reasons that terrorism 
coverage is generally available, even to policyholders in high-risk 
areas. 

While TRIA limits insurersï¿½ potential losses in the event of a future 
terrorist attack, insurersï¿½ 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 
insurersï¿½ TRIA deductibles in areas affected by a large terrorist 
attack might help increase insurersï¿½ willingness to offer coverage, but 
others disagreed and thought that any increased willingness would be 
limited. 

* This proposal could also increase the federal governmentï¿½s 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 policyholderï¿½s 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 analystï¿½s 
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 ï¿½soft,ï¿½ 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. 

Insurersï¿½ efforts to mitigate potential losses contribute to terrorism 
coverage challenges: 

While TRIA limits insurersï¿½ 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 insurersï¿½ 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 
insurerï¿½s internal limit on exposures within the defined area. 

Figure 3: An insurerï¿½s 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 insurersï¿½ 
willingness to offer coverage include: 

* rating agenciesï¿½ 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 agenciesï¿½ views on the companyï¿½s 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 insurersï¿½ 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 insurersï¿½ 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 insurersï¿½ 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 
Presidentï¿½s 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. ï¿½ 6701 note (Terrorism Insurance Program ï¿½ 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 ï¿½act of terrorismï¿½ 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. ï¿½ 6701 note (Terrorism Insurance Program ï¿½ 102 (1)). 

[7] 15 U.S.C. ï¿½ 6701 note (Terrorism Insurance Program ï¿½ï¿½ 102(7)(F) and 
103(e)(1)(A)). 

[8] 15 U.S.C. ï¿½ 6701 note (Terrorism Insurance Program ï¿½ 103(e)). 

[9] See S. 2621, 110th Cong. ï¿½ 2 (2008) and H.R. 4721, 110th Cong. ï¿½ 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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