GEOSPATIAL-RISK-BASED RECOUPMENT FOR TRIA-ELIGIBLE INSURANCE
- Area of Honors:
- Bachelor of Science
- Document Type:
- Thesis Supervisors:
- Zhongyi Yuan, Thesis Supervisor
- Sergei Tabachnikov, Honors Advisor
- Terrorism risk has become a major threat to human lives and businesses around the world. In an effort to make insurance against such risk available and affordable in the United States, the Terrorism Risk Insurance Act (TRIA) was passed in 2002 to establish a public-private partnership and to provide subsidies for insuring terrorism losses. Essentially, under TRIA, government subsidies apply only to the insured losses above the market retention level. For those below the retention level, the government will recoup any claim payments it initially shares plus a 40% surcharge. The loss-sharing mechanism has been running untested for the past decade. The specification of its recoupment process has never been clear and remains a challenge. We propose an easily implemented recoupment scheme based on the geospatial risk of terrorist attacks. We use a geospatial point process to model terrorism risk and its occurrences, estimated using the Global Terrorism Database, and also illustrate our suggested recoupment for a hypothetical insurance portfolio.