Terrorism insurance is insurance purchased by property owners to cover their potential losses and liabilities that might occur due to terrorist activities.
It is considered to be a difficult product for insurance companies, as the odds of terrorist attacks are very difficult to predict and the potential liability enormous. For example the September 11, 2001 attacks resulted in an estimated $31.7 billion loss. This combination of uncertainty and potentially huge losses makes the setting of premiums a difficult matter. Most insurance companies therefore exclude terrorism from coverage in Casualty and Property insurance, or else require endorsments to provide coverage.
On December 26, 2007, the President of the United States signed into law the Terrorism Risk Insurance Program Reauthorization Act of 2007 which extends the Terrorism Risk Insurance Act (TRIA) through December 31, 2014. The law extends the temporary federal Program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism.
The United States insurance market offers coverage to the majority of large companies which ask for it in their polices. The price of the policy depends on where the clients are residing and how much limit they buy.
Industry Needs
Concentration of risk is another factor in determining availability for terrorism insurance. Due to the concentrated losses of the World Trade Center, carriers were hit with large losses in one centralized location. Insurers seek to spread the coverage over a wider geographic area than as with other aggregate perils, such as flood.
Insurance companies are using an approach that is similar to that used with natural catastrophe risks. A Swiss Re report suggested that in this case where demand is greater than the supply for terrorism coverage that a short-term solution is possible: a mix of government and private resource to make easy the transition. In this situation, the government would serve two functions: to establish rules to overcome the capacity shortage and to be the insurer of last resort.
Crisis management planning can save large amounts money in the long run. According to experts[citations needed], for every dollar spent on developing crisis management plan a head of time, $7 is saved in losses when a disaster comes.
Insurance payments related to terrorism are restricted to a billion euro per year for all insurance companies together. This regards property insurance, but also life insurance, medical insurance, etc.
According to The Economist, one of the best studies to understand TRIA has been the one undertaken in 2005 by the Center for Risk Management at the Wharton Business School ("TRIA and Beyond"; available on their website below).
In mid-2007 the idea of another extension to TRIA was tabled and is officially known as TRIREA, (Terrorism Risk Insurance Revision and Extension Act). Initially TRIREA contained several new provisions including a mandatory 'make available' clause for NCBR coverge (Nuclear, Chemical, Biological and Radiological) and the ending of the distinction between domestic and foreign events.
The New York Times reports that in Baghdad personal terrorism insurance is available. One company offers such insurance for $90, and if the customer is a victim of terrorism in the next year, it pays the heirs $3,500.
Countries With Long-Term Terrorism Insurance Programmes
According to the policy agenda of The Real Estate Roundtable, the following countries are the only ones in the world with long-term terrorism insurance.
- Australia
- Austria
- Finland
- France
- Germany
- Israel
- Namibia
- Netherlands
- Russia
- South Africa
- Spain
- Switzerland
- Turkey
- United Kingdom
