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Research Projects

Losses and Loss Distribution in Terrorist Attacks

Principal Investigators: Tom LaTourrette, Stephen Carroll

This study estimates the expected losses for several types of aircraft impact and anthrax attacks and examines the effects of the private insurance system and the Federal Terrorism Risk Insurance Act (TRIA) on the distribution of those losses among different the parties involved. An attack consequence model simulates losses in the form of casualties, property damage, and business interruption. Anthrax attack models also allow us to estimate the extent to which losses can be reduced by different protective and mitigative measures. We then model the distribution of these losses by the insurance system and TRIA, collectively referred to as the loss distribution system. This analysis provides insight into how the distribution of losses among parties depends on the magnitude of the total loss as well as on details of the loss profiles resulting from different types of attacks.

When examining the loss distribution in terms of the total loss, our model simulation shows that, no matter what the loss, insurers of damaged persons and property (target insurers) are expected pay approximately 70% of the total loss. The remaining 30% is split between the broader commercial insurance marketplace and taxpayers. For annual TRIA covered losses (insured losses incurred in insurance lines eligible for TRIA coverage and resulting from certified terrorist attacks) up to $15 billion, the federal government makes an initial payout to insurers which is entirely recouped from the broader commercial insurance marketplace through a policyholder surcharge. Hence there is no direct taxpayer subsidy below $15 billion.

When examining the loss distribution in terms of the loss profiles of different types of attacks, we find that:

• A single aircraft impact event is unlikely to entail any direct taxpayer subsidy under TRIA. Four or more impacts in a year are required before taxpayers begin to pay.
• Although TRIA allows the exclusion of biological terrorism and almost no insurers offer such coverage, our modeling shows that over 60% of the losses in an indoor anthrax attack are expected to be in workers' compensation, which cannot be excluded. Hence insurers may be responsible for large payouts in an anthrax attack even when coverage is nominally excluded.
• High efficiency filters may be able to substantially reduce the expected losses in anthrax attacks. Based on an initial cost-benefit analysis, installing filters may be attractive in high threat targets.
• Life and health insurance lines are expected to comprise a relatively small fraction of losses in large terrorist attacks. Hence incorporating them into TRIA is likely to have a little impact.

The complete study will be presented in a series of three reports. The first report estimates the losses that could result from a variety of aircraft impact scenarios and the subsequent redistribution of those losses through the insurance system and TRIA. A companion report presents the corresponding results for a variety of indoor and outdoor anthrax attacks. The final report will discuss the effects and implications of TRIA and possible alternatives in the context of the findings in these technical reports.