Terrorism and War-Risk Insurance Programs


   The Federal Government provided billions of dollars in disaster assistance following the September 11, 2001 terrorist attacks on New York and Washington, DC, including about $4 billion in aid to the airline industry and about $20 billion in aid to the New York City area. To date, about $36 billion in loss claims have been paid by private insurers. Though insured losses represented only a fraction of the total economic costs of the September 11 attacks, they were far greater than those arising from any prior terrorist event.

   Following September 11, commercial property and casualty insurers reevaluated their policyholders exposure to risk from possible future attacks. Many insurers canceled policies, began explicitly excluding coverage for terrorist attacks from new policies, or increased premiums charged to policyholders. In response to what was believed to be a temporary contraction in the supply of insurance available for terrorism risk, the Administration and Congress undertook measures to ensure that the airline and commercial real estate sectors would not be adversely affected.

   Less than two weeks after the September 11 attacks, the Federal Aviation Administration (FAA) began selling insurance policies directly to U.S. airlines to cover third-party liability (e.g., harm to individuals or property on the ground) arising from acts of war or terrorism, and in November of 2002 the Homeland Security Act expanded this program to provide insurance coverage for loss of aircraft and airline passenger liability as well. The program has been reauthorized several times since its inception and it remains in effect today. As of October 1, 2006, policies under this program provided 75 airlines with insurance coverage for potential losses ranging from $100 million to $4 billion each.

   The Terrorism Risk Insurance Act (TRIA) passed in November of 2002 established a second, much broader, Federal program to encourage privatesector commercial property and casualty insurers to provide terrorism risk coverage. The program was originally designed to expire after three years, but in 2005 Congress elected to extend the program with some modifications through 2007.

   TRIA has two main components. First, it mandates that insurance companies that sell commercial property and casualty insurance make available to customers policies that do not explicitly exclude coverage for losses caused by acts of terrorism. Insurers may exclude losses on other grounds, however, so not all losses arising from terrorist attacks must be covered. According to the President's Working Group on Financial Markets, commercial insurance policies generally do not cover losses arising from chemical, nuclear, biological, and radiological events, whether or not these events are caused by acts of terrorism. Second, TRIA authorizes the Treasury Department to provide reinsurance to cover a portion of insurance loss claims arising from certified acts of international terrorism against U.S. targets. Under the reinsurance program, a primary insurer must cover 100 percent of its loss claims up to a specified deductible. The Federal Government then pays a fixed share of losses in excess of the deductible. For 2007 an insurance company is required to cover all losses up to 20 percent of its prior year's premiums on qualifying lines of business and 15 percent of losses above this deductible. TRIA imposes a cap of $100 billion on total insurer losses from terrorist attacks. Under the statute, Congress would determine the procedures to govern any payments for losses beyond $100 billion in separate legislation.

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