News Release

Expiration of terrorism risk insurance act could hurt national security, Rand study finds

Peer-Reviewed Publication

RAND Corporation

Allowing the federal terrorism risk insurance act to expire could have negative consequences for U.S. national security, according to a new study from the RAND Corporation.

Insurance markets were unprepared for the aftermath of the terrorist attacks of Sept. 11, 2001. Terrorism risk insurance quickly became either unavailable or extremely expensive. Congress reacted by passing the Terrorism Risk Insurance Act, which provided government support by providing mechanisms for spreading losses across policyholders nationwide or using government payments to cover the most-extreme losses.

The current terrorism risk insurance program will expire in 2014 and Congress again is considering the appropriate government role in terrorism insurance markets.

"Our study finds that if the act expires and the take-up rate for terrorism insurance falls, then our country would be less resilient to future terrorist attacks," said Henry Willis, lead author of the study and director of the Homeland Security and Defense Center at RAND, a nonprofit research organization.

The RAND study found that terrorism remains a real -- albeit uncertain -- national security threat, with the most likely scenarios involving arson or explosives being used to damage property or conventional explosives or firearms used to kill and injure civilians. Terrorism has occurred persistently in the U.S. since 2001, yet complex terrorist attacks have not occurred. However, there are active terrorist groups who do aspire to conduct more complex attacks on U.S. targets, and the possibility remains that sometime in the future, one of these groups may succeed.

An examination of past attacks is only of limited use for accurately predicting the probability of future attacks or losses from attacks different than those that have occurred, Willis said. For that reason, there are limits to how terrorism risk models can be used to understand future terrorism risks.

The current terrorism risk insurance program has a $27.5 billion threshold for aggregate losses that are paid by the insurance industry and commercial policyholders before the government program begins paying.

The threshold ensures that the insurance industry, rather than the taxpayer, is ultimately responsible for paying for those incidents that are within the range of the industry's modeling capability. At the same time, that threshold permits insurance companies and policyholders to manage risks from incidents that involve deep uncertainty that cannot be adequately quantified using modeling.

Willis and study co-author Omar Al-Shahery say terrorism insurance also can contribute to making communities more resilient to terrorism events. Access to appropriately priced terrorism insurance can promote economic growth, making resources available to address national security threats or other social problems. Recovery and rebuilding will be more rapid and efficient if the take-up rate for terrorism insurance is high.

In these cases, policies and decision-making are clear about how much compensation will be available after an attack and how it will be distributed. The more-rapid recovery can reduce the consequences of subsequent attacks, thus contributing to national security.

The study, "National Security Perspectives on Terrorism Risk Insurance in the United States," can be found at http://www.rand.org.

###

Support for the study was provided by the property-casualty insurance industry and major business groups. Contributors included the American Insurance Association, Chubb & Son, The Financial Services Roundtable, Liberty Mutual Insurance Group, The NAREIT Foundation, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, Property Casualty Insurers Association of America, The Real Estate Roundtable Education and Research Foundation, Reinsurance Association of America, and the Willis Group.

Research for the study was conducted within the RAND Center for Catastrophic Risk Management and Compensation, part of the RAND Justice, Infrastructure and Environment division. The center's mission is to identify policies, strategies, and other measures that have the potential to reduce the adverse social and economic effects of natural and manmade catastrophes by improving incentives to reduce future losses; providing just compensation to those suffering losses while appropriately allocating liability to responsible parties; helping affected individuals, businesses and communities to recover quickly; and avoiding unnecessary legal, administrative, and other transaction costs.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. To sign up for RAND e-mail alerts: http://www.rand.org/newsletters.html

RAND is a registered trademark


Disclaimer: AAAS and EurekAlert! are not responsible for the accuracy of news releases posted to EurekAlert! by contributing institutions or for the use of any information through the EurekAlert system.