Insurance Center

The threat of terrorism is vastly different from that of natural disasters because it presents too many uncertainties to be modeled to effectively anticipate frequency and potential levels of damage. TRIA, The Terrorism Risk Insurance Act, is a US federal act signed into law by President George W. Bush on November 26, 2002. The Act created a federal "backstop" for insurance claims related to acts of terrorism. The Act is intended as a temporary measure to allow time for the insurance industry to develop their own solutions and products to insure against acts of terrorism. The Act has expired and been extended through December 31, 2014.

In view of TRIA, it is thought that many companies might simply exclude coverage for all terrorist incidents. "We are part of the global war on terrorism and it's impossible to characterize the true nature of the threat environment that we're living in," says insurance expert and vice president of economics and risk management at the Insurance Information Institute, an industry think tank in New York. "It's amorphous, ambiguous, and we can't say anything about it with any specificity."

Actuaries, the people who model risk for the industry, say they can model some types of terrorist risk based on the kind of catastrophic models they use for natural disasters such as hurricane Katrina. The Defense Department also has done extensive analyses of the types of damage done by truck bombs of different sizes. That information can be used to estimate the economic losses, which can be used to come up with estimated insurance premiums. The problem, actuaries say, is that it's impossible to model how often a terrorist truck bombing might occur.

Opponents of federal involvement in terrorism insurance argue the TRIA program has kept the market from coming up with such solutions faster. As a result, when TRIA was extended in 2005, Congress increased the amount that private insurers would have to pay on their own before the federal government would take over.

Insurance experts contend that that's proof the industry is taking on more of the risks associated with terrorism and working for a solution. But they worry that if the federal backstop disappears before the market is ready to step in fully, public places like baseball stadiums and other places of high density occupation could again see their insurance rates skyrocket, if terrorism insurance doesn't disappear completely.