The U.S. Government Accountability Office says the federal government’s recoupment structure for terrorism insurance under the Terrorism Risk Insurance Act (TRIA) may result in higher prices for policyholders.
TRIA was established by Congress after the Sept. 11, 2001 terrorist attacks to share losses from an act of terror between the insurer and the federal government. The 2015 Terrorism Risk Insurance Program Reauthorization Act includes a provision that required GAO to review alternative funding approaches for TRIA.
Insurance companies that offer terrorism insurance manage their exposure to cover their own losses, not the federal government’s share of losses.
“Under the current structure, in some scenarios federal losses must be recouped through premium surcharges on policyholders with TRIA-eligible insurance coverage after a certified terrorism event,” the GAO said.
This could affect the price of coverage and policyholder decisions to purchase terrorism coverage,” the GAO report stated.
However, the GAO said an alternative approach, that lengthens the recoupment time frame or allowing flexibility in set-asides, or charging a v broad group of policyholders, could mitigate the prices increases.
“A charge on insurers or policyholders could either (1) be a risk-based charge intended to help pay for the federal share of potential losses, replacing the current recoupment structure, or (2) be a charge, or fee, paid to the Treasury for the promise of payment of the federal share of loses with recoupment in place to cover the actual losses,” said the GAO.
“A federal charge could help cover potential losses, but determining a price based on risk would be difficult,” it added.