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Difficulty: HardTerrorism Risk Insurance Act (TRIA)

A commercial property and casualty insurer sustains 50millionincoveredlossesafteratargetedattackonadomesticmanufacturinghub.TheeventisofficiallycertifiedasanactofterrorismbytheSecretaryoftheTreasury,inconsultationwiththeSecretaryofHomelandSecurityandtheAttorneyGeneral.Theinsurer′scalculatedTRIAdeductiblefortheyearis50 million in covered losses after a targeted attack on a domestic manufacturing hub. The event is officially certified as an act of terrorism by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General. The insurer's calculated TRIA deductible for the year is 10 million. If the total aggregate industry losses for this event reach 150million,howwillthefinancialresponsibilityfortheinsurer′s150 million, how will the financial responsibility for the insurer's 50 million claim be allocated under the Terrorism Risk Insurance Act (TRIA)?

  1. The insurer is solely responsible for the entire $50 million loss because the aggregate industry losses did not meet the required program trigger.Answer
  2. B
    The insurer pays its 10milliondeductible,andthefederalgovernmentactsasareinsurertocover8010 million deductible, and the federal government acts as a reinsurer to cover 80% of the remaining 40 million.
  3. C
    The federal government assumes the entire $50 million liability immediately upon the official certification of the act of terrorism.
  4. D
    The insurer pays the $10 million deductible, and the state Guaranty Association covers the remainder since the federal backstop has not been triggered.

Answer

The insurer is solely responsible for the entire $50 million loss because the aggregate industry losses did not meet the required program trigger.
The correct answer identifies that while the event was properly certified by the correct authorities, TRIA requires aggregate industry losses to exceed a statutory threshold of 200millionbeforefederalfinancialassistanceistriggered.Sincethetotalindustrylosseswereonly200 million before federal financial assistance is triggered. Since the total industry losses were only 150 million, the federal backstop does not apply, leaving the individual insurer fully responsible for its covered claims.

Step-by-Step Solution

1
Analyze the certification status of the event.
The event was properly certified by the Secretary of the Treasury.
Certification is the first mandatory requirement for TRIA coverage to apply.
2
Compare the aggregate industry losses to the statutory TRIA program trigger.
The 150millioninaggregateindustrylossesisbelowthe150 million in aggregate industry losses is below the 200 million minimum program trigger.
TRIA requires industry-wide losses to reach a specific threshold before the federal government begins sharing the financial burden.
3
Determine the resulting financial allocation.
Because the program trigger was not met, the federal backstop is not activated.
When the federal backstop is not activated, insurers are fully responsible for the covered losses they underwrote, regardless of their individual deductibles.

Key Concept

TRIA Program Trigger and Cost-Sharing Mechanisms
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Topics

Terrorism Risk Insurance Act (TRIA)

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