Benefits of the U.S. Program for Terrorism Insurance from a Comparative Perspective

Abstract

This article summarizes the U.S. program for terrorism insurance and outlines its advantages as compared to similar programs in other developed countries. The program, while similar to reinsurance, does not require participants to pay premiums but instead uses an ex post recoupment mechanism. Consequently, it is generally referred to as a “Federal backstop.” This approach requires less capital investment and makes “pricing” more accurate than a reinsurance approach. The program also requires insurers to maintain significant amounts of exposure through insurer deductibles and copayments, which creates market demand for the development of terrorism reinsurance in the private market. The current program extends until 2020, though perhaps it will be extended further in the future.