	Treasury and Insurers Have Made Progress in Implementing TRIA, although Important Work Remains

More than a year after TRIA’s enactment, Treasury and insurance industry  participants have made progress in implementing and complying with its  provisions, although Treasury has yet to fully implement the 3-year  program. Treasury Has Issued Regulations, Staffed the TRIP Office, and Begun Studies and Data Collection Efforts

To implement TRIA and make TRIP functional, Treasury has taken  numerous regulatory and administrative actions that include rulemaking,  staffing a program office, and collecting and analyzing data. As of April  2004, Treasury had not yet decided whether to extend the “make available”  requirement to policies issued or renewed in 2005. Insurers are concerned that Treasury has not already made a  decision about extending the “make available” requirement through 2005. Although Available, 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. Limited industry  data suggest that 10–30 percent of commercial policyholders are  purchasing terrorism insurance, perhaps because most policyholders  perceive themselves at relatively low risk for a terrorist event. Some  industry experts are concerned that those most at risk from terrorism are  generally the ones buying terrorism insurance. In combination with low  purchase rates, these conditions could result in uninsured losses for those  businesses without terrorism coverage or cause financial problems for  insurers, should a terrorist event occur. Moreover, even policyholders who  have purchased terrorism insurance may remain uninsured for significant  risks arising from certified terrorist events—that is, those meeting  statutory criteria for reimbursement under TRIA—such as those involving  NBC agents or radioactive contamination. Finally, although insurers and  some reinsurers have cautiously reentered the terrorism risk market,  insurance industry participants have made little progress toward  developing a mechanism that could permit the commercial insurance  market to resume providing terrorism coverage without a government  backstop. TRIA requires that insurers “make  available” coverage for terrorism on terms not differing materially from  other coverage. Largely because of this requirement, terrorism insurance  has been widely available, even for development projects in high-risk areas  of the country. In spite of the reentry of reinsurers into the terrorism market, insurance  experts said that without TRIA caps on potential losses, both insurers and  reinsurers likely still would be unwilling to sell terrorism coverage  because they have not found a reliable way to price their exposure to  terrorist losses. 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. As a result, the  first objective of TRIA appears largely to have been achieved. 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 the TRIA-mandated study that requires Treasury  to assess the effectiveness of TRIA and evaluate 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, 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 (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 assess Treasury's progress in implementing TRIA and describe how TRIA affected the terrorism insurance market.

What GAO Found

Treasury and industry participants have made significant progress in implementing TRIA to date, although Treasury has important actions to complete in order to comply with its responsibilities under TRIA. Treasury has issued regulations on TRIA, created and staffed the Terrorism Risk Insurance Program office, and begun mandated studies and data collection efforts. However, Treasury has not yet made a decision on whether to extend the mandate that insurers "make available" terrorism coverage, using terms not differing materially from other coverage, for policies issued or renewed in 2005. Treasury's ongoing studies and data collection efforts will provide further insight into TRIA's effectiveness. TRIA has enhanced the availability of terrorism insurance for commercial policyholders, largely fulfilling a principal objective of the legislation. In particular, TRIA has benefited commercial policyholders in major metropolitan areas perceived to be at greater risk for a terrorist attack, largely because of the requirement in TRIA that insurers offer coverage for terrorism. Prior to TRIA, GAO reported concern that some development projects had already been delayed or cancelled because of the unavailability of insurance and continued fears that other projects also would be adversely impacted. GAO also conveyed the widespread concern that general economic growth and development could be slowed by a lack of available terrorism insurance. Largely because of TRIA, these problems no longer appear to be major concerns. Despite increased availability of coverage, limited industry data suggest that most commercial policyholders are not buying terrorism insurance, perhaps because they perceive their risk of losses from a terrorist act as being relatively low. The potential negative effects of low purchase rates, in combination with the probability that those most likely to be the targets of terrorist attacks may also be the ones most likely to have purchased coverage, would become evident only in the aftermath of a terrorist attack. Such negative effects could include more difficult economic recovery for businesses without terrorism coverage or potentially significant financial problems for insurers. Moreover, those that have purchased terrorism insurance may still be exposed to significant risks that have been excluded by insurance companies, such as nuclear, biological, or chemical events. Finally, although insurers and some reinsurers have cautiously reentered the terrorism risk market to cover insurers' remaining exposures, industry sources indicated no progress to date toward finding a reliable method for pricing terrorism insurance and little movement toward any mechanism that would enable insurers to provide terrorism insurance to businesses without government involvement.