Following a major terrorist attack, a commercial property insurer receives numerous claims for significant property damage. Due to the catastrophic nature of the event, the insurer anticipates that the total insured losses will far exceed its capacity. Under the Terrorism Risk Insurance Act (TRIA), what is the primary role of the federal government in such a scenario?
- AThe federal government directly pays all claims arising from certified acts of terrorism, bypassing private insurers.
- BThe federal government provides a reinsurance backstop to private insurers for a portion of certified terrorism losses, after a deductible and insurer retention.
- CThe federal government mandates that insurers cover terrorism risks at no additional cost to policyholders.
- DThe federal government takes over the management of the affected insurance companies to ensure efficient claims processing.
Show answer & explanationAnswer & explanation
Correct answer: B. The federal government provides a reinsurance backstop to private insurers for a portion of certified terrorism losses, after a deductible and insurer retention.
TRIA established a federal backstop for terrorism-related losses. It requires insurers to offer terrorism coverage and, in return, the federal government shares a significant portion of losses above a certain deductible and retention level for certified acts of terrorism.
Why the other options are wrong
- A. TRIA involves a partnership, not direct federal payment of all claims.
- C. TRIA requires insurers to 'make available' coverage, but it does not mandate it at no additional cost; premiums are allowed.
- D. The federal government does not take over management of private insurers under TRIA.
Terrorism Risk Insurance Act (TRIA)
A federal law passed in 2002 (and reauthorized multiple times) that created a federal backstop for commercial property and casualty insurance losses resulting from certified acts of terrorism, sharing the risk between the federal government and private insurers.
- Federal government acts as a reinsurer
- Applies to certified acts of terrorism only
- Insurers must offer terrorism coverage, and the federal government shares losses above a deductible and retention
Memory trick: TRIA: Terrorism Reinsurance In America.