Conning Says Terrorism Insurance Act Does Not Solve Problems

The Terrorism Risk Insurance Act of 2002 (TRIA) has done very little to address the fundamental issues that make terrorism risk so difficult and unattractive to insure, according to new studies by Conning Research & Consulting, Inc.

Moreover, Conning (www.conningresearch.com) has concluded that this Act may even prove to be a big distraction from solving the real issues that get in the way of developing a workable insurance solution.

“The placebo effect of passing this legislation is beginning to wear off,” Bruce Thomas, vice president at Conning, remarked. “Although the Act does not harm insureds or insurers in any substantive way, businesses and insurers are starting to recognize how little it actually does to solve any of their problems.”

From the insured’s perspective, the coverage mandated by TRIA does not address all losses that may arise from terrorism since it does not cover domestic terrorism or losses from nuclear, biological and chemical hazards. Also, many insureds still feel that the price of insurance is too high. Although the Secretary of the Treasury has substantial authority to interpret the Act, this regulatory flexibility represents both a benefit and an uncertainty to the insurance industry.

“While the Act will provide some capital relief in the event of another large-scale terrorist attack, it will not prevent insurers from becoming insolvent if their exposures are too concentrated,” Thomas said. “This was a quick fix, but ultimately the insurance industry and its customers will need a long-term solution. This requires an in-depth understanding of terrorism risk and of the risk-spreading mechanisms that can be used to deal with it.”

“Terrorism Risk Insurance Act of 2002: Problem Not Solved,” examines the Act and illuminates the issues that make it difficult to implement and administer. “The Insurability of Terrorism Risk: It’s Not That Simple,” explores each of the fundamental problems that make insuring terrorism risk so complicated. Understanding these issues helps clarify the strengths and weakness of insurance and illuminates the important legal, regulatory, and political issues that the insurance industry will face over the next few years.