Justice and Law Enforcement:

Initial Results on Availability of Terrorism Insurance in Specific Geographic Markets

GAO-08-919R: Published: Jul 11, 2008. Publicly Released: Jul 11, 2008.

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Yvonne D. Jones
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The terrorist attacks of September 11, 2001, on the World Trade Center in New York City and the Pentagon in Arlington, Virginia, are estimated to have resulted in insured losses amounting to $32.5 billion. Subsequent to the attacks, insurers largely stopped offering terrorism insurance coverage to commercial property owners, which raised significant concerns about potential negative economic consequences. To help restore confidence and stability in property insurance markets, Congress enacted and the President signed the Terrorism Risk Insurance Act of 2002 (TRIA). Under TRIA, the federal government assumed significant responsibility for the potential insured financial losses associated with future terrorist attacks. While TRIA, which was reauthorized in 2005 and again in 2007, has been credited with stabilizing markets for commercial property insurance, some building owners, Members of Congress, and other industry participants remain concerned that there may still be gaps in coverage. In particular, they have expressed concerns about the ability of policyholders located in large urban areas that are viewed as being at high risk of attack to obtain terrorism insurance coverage. Under the 2007 statute that reauthorized TRIA coverage, GAO was required to conduct a study to determine if specific markets in the United States have any unique constraints on the amount of terrorism insurance available and to evaluate options to enhance coverage. This law required GAO to submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives no later than June 23, 2008. The purpose of this report is to document our compliance with this reporting requirement.

While commercial property terrorism insurance coverage appears to be available nationwide at rates policyholders view as reasonable, certain policyholders may face challenges in obtaining desired amounts of coverage or obtaining coverage at prices they view as reasonable. The policyholders experiencing these challenges were typically those that own large, high-value properties in areas where many large buildings are clustered, particularly in urban areas viewed as at high risk of attack, such as Manhattan, and to a lesser extent certain areas of other major cities, such as Chicago and San Francisco, according to policyholders and brokers. While TRIA limits insurers' financial exposure related to future terrorist attacks, several insurers said they remained concerned about the exposure they retain, and their efforts to minimize potential losses appear to be the primary reason some policyholders face challenges in obtaining coverage. Insurance industry participants and analysts had no consensus on whether TRIA should be modified or additional actions taken to increase the availability of terrorism insurance coverage. Industry analysts and participants identified the advantages and disadvantages of various policy proposals that have been made to increase terrorism insurance coverage. One proposal involves lowering insurers' TRIA deductibles in areas affected by a future large terrorist attack under the premise that further relieving insurers of the financial consequences of such attacks would make them more willing to offer terrorism insurance coverage. Some industry participants believe that another option, allowing insurers to establish tax-deductible reserves for terrorist attacks, could increase insurers' ability to provide terrorism insurance coverage. However, others said that establishing the appropriate size of such reserves would be difficult. Finally, some industry analysts and participants said that changing the federal tax code to encourage the issuance of catastrophe bonds within the United States could allow capital from the securities markets to help cover the potential costs of terrorist attacks.

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