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WASHINGTON – A terrorist attack in the United States could become even more costly to the U.S. economy and national security as federal insurance is due to expire at the end of the year.

A study by the Rand Corporation has warned of the impending expiration, Dec. 31, of the insurance authorized by Congress in the Terrorism Rick Insurance Act following 9/11 that covers claims resulting from an attack.

After 9/11, insurance companies were unable to deal with the thousands of claims, prompting Congress to act, since insurance to cover future attacks became either unavailable or very expensive to obtain.

“Our study finds that if the act expires and the take-up rate for terrorism insurance falls, then our country would be less resilient to future terrorist attacks,” according to Henry Willis, lead author and director of the Homeland Security and Defense Center at Rand.

“Allowing the federal terrorism rick insurance act to expire could have negative consequences for U.S. national security,” the report said.

With the insurance program due to expire this year, Congress is said to be looking at what the government’s role is in terrorism insurance markets.

The Rand study found that terrorism remains a real, although uncertain, national security threat. The most likely scenarios involve arson or explosives used to damage property, or conventional explosives or firearms used to kill and injure civilians.

Terrorism has occurred persistently in the U.S. since 2001, yet complex terrorist attacks have not occurred, the report pointed out.

“However, there are active terrorist groups who do aspire to conduct more complex attacks on U.S. targets, and the possibility remains that sometime in the future, one of these groups may succeed,” Rand said.

An examination of past attacks is only of limited use for accurately predicting the probability of future attacks or losses from attacks different than those that have occurred, Willis said. For that reason, there are limits to how terrorism risk models can be used to understand future terrorism risks.

Counting the cost

The current terrorism risk insurance program has a $27.5 billion threshold for total losses that are paid by the insurance industry and commercial policyholders before the government program begins paying.

The threshold ensures that the insurance industry, rather than the taxpayer, is ultimately responsible for paying for incidents that are within the range of the industry’s modeling capability, the study pointed out.

At the same time, that threshold permits insurance companies and policyholders to manage risks from incidents that involve deep uncertainty that cannot be adequately quantified using modeling.

To put the financial burden of the Sept. 11, 2001, terrorist attack into perspective, the total cost related only to the World Trade Center, including loss of earnings, property damage, clean up and restoration, amounted to some $36 billion.

Insured losses to property, including building, contents and business interruption, amounted to $19 billion.

By comparison, insured losses from Hurricane Katrina in 2005 were $41.1 billion, placing an enormous burden on the U.S. insurance industry. Total property loss was almost double that, at $81 billion.

As a result of 2001 terrorist attack on the World Trade Center in New York, some 3,000 lives were lost and more than 30 million square feet of office space in Lower Manhattan was damaged or destroyed.

This cost included earnings losses of $7.8 billion in deceased workers’ prospective lifetime earnings and up to $6.4 billion in reduced wage and salary income in city industries affected by the attack, according to an analysis by economists Jason Bram and James Orr, and Carol Rapaport, an economist at the Federal Reserve Bank of New York.

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