Terrorism will forever change the way insurance companies calculate risk. In 2002, the United States government passed a law to, in effect, insure the insurance companies against terrorism via a kind of government-backed umbrella insurance so they would not have to face the full force of this financial threat.
Terrorism Risk Insurance
The terrorist attacks of September 11th, 2001 represented the most costly event in United States history in terms of insurance payouts. Because of this, it was decided that certain steps would need to be taken to insure the long-term viability of terrorism risk insurance. This was accomplished via an act called the Terrorism Risk Insurance Act.
The 2002 Terrorism Risk Insurance Act
In 2002, with the support of both parties, Congress passed, and President Bush signed into law, the Terrorism Risk Insurance Act. It set certain parameters for what qualifies as a "terrorist attack," and mandated that the government be responsible for 90% of the value of the insurance claims in the event of one, with the insurance companies picking up the other 10%. This 90% number is actually "90% in excess of a certain value," which was determined to be 17.5% of the specific company's premiums. The act was set to expire in 2005, but was extended for two more years. In 2007, it was extended until 2014, but the rates were changed to 85% government assistance and 15% insurer payout, with the premium exclusion rising to 20%.
Terrorism Risk Insurance Policies
In his book, Trends in Terrorism: Threats to the United States and the Future of the Terrorism Risk Insurance Act, Peter Chalk writes that "TRIA [Terrorism Risk Insurance Act] was intended to provide federal support and encouragement for the development of a private terrorism commercial insurance following the 9/11 attacks." In other words, in addition to protecting the insurance companies, the act was meant to encourage insurance companies to offer certain terrorism risk insurance policies because the companies would know that they would not have to pay out most of the money in the event of a terrorist attack. This kind of policy is often described by its detractors as "privatizing profit, socializing risk," because it allows insurance companies to keep their profits but places their losses at the feet of taxpayers.
In response to the terrorist attacks of 9/11, Congress and President Bush decided to take special action to insure the insurance companies against having to pay out too much money in the event of another terrorist attack. The 2002 Terrorism Risk Insurance Act was created, voted on by majorities of both parties of Congress, signed into law by the President, and then extended twice, currently until 2014. The act encourages insurance companies to offer terrorism risk insurance by allowing them to keep their profits but having the government assume the risk, which is a demonstration of a philosophy often derided by both the left and the right as "privatizing profit, socializing risk."
Sources:
Peter Chalk, Trends in Terrorism: Threats to the United States and the Future of the Terrorism Risk Insurance Act, 2005.
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