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Two terrifying reports from the GAO yesterday

January 13, 2017

The Government Accountability Office, the audit arm of the United States Congress, issued two scary reports yesterday.

One of them was released in conjunction with another scary report – the annual Financial Report of the United States Government (the “FRUSG”).   The FRUSG includes the annual audited financial statements for our federal government.  These financials are audited by the GAO, which delivers an opinion on them, like audited financial statements in the private sector.

And the GAO issued a ‘disclaimer’ opinion again this year, just like it has every year since 1997, when the modern FRUSG began to be issued.  A ‘disclaimer’ opinion matters because the GAO’s concern with internal control and other accounting issues raises so much uncertainty that the GAO cannot allow itself to opine whether the statements are fairly presented.

That’s scary, and the most important story of the day today, in our neck of the woods, anyway.  See this article, for example.

But the GAO issued another scary report yesterday, one that shouldn’t be flying under the radar, either.

This report was titled “Terrorism Risk Insurance: Market Challenges May Exist for Current Structure and Alternative Approaches.”

The insurance (and reinsurance) world includes some fascinating and important risk management issues relating to ‘cat risk,’ or catastrophe risk.   They include the funding and the U.S. government’s role for insurance losses due to terrorism, and “political risks.”

After 9/11, the U.S. Government passed the Terrorism Risk Insurance Act (TRIA), which established a mandate for the federal government to provide backstop reinsurance for the insurance industry in losses arising from terrorism. 

This raises some weighty issues.  And we’ve noted in the past that the U.S. government has been budgeting for significant increases in spending for losses incurred in this program in coming years.  See this and this, for example.

Yesterday’s GAO report was issued under provisions in TRIA calling for the GAO to report on various ways of funding terrorism risk insurance.  GAO's summary included “Under the Terrorism Risk Insurance Act's (TRIA) current structure, insurers manage their terrorism exposure to cover their share of losses and not the federal share of losses, which may be recouped from policyholders after an event. Specifically, insurers do not assume the risk of the federal share of potential losses and, thus, do not consider the potential federal share of losses in how they manage their terrorism risk exposure and price coverage.”

This sounds like citizens and taxpayers have a few good reasons to figure things out in this area.

You can read GAO’s report on terrorism risk insurance here.



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