Insuring Against Terrorism Risks

Terrorism Risk Insurance in OECD Countries
OECD Observer

Insurance policies, whether covering travel, housing or business, increasingly carry fine print that carefully spells out whether or not they cover or exclude losses due to terrorism. Acts of “mega” terrorism, like the 9/11 attacks, or the bombings in Bali or Madrid, have overwhelmed insurance companies with claims, and insurers have since waived sole responsibility.

Terrorism Risk Insurance asks whether coverage for large-scale terrorism acts should be mandatory, and to what extent governments should step in.

Part of the problem is that potential terrorism-related loss scenarios are “low-probability/high-consequence”. They are also extremely difficult to predict. Moreover, the effects of terrorist attacks go beyond reimbursable loss, such as the need to permanently relocate people or economic activities away from a contaminated area. Add to this the possibility that terrorists exploit large networks, as with anthrax, or develop dirty bombs or weapons of mass destruction; catastrophic losses could occur that go well beyond the ability of any financial markets to handle. The trouble is, governments can hardly afford these expenses, either.

There is no ready-made solution. Terrorism Insurance urges government intervention as a condition of private market operations; that is, not a market substitute but as a complement to private operators in the coverage of extreme risks that markets would in any case not be capable of meeting. After the attacks on the World Trade Center, the US created the Terrorism Risk Insurance Act as a temporary programme, to be re-evaluated at the end of 2005, for sharing public and private compensation for commercial property and casualty losses. On an international level, the Commité Européen des Assurances has proposed combining coverage by the private and public sectors, with additional negotiated use of EU backup funds.

Insurance–the transfer and sharing of risk–is by definition a socio-economic activity. So, when insurance markets fail to meet new challenges, citizens reasonably look to their government for a remedy. The greater the risks, the greater will be the demand for a government solution.

©OECD Observer No 249, May 2005

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