Terrorism has led to massive losses for the insurance industry. The attacks on Sept. 11, 2001 totaled $31.6 billion in costs for the insurance industry when taking all claims into account.

Not all insurance companies pay out in the event of international terrorism or foreign wars, so the impact is likely less than you might first expect. Nevertheless, terrorism is risky business for everyone, and insurance companies hate risk as much as anyone else. Since the 9/11 attacks the government has created some backstops in order to keep insurance companies issuing policies even when terrorism strikes,

Key Takeaways

  • The 9/11 terrorist attacks hit the U.S. economy hard and led to a sharp drop in the stock market.
  • Insurance companies were also greatly impacted, with the 9/11 attacks costing the industry nearly $32 billion.
  • As a response, the government passed the terrorism risk insurance act that provided a backstop to insurers when paying out claims that result from damages due to terrorism.

Terrorism Risk Insurance Act

As a result of the fallout from the 9/11 attacks on the insurance industry, the Terrorism Risk Insurance Act was passed to share losses between the federal government and insurance industry. This legislation became necessary as premiums were becoming too costly or simply unavailable due to perceptions of increased risk. No financial formula can perfectly gauge the risks of a terrorist attack in terms of the scope of damage. Following 9/11, many insurance companies were refusing to cover damages stemming from terrorist activities.

With the structure of the Terrorism Risk Insurance Act, insurers once again included terrorism insurance as a part of their coverage. Without this legislation, the cost of coverage against terrorism acts would be too steep for most businesses to purchase.

What's Happened Since

The act was extended in January 2015 for six years with bipartisan support. Government support for the insurance companies kicks in when losses exceed $200 million. Prior to 9/11, the insurance industry was not equipped to deal with a terrorist attack of that magnitude. They suffered heavy losses. Many insurance companies would not have survived without the government assuming some of the losses.

After 9/11, premiums have risen as actuaries are more aware of this risk, especially in high-traffic areas that are more vulnerable to an attack, even though legislation has kept this increase manageable. Due to the lack of a major terrorist attack since 9/11, insurance companies have actually done well. They are receiving higher premiums but not paying out as much due to the lack of a major attack.