Federal Reinsurance for Terrorism Risk and Its Effects on the Budget: Working Paper 2020-04
This paper describes CBO’s methods for estimating the costs of the federal terrorism risk insurance program. It also discusses how estimates of the program’s budgetary effects would differ if they were produced using accrual-based measures rather than cash-based measures.
By Perry Beider and David Torregrosa (both of CBO)
Lawmakers recently reauthorized the federal program that provides insurance against the risk of terrorism, extending it through December 31, 2027. Under that program, the government shares the risk of loss with commercial insurers, thereby supporting the wide availability of terrorism insurance and, in the event of a large attack, reducing demands for assistance and helping to stabilize the economy. CBO estimates that under current law, the program yields net savings to the federal government, and hence to taxpayers, on an expected-value basis, primarily because federal outlays after a terrorist attack would be more than recovered through taxes on commercial policyholders (unless the attack was exceptionally, and improbably, large). However, the federal government bears the risk of catastrophic losses. The government could also incur net costs if an attack leads to policy changes such that the tax mechanism is not used as specified under current law.