Treasury and Industry Participants Have Made Progress in Implementing TRIA, but Treasury Has Not Yet Achieved Key Goals

More than a year after TRIA’s enactment, Treasury and insurance industry  participants have made progress in implementing and complying with its  provisions, but Treasury has yet to fully implement the 3-year program. Treasury has issued regulations (final rules) to guide insurance market  participants, fully staffed the TRIP office, and started collecting data and  performing studies mandated by TRIA. However, Treasury has yet to make  the claims payment function operational and decide whether to extend the  “make available” requirement through 2005. 2). More specifically, TRIA gave Treasury until September 1, 2004,  to decide if the requirement that insurers offer terrorism coverage on terms  that do not differ materially from other coverage should be extended for  policies issued or renewed in 2005, the third and final year of the program. Additionally, Treasury has not yet developed processes for  auditing claims payments to insurers. Insurance Companies Made Changes to Their Operations to Comply with TRIA

In order to comply with TRIA requirements, primarily those concerning  disclosure to policyholders, insurers generally have made changes to their  operations. Insurers are concerned that Treasury has not  already made a decision about extending the “make available” requirement  through 2005; they are also concerned about the potential length of time it  may take for the Secretary of the Treasury to certify a terrorist event,  potential inefficiencies and time lags in processing and paying claims once  an event is certified, and the issue of TRIA expiration. Insurers need to make underwriting, price, and coverage  decisions for these policies in mid-2004. Despite Availability, Few Are Buying Terrorism Insurance, and the Industry Has Made Little Progress toward Post-TRIA Coverage

While TRIA has improved the availability of terrorism insurance,  particularly for high-risk properties in major metropolitan areas, most  commercial policyholders are not buying the coverage. Tighter Exclusions Leave Policyholders Exposed to Significant Perils

Since September 11, 2001, the insurance industry has moved to tighten  long-standing exclusions from coverage for losses resulting from NBC  attacks and radiation contamination. As of March 1, 2004, industry sources indicated that there has been little  development or movement among insurers or reinsurers toward  developing a private-sector mechanism that could provide capacity,  without government involvement, to absorb losses from terrorist events. Key components  of the Terrorism Risk Insurance Program defined by TRIA remain  uncompleted. The first was to  ensure that business activity did not suffer from the lack of insurance by  requiring insurers to continue to provide protection from the financial  consequences of another terrorist attack. Since TRIA was enacted in  November 2002, terrorism insurance generally has been available to  businesses. While most have not purchased this coverage, purchases have  been higher in areas considered to be at high risk of another terrorist  attack. As a result, the first objective of TRIA appears  largely to have been achieved. Congress’s second objective was to give the insurance industry a  transitional period during which it could begin pricing terrorism risks and  developing ways to provide such insurance after TRIA expires. Unfortunately, insurers and reinsurers still have  not found a reliable method for pricing terrorism insurance, and although  TRIA has provided reinsurers the opportunity to reenter the market to a  limited extent, industry participants have not developed a mechanism to  replace TRIA. Such an assessment could be a part of  Treasury’s TRIA-mandated study to “assess…the likely capacity of the  property and casualty insurance industry to offer insurance for terrorism  risk after termination of the Program.”

	Recommendation for Executive Action

As part of the response to Treasury’s TRIA-mandated study requiring an  assessment of the effectiveness of TRIA and evaluating the capacity of the  industry to offer terrorism insurance after TRIA expires, we recommend   that the Secretary of the Treasury, after consulting with the insurance  industry and other interested parties, also identify for Congress an array of  alternatives that may exist for expanding the availability and affordability  of terrorism insurance after TRIA expires.
Why GAO Did This Study

After the terrorist attacks of September 11, 2001, insurance coverage for terrorism largely disappeared. Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002 to help commercial property-casualty policyholders obtain terrorism insurance and give the insurance industry time to develop mechanisms to provide such insurance after the act expires on December 31, 2005. Under TRIA, the Department of Treasury caps insurer liability and would process claims and reimburse insurers for a large share of losses from terrorist acts that Treasury certified as meeting certain criteria. As Treasury and industry participants have operated under TRIA for more than a year, GAO was asked to describe (1) their progress in implementing the act and (2) changes in the terrorism insurance market under TRIA.

What GAO Found

Treasury and industry participants have made significant progress in implementing TRIA during its first year, but Treasury has important work to complete in order to comply with its responsibilities under the act. For example, Treasury has issued regulations to define program requirements, created and fully staffed the Terrorism Risk Insurance Program office, and begun data collection efforts in support of mandated studies. Insurers also have adjusted their operations and policies to comply with TRIA. However, insurers have expressed concerns that Treasury has not yet decided whether to extend through 2005 the requirement that insurers offer terrorism coverage on terms that do not differ materially from other coverage. Although the act gives Treasury until September 1, 2004, to decide this issue, a more timely decision is needed to avoid hindering underwriting and pricing decisions for policies that are issued or renewed through 2005. In addition, Treasury has not fully established a claims processing and payment structure. Insurers are concerned that a delayed payment of claims by Treasury, whether because of the length of time taken to certify that an act of terrorism met the requirements for federal reimbursement or from inadequate claims processing capability, might seriously impact insurer cash flows or, in certain circumstances, insurer solvency. It appears that Congress's first objective in creating TRIA--to ensure that business activity did not materially suffer from a lack of available terrorism insurance--has been largely achieved. Since TRIA was enacted in November 2002, terrorism insurance has been generally available to businesses. But most commercial policyholders are not buying the coverage. According to insurance industry experts, purchases have been higher in areas considered to be at high risk of another terrorist attack. However, many policyholders with businesses or properties not located in perceived high-risk locations are not buying coverage because they view any price for terrorism insurance as high relative to their perceived risk exposure. Further, those who have bought terrorism insurance remain exposed to significant perils. Insurers have broadened long-standing policy exclusions of nuclear, biological, and chemical events. Congress's second objective--to give private industry a transitional period during which it could begin pricing terrorism insurance and develop ways to cover losses after TRIA expired--has not yet been achieved. Industry sources indicated that under TRIA, insurance market participants have made no progress to date toward the development of reliable methods for pricing terrorism risks and made little movement toward developing any mechanism that would enable insurers to provide terrorism insurance to businesses without government involvement.