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If Congress does not reauthorize the Terrorism Risk Insurance Act by the end of 2014, it could significantly affect the cost and availability of workers’ compensation coverage, according to new policy brief by RAND researchers. The report examines how insurers might respond if TRIA expires, especially in the workers’ compensation markets because states “rigidly define the terms of the coverage.” For example, insurers cannot exclude terrorism from such policies, impose policy limits or exclude losses from nuclear, biological, chemical or radiological attacks as a way to control their exposure.

Congress passed TRIA the year after the Sept. 11, 2011 terrorist attacks, which resulted in $40 billion of insured losses – considered “the most expensive man made catastrophe in insurance history,” the brief said. TRIA provides a high-level federal backstop in case of large catastrophic losses greater than $100 million. This helps mitigate the impact of terrorism on the insurance markets by spreading the losses across all property and casualty policyholders.

RAND researchers said if the TRIA expires and there is not a sufficient private reinsurance capacity covering terrorism losses then insurers could decline to provide workers’ compensation coverage to businesses considered high risk. Compared with other insurance lines covered by the Terrorism Risk Insurance Act (TRIA), workers’ compensation offers insurers less flexibility to control terrorism exposure through modifications in coverage: WC policies cannot exclude terrorism, impose policy limits, or exclude losses from nuclear, biological, chemical, or radiological (NBCR) attacks.

Terrorism does present the potential for extremely large WC losses. Attack simulations performed by Risk Management Solutions (RMS) for previous RAND work suggest that losses in WC could be more than $10 billion from a large conventional attack (10-ton truck bomb) and more than $300 billion from a nuclear attack. In comparison, the 9/11 attacks caused approximately $2.6 billion (in 2013 dollars) of WC losses. What is more, the probabilities of these catastrophic events are highly uncertain. As discussed in a previous RAND policy brief on TRIA, terrorism risk models are limited in their ability to predict the frequency of events.

As a result, some employers might have to get coverage in residual markets where higher premiums are charged. The higher cost of coverage could reduce incomes and economic growth although the brief said this effect would likely be small. And if TRIA expires and there is another terrorist attack, then businesses and taxpayers would likely finance workers’ compensation losses within the state where the attack occurred, adding to the challenge of rebuilding. “It is important that policy makers be aware of this plausible scenario when debating how to proceed with TRIA,” the brief said.