Another approach to financing insurance  coverage is through post-event funding, which involves collecting  reimbursement for actual losses and associated expenses after an  event has occurred. Seven of the 16  programs we reviewed have a multilayered structure in which insurers  and governments provide coverage for terrorism risk, and in some cases  the government administers the programs. Reinsurance. Reinsurers do not provide a layer of coverage in the program. Insurers and Reinsurers Provide All the Coverage for Terrorism Risk in Some Programs

In some programs we reviewed the insurance industry provides all the  coverage for terrorism risk, and the government provides no financial  backstop to the program. Programs in this category include those in  Austria, Bahrain, India, Russia, South Africa, and Switzerland. In other programs, such as those in Austria, Bahrain,  Russia, and Switzerland, insurance companies have established  reinsurance arrangements with each other to cover losses, and their  governments have no financial or administrative roles. Program Has Layers of Coverage from Insurers and the Government, but Its Structure Does Not Include Reserves and Reinsurance

Like many of the foreign programs we reviewed, the structure of the U.S.  terrorism risk insurance program includes multiple layers of coverage,  with insurers and the government providing layers of coverage. Under Most Arrangements Private Sector and Program Funds Would Cover Initial Losses, and Most Programs Fund Losses and Costs Up Front

For the six programs we reviewed in-depth, the private sector and  program reserves would cover initial losses and governments are often  responsible for a potentially large share of losses in more extreme events. Additionally, private  sector coverage is generally larger for those programs in countries with  larger economies, as measured by GDP. In the event of a terrorist attack, insurers in  the United States could pay more than the total coverage provided by the  other five countries’ national programs. The participants  involved and their share of losses vary across programs, but according to  program officials, private sector participants and program reserves likely  would cover commercial and property losses from most conventional  terrorist events. In the event of a large terrorist  attack that exhausted coverage from the other participants, the  governments of Australia, Spain, the United Kingdom, and the United  States would be responsible for a potentially significant proportion of  losses. In the United Kingdom, although the government backstop is  also unlimited, the program has private reserves and has a line of credit  that is expected to be repaid. All Five Foreign Programs Collect Funds Up Front to Cover Losses, in Contrast to the U.S. Up-front funds related to Austria’s program are based on market  share. Spain. Appendix I: Objectives, Scope, and Methodology

For terrorism risk insurance programs in the United States and selected  foreign countries, the objectives of our report were to (1) compare the  organizational structures and the role of government and (2) examine the  loss-sharing arrangement between the government and private sector  and the methods by which the programs are funded. In addition, we conducted a number of interviews. For example, our criteria  included selecting countries representing different types of programs,  such as at least one country with a national terrorism risk insurance  program that did not include any government financial support as part of  the insurance coverage, at least one country with a national terrorism risk  insurance program that was not a member of OECD, and at least one  country with a national terrorism risk insurance program that was  developed prior to 2001. We also included the program in the United  States in the review for this objective. To analyze the administrative costs of the five selected foreign terrorism  risk insurance programs and how such costs were incorporated into  program fees or premiums, we reviewed the programs’ audited financial  statements, where available. Further, we reviewed annual reports and other program documentation  and interviewed officials from the terrorism risk insurance programs of  Australia, India, Spain, and the United Kingdom to identify terrorist attacks  in their countries since 2001.
Why GAO Did This Study

A number of countries have established national terrorism risk insurance programs to respond to market shortages for such insurance resulting from attacks either in their own or other countries. Many programs were created following the events of September 11, 2001, but some existed earlier. In 2002, the Terrorism Risk Insurance Act established a program to ensure the availability of terrorism risk insurance in the United States.
The Terrorism Risk Insurance Program Reauthorization Act of 2015 includes a provision for GAO to review how other countries have structured and funded their terrorism risk insurance programs. This report compares the structures of and the role of government in selected foreign terrorism insurance programs and examines the loss-sharing arrangements between the government and private sector. Of the 16 programs identified through a literature review, GAO selected 6 representing a range of structures to examine in-depth—programs in Australia, Austria, India, Spain, the United Kingdom, and the United States. For the six programs, GAO reviewed program financial statements, annual reports, and documentation from the Organisation for Economic Co-operation and Development and interviewed officials from terrorism insurance programs, agencies, reinsurance companies, and trade associations.
GAO makes no recommendations in this report. GAO provided a draft to Treasury and the five selected programs for their review and received technical comments, which were incorporated as appropriate.

What GAO Found

The structures of the 16 terrorism insurance programs GAO reviewed generally fell into three broad categories. Programs in the first category have a multilayered structure, with insurers, reinsurers (which offer insurance for insurers), and governments providing coverage. Several programs, including those in Australia and the United Kingdom (UK), use this approach. In the second category, which includes Spain and Israel, government entities provide all the coverage for terrorism risk, and insurers and reinsurers do not take on any risk. The third category includes programs, such as those in Austria and India, in which insurers and reinsurers are entirely responsible for providing coverage and the government has no financial role. In comparison, the U.S. program involves coverage from the government and insurers, but it differs from many programs as its program does not include the purchase of reinsurance.
Among the six programs GAO reviewed in-depth, the loss-sharing arrangements among program participants vary, but program reserves and the private sector likely would be able to cover losses from most conventional terrorist events before public funds are needed, according to program officials. However, in the event of a very large terrorist attack, governments that have a role would potentially be responsible for a substantial proportion of losses. As shown in the figure, programs in which the government provides a layer of financial support have greater total amounts of coverage compared to those with only private sector participation. Additionally, private sector coverage is larger under programs in countries with larger economies, as measured by gross domestic product. In the event of a large terrorist attack, insurers in the United States could pay more than the total coverage provided by the other five countries' national programs. Most of the selected programs collect premiums up front to cover losses and program costs; the United States, in contrast, collects reimbursement for actual losses and associated expenses after an event occurs.
Note: In the UK, the government share is an unlimited line of credit to the private program that is expected to be repaid. Spain's funds include program reserves for terrorism and other catastrophic events and an unlimited government backstop. The unlimited government shares are portrayed as matching the program funds, but the actual size could differ depending on the type and size of terrorist attack. Austria's program is entirely private.