Academic journal article Washington and Lee Law Review

Terror CATs: TRIA's Failure to Encourage a Private Market for Terrorism Insurance and How Federal Securitization of Terrorism Risk May Be a Viable Alternative

Academic journal article Washington and Lee Law Review

Terror CATs: TRIA's Failure to Encourage a Private Market for Terrorism Insurance and How Federal Securitization of Terrorism Risk May Be a Viable Alternative

Article excerpt

Table of Contents

I. Introduction ............................................................................ 1826

II. The Structure of TRIA ............................................................ 1831

III. Private Market's Failure to Create a Long-Term Solution to Terrorism Risk ..................................................... 1833

A. Mandatory/Discretionary Recovery ................................. 1833

B. Large Insurers Can Game TRIA ...................................... 1840

C. Lack of Information Sharing ............................................ 1843

D. TRIA Creates Regulatory Certainty ................................. 1846

E. Insurers Believe They Can Rely on Traditional Coverage Exclusions ........................................................ 1848

F . TRIA Displaces Traditional Private Reinsurance ............. 1850

IV. Why Continuing Under TRIA in Its Current Form Is Not Attractive ......................................................................... 1850

V. Proposed Alternatives to TRIA ............................................... 1852

A. Alteration of the Tax Code to Allow Insurers to Build Additional Reserves ........................................... 1852

B. Creation of Terrorism Insurance Pools ............................ 1854

VI. Federal Terror CATs .............................................................. 1856

A. Risk Securitization and Traditional Reinsurance ............. 1 857

1. Advantages of Risk Securitization ............................. 1857

2. Disadvantages of Risk Securitization ........................ 1860

B. Federal Terror CATs ........................................................ 1863

1. $60 Billion Terrorism Reinsurance Fund ................... 1864

2. Funding Each Terror CAT Tranche ........................... 1864

3. Attributes of Terror CATs ......................................... 1865

4. Recapitalizing the Fund Following a Loss ................. 1866

5. Other Program Provisions .......................................... 1867

C. The Case for Federal Terror CATs ................................... 1868

1 . Advantages of a Federal Terror CAT Program .......... 1868

2. Concerns .................................................................... 1872

VII. Conclusion .................................................................................. 1873

I. Introduction

September 11, 2001 changed America forever. Although no one can value the Uves lost, the 9/11 attacks cost the American economy an estimated $1 trillion.1 Such an economic loss sent shock waves through the global economy.2

For the insurance industry, the 9/1 1 attacks were a "clash event."3 A clash event is characterized by catastrophic industry loss across multiple lines of insurance coverage.4 As a result of 9/11, approximately 150 insurers and reinsurers5 suffered an estimated $32.5 billion in losses.6 Insured property losses totaled over $1 1 billion.7

Prior to 9/11, insurers did not view terrorism as a risk.8 Accordingly, insurers failed to account for terrorism in their premiums or underwriting calculations.9 This oversight was due to the fact that historically, terrorism losses were small and uncorrelated.10 Large-scale terrorist attacks, such as the 9/1 1 attacks, however, are correlated risks." Unlike uncorrelated risks,12 correlated risks make it difficult for insurers to spread or "pool" those risks.13 Without the ability to pool risks, insurance companies cannot hedge many uncorrelated risks of loss against many other uncorrelated risks of loss.14 This prevents insurance companies from offsetting earned premiums against coverage payments.15 Following 9/11, the risk of terrorism losses became real and difficult to manage.16

In the face of this new and uncertain risk, insurers left the market to reduce their risk exposure. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.