Terrorism Insurance Research Articles

Terrorism Definiens in Terrorism Insurance

The terrorism insurance market is a constantly growing industry as a result of the rise in terrorism and associated violence around the world. This trend has captured the attention of the Indian insurance sector as well. More and more people, companies, and organizations are getting insurance to protect themselves in case a terrorist attack occurs in the future. However, what exactly is terrorism insurance? Is it given under the Unlawful Activities (Prevention) Amendment Act, 2008 or any other related and applicable national or state legislation formulated? Terrorism insurance offers coverage for damages resulting from the aforementioned terrorist acts or guarantees to hold the insurer harmless in the event of such losses. The Indian Market Terrorism Risk Insurance Pool, which is managed by the Insurance Regulatory and Development Authority, is now used by general insurers to offer property insurance. As foreign re-insurers withdrew their terrorist coverage following the 9/11 attacks in the United States of America, general insurers took the initiative to create the pool in April 2002. The cost of terrorism insurance, according to insurers, has decreased recently because there haven’t been any significant losses in the pool. The pool’s capacity has increased to 4,500 crore. But, the recent terrorist attacks in Paris and London as well as the ongoing enemy infiltration over our borders have stoked panic, leading to a rise in terrorism insurance in India. Despite the pool taking advantage of this fear, there is no legal framework in place to control it. While the United States and other nations have laws covering similar matters, this research study examines whether India also needs such legislation

Terrorism Risk Insurance Act: Time to Renew . . . or Rethink?

This paper summarizes the U.S. program for terrorism insurance, outlines its advantages and disadvantages, and describes the current proposals for extension of the program. The program, generally referred to as a “Federal Backstop,” functions in some ways that are similar to reinsurance, but it does not require participants to pay premiums ex ante. Instead uses an ex post recoupment mechanism to recover some or all of the Federal payments made under the program. This approach has the advantage of reducing the cost and increasing the availability of terrorism insurance. Some have criticized the program for its interference in market mechanisms, but the program facilitated the development of the market underneath the backstop. The program does not cover NBCR risk, and some types of insurance are excluded. In addition, the program does not preempt state price regulation or the mandated use of the standard fire insurance policy, which provides coverage for ensuing fires after terrorism events. These weaknesses are not addressed by current proposed legislation to extend the program for seven years without any changes. The strong, bipartisan support for the proposed legislation suggests that it is likely to pass.

What's in a Model? Computer Simulations and the Management of Ignorance

Research on artifacts in organization studies predominantly focuses on knowledge – what we know – and how it is produced, used and exchanged through artifacts. This study examines the role of artifacts in managing ignorance. Namely, what is not known, and what cannot be shared across collaborating organizations. We do that through a qualitative study of the use of computerized simulation models in terrorism insurance, using interviews supplemented by observational data. Illustrating the sources of ignorance, we develop a conceptual framework to show how terrorism models, by compartmentalizing ignorance, enable strategies of acceptance, work around and ignoring of ignorance. This contributes to the nascent area of organizational research on ignorance by unpacking the evolving interplay between knowledge and ignorance. Our study also contributes to the organizational literature on the role of material artifacts as enablers of (inter)action. Further, showing how decoupling elements of ignorance from action occurs when demands for rationality in calculating and trading risk require access to knowledge that science cannot produce, this study contributes to the literature that explores how insurance remains possible in contexts of extreme uncertainty.

A Successful (Yet Somewhat Untested) Case of Disaster Financing: Terrorism Insurance Under TRIA, 2002–2020

AbstractThe Terrorism Risk Insurance Act (TRIA) established a public–private partnership between the U.S. federal government, private insurers, and all commercial enterprises operating on U.S. soil. Renewed and modified in January 2015 until December 2020, the TRIA program requires insurers to offer terrorism insurance to their commercial policyholders while providing insurers with free up‐front financial protection up to $100 billion against terrorist attacks in the United States. With the federal government providing a financial safety net, the private insurance sector can offer coverage against an uncertain risk that would otherwise be largely considered uninsurable, thus making terrorism insurance widely available and affordable. TRIA is a successful case of public–private disaster risk financing that has received bipartisan political support. Yet it remains untested for large losses and it is unclear how the market and policymakers will react should another large‐scale insured loss occur. TRIA also raises concerns about the indemnification of individual victims of a terrorist attack (in addition to workers’ compensation).

A Successful (Yet Somewhat Untested) Case of Disaster Financing: Terrorism Insurance Under TRIA, 200222020

The Terrorism Risk Insurance Act (TRIA), passed at the end of 2002, established a public-private partnership between the US federal government, private insurers, and all commercial enterprises operating on US soil. Renewed and modified by the US Congress and the president in January 2015 until December 2020, the TRIA program requires insurers to offer terrorism insurance to their commercial policyholders while providing insurers with free up-front financial protection up to $100 billion against terrorist attacks in the United States. With the federal government providing a financial safety net, the private insurance sector can offer coverage against an uncertain risk that would otherwise be largely considered uninsurable, thus making terrorism insurance widely available and affordable. Overall premiums have been at about 2 to 6 percent of property premiums over the past four years, with the most significant increase recently for financial institutions (from 4 percent in 2012 to 9 percent in 2015). A significant portion of insurance policies, 23 percent according to a recent study by the US Treasury, which are typically those covering smaller firms, include terrorism coverage at no disclosed additional cost. TRIA is a successful case of public-private disaster risk financing that has received bipartisan political support. Yet it remains untested for large losses and it is unclear how the market and policymakers will react should another large-scale insured loss occur. TRIA also raises concerns about the indemnification of individual victims of a terrorist attack (in addition to workers’ compensation).

Benefits of the U.S. Program for Terrorism Insurance from a Comparative Perspective

This article summarizes the U.S. program for terrorism insurance and outlines its advantages as compared to similar programs in other developed countries. The program, while similar to reinsurance, does not require participants to pay premiums but instead uses an ex post recoupment mechanism. Consequently, it is generally referred to as a “Federal backstop.” This approach requires less capital investment and makes “pricing” more accurate than a reinsurance approach. The program also requires insurers to maintain significant amounts of exposure through insurer deductibles and copayments, which creates market demand for the development of terrorism reinsurance in the private market. The current program extends until 2020, though perhaps it will be extended further in the future.

Corporate Demandfor Insurance: New Evidence Fromthe U.S. Terrorismand Property Markets

Journal of Risk and InsuranceVolume 82, Issue 4 p. 989-990 CorrigendumFree Access Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets This article corrects the following: Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets Erwann Michel-Kerjan, Paul Raschky, Howard Kunreuther, Volume 82Issue 3Journal of Risk and Insurance pages: 505-530 First Published online: March 14, 2014 First published: 18 November 2015 https://doi.org/10.1111/jori.12133AboutSectionsPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat In Michel-Kerjan (2015), the following error was published on page 515. The coefficient β2, exhibits the price elasticity of demand. We expect β2 to be negative and significant for both property and terrorism. We also expect β2 to be higher for property than for terrorism and to find the demand for terrorism insurance to be more price inelastic for reasons we explained in the Introduction that reviews the literature and our hypotheses. The text was incorrect and should have read: The coefficient β2, divided by the mean of Coverci, exhibits the price elasticity of demand. We expect β2 to be significant for both property and terrorism. We also expect to find the demand for terrorism insurance to be more price inelastic for reasons we explained in the Introduction. The online version of this article has been amended and the revised text is denoted by a correction statement. We apologize for this error. Reference Michel-Kerjan, E., P. Raschky, and H. Kunreuther, 2015, Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets, Journal of Risk and Insurance, 82(3): 505- 530. Volume82, Issue4December 2015Pages 989-990 ReferencesRelatedInformation

Corporate Demand for Insurance: New Evidence From the U.S. Terrorism and Property Markets

AbstractSince the passage of the Terrorism Risk Insurance Act of 2002, corporate terrorism insurance is sold as a separate policy from commercial property coverage. In this article, we determine whether companies differ in their demand for property and terrorism insurance. Using a unique data set of insurance policies purchased by large U.S. firms, combined with financial information of the corporate clients and of the insurance provider, we apply a two‐stage least squares approach to obtain consistent estimates of premium elasticity of corporate demand for property and terrorism coverage. Our findings suggest that both are rather price inelastic and that corporate demand for terrorism insurance is significantly more price inelastic than demand for property insurance. We further find a negative relation between the solvency ratios of both property and terrorism risk coverage, with a stronger effect on the latter, indicating that companies use their ability to self‐insure as a substitute for market insurance. Our results are robust to the application of alternative estimators as well as changes in the econometric specifications.

Report: The Need to Renew TRIA ABA TIPS Task Force on Federal Involvement in Insurance Regulation Modernization

This Report support’s the position by the ABA TIPS Task Force on Federal Involvement in Insurance Regulation Modernization that the Terrorism Risk Insurance Act (TRIA) should be renewed. Although the market for terrorism insurance has developed with the support of TRIA, the fundamental nature of terrorism risk has not changed and continues to require the Federal backstop. Because of the unpredictability of terrorism risk, without a Federal backstop many insurers will withdraw from the terrorism market, the price of terrorism insurance will rise and take-up rates will fall. Other countries facing terrorism risk, in some cases substantially less risk than the United States, have recognized the need for government involvement and have government programs. In fact, TRIA’s use of a significant insurer and industry retentions, and the role of the Federal government as a “backstop” rather than as an insurer, makes TRIA one of the most “market” oriented terrorism insurance programs.

Corporate Management of Highly Dynamic Risks: Evidence from the Demand for Terrorism Insurance in Germany

This paper investigates a corporation's risk management response to highly dynamic risks. Using a unique data set on the German terrorist insurance market, the paper tests whether corporate risk managers have a clear understanding of the probability distribution of highly dynamic risks or if risk managers learn from severe losses and base their decisions upon day-to-day experience. The paper further investigates whether risk managers become more confident in their risk management decisions over time. For this purpose, we apply Viscusi's prospective reference theory to a corporate context. We find that firms learn from single events when making their risk management decisions, and that risk managers become more confident with their risk management decisions over time.

The effects of government intervention on the market for corporate terrorism insurance

Nine OECD countries presently have national terrorism insurance programs based on some type of public–private risk sharing. While such arrangements have helped provide the necessary insurance capacity in the post-September 11, 2001 era, little is known about the effect of such governmental intervention on terrorism insurance markets. This paper focuses on the United States, where the Terrorism Risk Insurance Act of 2002 (TRIA) provides insurers with no cost federal reinsurance up to an industry-wide loss of $100 billion. We present an empirical analysis to compare how insurers' diversification behavior varies between property coverage (no governmental intervention) and terrorism coverage (with government intervention). We find evidence that insurers in the U.S. are much less diversified for terrorism coverage than they are for property lines of coverage. We interpret these findings as tentative evidence for moral hazard caused by the governmental intervention under TRIA.

Colonel Blotto in the War on Terror: Implications for Event Frequency

The U.S. private terrorism-insurance market has failed to develop as hoped under the Terrorism Risk Insurance Act (TRIA) of 2002 and the Terrorism Risk Insurance Extension Act (TRIEA) of 2005. The principal reason that terrorism risk is viewed as uninsurable in conventional insurance markets is the great difficulty in predicting both its severity and frequency components. While the insurance industry has made some progress in forecasting loss severities, there has been little research on terrorism loss frequency. In this article, we extend the work of Major (2002) by employing a formal Colonel Blotto game to investigate the frequency of terrorist attacks. In two different constant-sum scenarios – simultaneous multiple attacks and single random attacks – our equilibrium solutions demonstrate that both sides (terrorists and counter-terrorists) will choose to allocate their forces to all targets in proportion to the square roots of the targets' physical volumes. In the case of single random attacks, the equilibrium frequency results are consistent with Woo's (2005) "principle of target substitution," and provide guidance for the pricing of terrorism insurance.

Government Support for the Terrorism Insurance Industry: Where do We go from Here?

Federal government support for the terrorism insurance industry has a very brief history. Prior to 9/11, insurers did not take terrorist-related losses into account when underwriting risks. The industry did not even conceive of an attack that could generate such significant losses. The dramatic shift in perception since then has caused many to suggest that terrorism risks are uninsurable. The notion that terrorism risk was uninsurable was part of the rationale advanced for government intervention. When the initial efforts at legislation failed, the industry began to withdraw from the market by adding exclusions for terrorism-related losses to their policies. Reinsurers were the first to adopt such exclusions and their withdrawal left the primary insurers at risk of insolvency in the event of a major terrorism loss. The fundamental problem of terrorism insurance is the impossibility of adequate capital following a large loss. When Congress decided that reduced availability of terrorism insurance was causing a drag on the U.S. economy, the Terrorism Risk Insurance Act (TRIA) was adopted. TRIA provides liquidity through government support to pay terrorism claims. This paper examines the essential features of the TRIA while asking how terrorism insurance could optimally be regulated. It concludes with the suggestion to extend to insurers of terrorism-related loss the same access to public capital as the Federal Reserve provides to banks in times of liquidity crises.

Catastrophic Loss, Alternative Risk Transfer, and Terrorism Insurance

This paper constitutes a compilation of summary entries on catastrophic loss, alternative risk transfer, and the Terrorism Risk Insurance Act of 2002 and the Terrorism Risk Insurance Extension Act of 2005, along with references and further reading.

Terrorism Insurance: Subsidy is Corporate Welfare

This is an opinion editorial published in the National Law Journal. It argues that subsidized terrorism insurance is corporate welfare. Consistent with the findings of the Congressional Budget Office, subsidized insurance does not reduce the cost of terrorism, but instead shifts the cost from insurance companies and corporations to the American taxpayers. Moreover, subsidized insurance over the long term tends to increase the cost of terrorism because premiums are not sensitive to mitigation efforts. Thus, subsidized terrorism insurance runs counter to the national interest.

Trends in Transnational Terrorism and Implications for U.S. National Security and U.S. Terrorism Risk Insurance Act

The unprecedented losses brought about by the attacks of 11 September 2001 have cast the issue of terrorism risk insurance into sharp relief. In particular, it has raised questions as to whether attacks on this scale are an insurable risk and the extent to which the private insurance industry is able and/or willing to price such risks independent of a Federal safety net. Although the Bush administration has committed to renew the Terrorism Risk Insurance Act (TRIA) to offset the human and materiel costs that might result from future cataclysmic terrorist strikes taking place on U.S. soil, it is not apparent that this legislative framework is relevant to the type of extremist contingencies that the United States is likely to face over the short-to-medium term. Any long-term solution to providing insurance in America will necessarily need to go beyond TRIA's existing framework by dropping the “foreign interest” designation for certified attacks; including some sort of supplemental program that includes mandatory coverage for chemical, biological, radiological, and nuclear (CBRN) assaults; and investigating ways to increase the take-up rates of terrorism insurance by lowering its cost to the customer. An oversight board mandated to evaluate the Act's performance and relevance to evolving terrorist trends would also be useful.

Terrorism Insurance: Rethinking the Government's Role

Following a major terrorist attack, private providers of terrorism insurance often cease providing this coverage. As a result, the governments in developed countries around the world now provide some form of support to their terrorism insurance markets. This paper considers several questions regarding the private market failure and the resulting government intervention: Why do private markets for terrorism insurance fail? Given the failure, what is the optimal form of government intervention? And, what would be the likely economic ramifications if a government chose not to intervene? The paper’s discussion of these questions focuses on the 9/11 attacks on the United States, and on the 2002 Terrorism Risk Insurance Act (TRIA) and its 2005 extension (TRIAE). The paper argues that government support for the terrorism insurance market should be priced based on the expected cost of the support provided. The paper also argues that such support should generally be temporary, with a sunset as the private market recovers. A specific proposal is that the government intervention take the form of loans to the affected insurance companies, similar to the manner that central banks provide loans to banks facing temporary liquidity crises.

Is game theory a useful tool for terrorism insurance?

This paper addresses the topic of terrorism insurance. Financial markets and international institutions believe that terrorism risk modelling falls short of making the likelihood of future attacks more predictable and quantifiable. We present the literature of research in the domain of game theory applied to terrorism insurance, we scrutinise the possibility of using evolutionary game theory and we put forward the theoretical and practical issues that need to be addressed before reaching a satisfactory modelling framework to be used by the sector.

Transitions in Terrorism Insurance: The Debate over TRIA

In this paper we summarize the motivations for enacting the Terrorism Risk Insurance Act (TRIA) and provide a brief description of its provisions. We then turn to the controversy over TRIA's extension. Multiple views over the role of government in terrorism insurance have been expressed in both the academic and the popular literatures. Even the federal government is divided concerning the efficacy of TRIA. We cull what lessons we can from the debate and its many points of view. We conclude that TRIA has served a useful purpose as a temporary stopgap measure, allowing the industry much needed time to regroup in the face of a dramatically altered risk landscape.

A Somber Anniversary: Terrorism Insurance Five Years after 9/11

In this paper, the authors trace the evolution of the literature on terrorism insurance from its beginnings in the post-World War II era through to the present debate over international terrorist events in the new millennium. As part of that review, they examine the efficacy of programs undertaken in various countries - including TRIA in the United States. Finally, the authors evaluate the likely efficacy of recommendations made by academics and policymakers for new ways of dealing with terrorism insurance.