Under TRIA, the federal government is to reimburse insurers for a portion  of their losses from certified terrorist acts. Terrorism Insurance Generally Is Available Nationwide, although Some Policyholders Had to Take Additional Steps to Obtain Coverage

According to a variety of sources, commercial property terrorism  insurance currently appears to be widely available on a nationwide basis  at rates viewed as reasonable, largely due to the TRIA program and the  current “soft” insurance market. However, some policyholders in urban  areas viewed as being at higher risk of a terrorist attack, particularly in  Manhattan and to a lesser extent in some other high-risk cities such as  Chicago and San Francisco, may be forced to take additional steps to  overcome challenges they may have initially faced in obtaining desired  amounts of coverage at prices viewed as reasonable. Policyholders  generally have been able to obtain desired or required amounts of  terrorism coverage by increasing the number of carriers in what already  may be large and complex insurance programs, adding to what can be a  time-consuming and complicated process for policyholders and their  insurance brokers. Specifically, industry participants said that owners  of large, high-value properties in financial districts or downtown locations,  or near government offices or transit hubs, may face initial challenges in  obtaining coverage in their all-risk property policies. Insurer and Reinsurer Efforts to Mitigate Their Risks Appeared to Be Why Certain Policyholders Faced Initial Challenges in Obtaining Terrorism Insurance Coverage

While TRIA limits insurers’ potential losses from a terrorist attack, the  efforts of insurers’ to manage the remaining risks they faced appeared to  be the primary reasons for certain policyholders experiencing initial  challenges in obtaining desired amounts of coverage at prices they viewed  as reasonable. To mitigate their risks, many insurers set limits on the  amount of coverage that they would provide to policyholders in confined  geographic areas within a city, 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. According to a variety of  sources we contacted, these limits generally make obtaining coverage  more difficult or costly for certain policyholders in these areas. The representative of one large insurer said that the company’s TRIA  deductible was three times the net losses the company suffered due to the  September 11 attacks. For example, one reinsurance company representative said  that the company was less willing to write contracts covering properties in  cities viewed to be at high risk of terrorist attack. Various Proposals to Increase the Availability and Affordability of Terrorism Insurance Coverage Have Both Advantages and Disadvantages

Insurance industry participants and analysts did not express consensus on  whether TRIA should be modified or additional actions taken to increase  the availability of terrorism insurance coverage. They cited a variety of  advantages and disadvantages associated with five proposals that have  been offered in legislation, discussed in our prior reports, or suggested by  industry participants to increase the availability and perhaps limit the cost  of terrorism insurance. Because this proposal was designed to significantly reduce potential  industry losses, some insurers and industry participants we contacted said  that it might make them more willing to offer coverage in areas affected by  a future attack. The federal government would be responsible for losses in  excess of $40 billion up to $100 billion. However, several challenges and disadvantages also may be associated  with this option. Agency Comments

We provided a draft of this report to Department of the Treasury and NAIC  for their review and comment. In oral comments, Treasury and NAIC  officials said that the report was informative and useful. Appendix I: Objectives, Scope, and Methodology

Our objectives were to describe (1) whether the availability of terrorism  insurance for commercial properties is constrained in any geographic  markets and the effect 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. The geographic markets we studied represent locations  considered to be at high, moderate, and low risk of exposure to terrorist  attacks—Atlanta, Boston, Chicago, New York, San Francisco, and  Washington, D.C. We selected these markets based on rankings of  locations by risk of terrorism exposure that accounts for the risk of  terrorist attacks and the potential for associated losses from the Insurance  Services Office, an insurance industry analytics firm.
Why GAO Did This Study

The Terrorism Risk Insurance Act of 2002 (TRIA) specifies that the federal government assume significant financial responsibility for insured losses on commercial properties resulting from future terrorist attacks. While TRIA has been credited with stabilizing markets for terrorism insurance after the September 11, 2001, attacks, questions remain as to whether certain policyholders, especially those located in large urban areas viewed as being at high risk of attack, may still face challenges in obtaining coverage. GAO was asked to conduct a study to describe (1) whether the availability of terrorism insurance for commercial properties is constrained in any geographic markets, (2) factors limiting insurers' willingness to provide coverage, and (3) advantages and disadvantages of selected public policy options to increase the availability of such insurance. To address these objectives, GAO analyzed available data and interviewed industry participants, including those with expertise in specific geographic markets considered to be at high, moderate, or low risk of attack (Atlanta, Boston, Chicago, New York, San Francisco, and Washington, D.C.). GAO provided a draft of this report to the Department of the Treasury and the National Association of Insurance Commissioners (NAIC). Treasury and NAIC said the report was informative and useful.

What GAO Found

While some owners of high-value properties in major cities may face initial challenges obtaining terrorism insurance coverage compared with most policyholders nationwide, they generally have reported that they could meet current coverage requirements through a variety of approaches. Many industry participants said that terrorism insurance is currently available nationwide at prices viewed as reasonable and that the TRIA program was a key reason for these favorable conditions. However, some policyholders that own large, high-value properties in densely built urban areas viewed as at high risk of attack, particularly in Manhattan and to a lesser extent in Chicago and San Francisco, may still face initial challenges obtaining desired amounts of coverage at prices viewed as reasonable, according to industry participants. To address these challenges, some policyholders purchased coverage from a large number of insurers, which can be a time-consuming and complicated 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 may be more costly, or self-insured. While TRIA specifies that the federal government assume substantial financial responsibility for insured losses associated with future terrorist attacks, the steps insurers take to manage the risks they do face appear to be the primary reason some policyholders face challenges in obtaining coverage. Insurers said they seek to mitigate potential terrorism losses by limiting the amount of property coverage that they offered in specific areas of cities, such as downtown locations or areas considered to be at high risk of attack. These risk mitigation efforts generally make obtaining coverage more difficult or costly for policyholders with high-value properties in these areas, according to a variety of sources GAO contacted. Industry participants also said that the availability of reinsurance (insurance for insurers) and the views of rating agencies can limit the availability of coverage in such cities. Industry participants had no consensus on whether TRIA should be modified or additional actions taken to increase the availability of terrorism coverage, and identified advantages and disadvantages of selected policy proposals that have been included in legislation, discussed in prior GAO reports, or suggested by industry participants to increase such coverage. A proposal to increase the federal government's current responsibility under TRIA for the insured losses associated with a future attack could make insurers more willing to offer coverage in affected areas. For example, one large insurer said that the proposal might make the company more willing to immediately offer additional coverage in cities viewed as at high risk of attack. However, any such benefits might be limited for reasons including the widespread insurance market disruptions that may result from another attack. This proposal, along with several other proposals analyzed in the report, also would increase the federal government's exposure to the losses associated with terrorist attacks, which is already 85 percent of losses up to $100 billion annually, after an industry deductible.