Backing the backstop

The Santa Monica, Calif.-based RAND Corp. has been loosing some pretty serious thinkers on any of a number of issues over the past 60 years. A new interim report released earlier this month offers some of RAND’s thinking on the issue of a federal terrorism reinsurance backstop.

In short, the research by RAND’s Center for Terrorism Risk Management Policy finds that extending TRIA would be a smart move.

In the sizable report (some 113 pages, including references), RAND concludes that TRIA has positive effects on the market for terrorism insurance, leading to a higher take-up rate for terrrorism insurance for conventional attacks than would exist in TRIA’s absence, reducing the costs to businesses affected by attacks in many of the scenarios RAND examined.

What’s more, RAND concluded that though TRIA does increase the cost to taxpayers in scenarios involving the largest attacks, the expected costs to taxpayers from possible conventional attacks is lower with TRIA than without it. Tranferring risks for the largest events to taxpayers, according to RAND’s research, provides the benefits of lower uncompensated losses and lower taxpayer costs in the most likely terrorist attack scenarios.

The report finds that TRIA’s performance in responding to losses from chemical, biological, radiological or nuclear attacks is more mixed, though. While the TRIA program cap does reduce the risk to the insurance industry, the take-up rate for CBRN coverage is still low under TRIA, RAND said, resulting in little difference in the amount of uncompensated losses or the taxpayer burden than in the absence of a government backstop.

RAND said its findings showed that any expansion of TRIA to address CBRN attacks “must be made with significant care to achieve the desired goals and avoid unintended consequences.”

In particular, modifying TRIA to require insurers to offer policies covering both CBRN and conventional terrorist attacks without changes in other features of the program such as insurer deductibles or program caps may have unintended consequences for coverage for conventional attacks, RAND said, offering little improvement in outcomes after CBRN attacks and producing results in the case of conventional attacks similar to those if TRIA was allowed to expire.

RAND noted that analysis offered in the report, “Trade-Offs Among Alternative Government Interventions in the Market for Terrorism Insurance,” is the result of work in progress, and said it will continue to analyze changes in the existing program that might better address CBRN exposures and improve the take-up of terrorism insurance.

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