Economic Perspectives on Terrorism Insurance

Abstract

This study examines the market for terrorism insurance in the United States, discusses the economic implications of the cost and availability of terrorism insurance and considers the proposed federal role in terrorism insurance. The study reaches two principal findings. First, the market for terrorism insurance remains limited. Only a small number of insurers are actively providing stand-alone terrorism insurance policies. When available, coverage for terrorism losses is expensive, terms of coverage are restrictive and policy limits are often insufficient. Second, the problems associated with terrorism insurance pose a significant threat to sustained economic growth. The lack of terrorism insurance is stopping some business deals, such as real estate and construction projects where terrorism insurance may be necessary to obtain financing. The high cost of terrorism insurance (when available) diverts resources from other more productive uses, negatively affecting investment and jobs. Low coverage limits in terrorism insurance policies mean that businesses are bearing a huge amount of risk themselves. In the event of another attack similar to that of September 11th, insurance payments will not be available to the same degree to rebuild.